July 2023

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We are currently observing a nationalizing of the economy. What does this imply?  The brunt of the monetary collapse and rate hikes is disproportionately borne by households and small businesses, while large corporations and governments remain relatively unscathed.

As a result, when a significant entity like the state, which typically accounts for 40% to 60% of GDP in most economies, continues to consume wealth and spend, the gross domestic product does not exhibit signs of a recession, despite a decline in real terms of consumption and private investment. Bloated government spending masks the recessionary conditions in the private sector, including the decline in real disposable income, real wages, and margins of small and medium enterprises. Additionally, the external factor of weakening commodity prices is bolstering the contribution of gross domestic product from abroad.

These factors are the primary causes of the ongoing recession and the erosion of private wealth and wages, even though the official data fails to reflect this reality. As the government’s influence on the economy grows at an accelerated pace, technical recessions might not manifest in the official data, but people still experience their effects. One might perceive this as positive news since government spending directly benefits citizens through social programs. However, everything the state provides is ultimately derived from the private sector, either in the present or the future – current deficit spending entails future consequences of higher taxes and lower real wages. Therefore, the flip side of “no official recession yet” is “more public debt now and in the future.”

The alarming decline in global money supply is evident, with a contraction of -3.4% by the end of the first quarter, as reported by Longview. Concurrently, in the United States, money supply is contracting at the fastest rate since the Great Recession. It is crucial to consider that during the same period, global government indebtedness has risen by 3%, and the United States’ borrowing has outpaced real GDP growth. Moreover, these deficits are financed despite higher costs. Governments exhibit little concern for rising borrowing expenses since it is the populace who foots the bill.

Essentially, this implies that the drain of liquidity from the private sector will persist for an extended period. Central banks are puzzled as to why inflation remains persistent despite the complete resolution of supply chain disruptions and the return of international commodity prices to their initial levels. Consequently, they continue to raise interest rates, which directly and negatively impact families. Large corporations generally encounter minimal issues with higher rates, as they can access credit effortlessly, secure more favorable rates than many sovereign entities, and often possess substantial cash reserves due to prudent balance sheet management. While some may face bankruptcy, the mega caps are mostly shielded from the monetary tightening.  The YTD equal weight S&P 500 is up 4.55% (and that includes the 7 FANG stocks) compared to the market weighted S&P 500 up 14.8%.  This equal weight gives an equal weighting to all 500 companies in the S&P and serves as a better reflection of S&P performance as opposed to a market cap weighting that weights each company according to how large they are.  Market cap is defined as the number of shares of stock outstanding multiplied by current stocks’ price.  

So why doesn’t inflation, particularly core CPI, respond more swiftly to rate hikes? It is because the largest economic actor, the government, remains unconcerned and does not rectify its imbalances. Bloated governments continue to consume an increasing number of newly created money units, thereby preventing aggregate prices from reflecting the price contractions observed in external factors such as freight or energy. Additionally, as evidenced by the gross domestic product figures of several European nations, the tax revenue component of GDP displays a substantial increase, while the value added by businesses and the gross wage component remain below pre-pandemic levels. This situation can be attributed to the consequences of diminished real wages, reduced real disposable income, and lower real savings.

Given the current slump in money supply, inflation should be half its current level, even when accounting for the adjustments made to official CPI calculations. However, the velocity of money remains unaffected due to the government.

Factory Orders: Yesterday’s May data showed the first year-over-year decline since October 2020, marking the 8th consecutive month of deceleration. This aligns with the ISM Manufacturing Data and the Fed Regional Survey data, both indicating a clear industrial recession occurring globally.

Real Rates: Real Rates have surpassed 2% for the first time since 2008, and the Prime Rate now stands at 8.25%.

Trap Door Risk: The increase in real rates and the continuous rise in the prime rate exemplify the cyclical nature of the economy. Let’s imagine it’s the second quarter of 2022, and you have both excess savings and a Home Equity Line of Credit (HELOC). Suppose you decide to use your HELOC, tied to the Prime Rate, to purchase land or property worth $200,000. With a HELOC structured at Prime + 2%, at a 3.0% Prime Rate, you would be paying 5.0% interest, amounting to $833 per month. Now, fast forward through an exceptionally rapid tightening campaign, and the Prime Rate has more than doubled to 8.25%, resulting in an 11.25% interest rate on your HELOC, equivalent to $1,876 per month in interest expenses. This scenario demonstrates how the progression of the cycle can lead to precarious situations, where debt service capacity and discretionary consumption become challenging to sustain.

ISM: Later today, we will receive the ISM Services data. The Fed Regional Services Surveys have shown 13 consecutive months of contraction, while both the ISM and S&P Services PMI have consistently trended lower. It is evident that demand conditions have taken the lead from the supply-side in influencing price trends across the goods economy. Furthermore, the services economy typically follows the trajectory of the goods economy with a lag, which implies a similar pattern for the services sector.

Labor: The surprising increase in payrolls comes despite the Federal Reserve’s efforts to cool down the job market through interest rate hikes. Despite the high number of open positions compared to available workers, the strong payroll numbers will likely put pressure on the Fed to continue its hawkish rate hike campaign. This, in turn, is expected to further slowdown the economy.  Private sector jobs surged by 497,000 for the month, well ahead of the downwardly revised 267,000 gain in May and much better than the 220,000 Dow Jones consensus estimate. The increase resulted in the biggest monthly rise since July 2022.

New Home Sales/Construction: Given low levels of resale inventory, new home construction remains a primary beneficiary in the current economic conditions. The uptick in activity in the new home market will support Residential Investment and contribute to GDP.

Auto Sales: June saw a month-over-month increase of 4.19% and a year-over-year increase of 20.6% in auto sales. With automobiles accounting for over 20% of Total Retail Sales, this growth will contribute positively to the reported June.

Okay, so what does this all mean? Well, here’s what we are doing.  We remain patient and cautious.  We have made investments into gold, silver, and Japanese large cap ETFs, all reflected in our models.  We continue to maintain large positions in money markets (yielding approximately 5% annualized) and FDIC insured bonds. 

*The statistical data, interpretation and quotes were provided by Keith McCullough and the Hedgeye team.

2022 Q4

Many investors are anxious about the market losses they may have experienced, many investors are anxious about buying at a perceived market bottom and are erroneously rushing back into the market.  We are neither.  We believe that we have just experienced the first quarter of what we anticipate being a year-long recession.  We have been in front of the selloff, and we are holding out for markets to mathematically and thematically signal a good re-entry point for our reserved cash.  Since the beginning of 2021 over $12 trillion in U.S. stock market value has vanished.

“On a lot of levels, it’s worse now than in 2008. If 2008 was about Wall Street collapsing on itself, on all its conflicts of interests and lies, this one is more about Main Street. Main Street is broke. Main Street is taking all this inflation into their cost of living. Main Street has the highest credit-card interest going back to the 1990s. It’s way worse than 2008 on that basis. If you’re trying to pay your bills with credit, it’s getting worse and worse. And then they’re going to lose their jobs. Labor collapsing is always the last thing to go down. We’re right on the cusp of the labor cycle going the wrong way.” – Hedgeye CEO Keith McCullough

Some highlights:

•       September was the worst month for the S&P 500 since March 2020

•       The S&P 500 was down -9.3% for the month; the Nasdaq was pummeled -10.5%

•       Year-to-date the S&P 500 is in crash territory down over -22%; the Nasdaq Index and Russell Small Cap Index are down ~-30%

Indexes & Indicators  
Cumulative Total Returns YTD
S&P 500-23.9%
Russell 2000-25.1%
Foreign Stocks-26.8%
Emerging Markets-26.9%
Top 3 S&P Sectors
Consumer Staples-11.8%
Bottom 3 S&P Sectors
Consumer Disc.-39.0%
Communication Srv.-31.4%
Info. Tech.-29.9%
10 Year Treasury-16.9%
US Bonds-14.6%
Global Bonds-19.9%
Municipal Bonds -12.1%
Market Indicators 
Fed Funds Target3.25%
Inflation (Core CPI)6.3%
GDP (6/30/2022)  -0.6%

Walmart’s seasonal employees went from 150,000 last year to 40,000 this year.  Snapchat laid off 20% of their workforce.  Currently the volatility indexes of the S&P, Nasdaq and Russell are all in the mid-30 range (anything over 30 is considered extremely treacherous).  Business travel has suffered, and leisure travel is starting to slow.  Currently the spread between the 2-10 year yield curve (a foreteller of market movement and sentiment) is inverted over 50BPs.  An inversion we haven’t seen since 1982.

Despite the embellished news reports, Europe’s peril is far worse than ours.  We would not be surprised if bad things were to come of Credit Suisse, one of the largest European banking institutions, as credit default swaps have widened to a meaningful 300bps. At this number, there is significant counterparty risk and lenders, and investment partners will be wary to lend the bank money.  We believe this recession is global.

Countries around the world have been raising interest rates and are all experiencing a massive slowdown.  Irish confidence dropped to the lowest point since 2008 and their inflation numbers are at a 40 year high.  Belgium confidence is the lowest since 1985 and the UK confidence is the lowest since its historical tracking.  German PPI is raging at an all-time high of 43% (Producer Pricing Index-Inflation measurement).  China, which is essential for commodities and luxury good purchases, there economy is slow despite their rate cuts and over 100 million citizens are still on lockdown. 

In our last newsletter we discussed the need to remain vigilant and not to fall for the market head fakes.  This is proving true in any metric you look at specifically based on market performance across all broad market indexes.  The Fed Reserve has raised rates, from 0% in the beginning of the year, to 2.50% currently, and with a target of 3.25%.  30-year fixed mortgage rates have gone from 3% to over 6% today.  Non-farm payrolls, unemployment and PPI are all reporting in the next 10 days.  We anticipate aggressive numbers will maintain the Feds course of drastically tightening money supply and raising rates. 

In our models we have sold our utility exposure, healthcare and consumer staples.  These were all great positions to hold in a slowdown but are currently not worth holding in high volatility market environments.  We have been fortunate to be ahead of the game and have taken advantage of the raising rate environment.  As such we continue to buy individual bonds and have seen a continuing opportunity in negotiable bank CDs.  Banks are desperate for cash and are issuing bonds at rates of almost 80bps over the treasury market. 

We continue to believe we are extremely well positioned for the markets ahead.  Please call or email any questions or concerns.  Lastly, we are lucky to have partnered with a seasoned, passionate, and comprehensive research partner, Hedgeye.  This research is provided by Keith McCullough and the entire Hedgeye team.  Thank you and we will talk soon. 


As we head into the fourth quarter of 2021, the domestic economic backdrop has vacillated between a strong reflationary trend and muted growth coupled with high inflation.  Quite a range we do admit.  Despite the feds pacifying depictions of transitory inflation, we have seen container shipping up over 300% year over year, home prices up 20% for the year and the 19 commodities on the CRB index are at all-time highs. We are seeing inflation broadening across multiple venues.  Wheat is up 30% and coal is up 35% for the past month alone.  Oil is at its highest level since 2014.  In turn, 7 of the 11 S&P 500 sectors are positive for the quarter and all 11 sectors are positive for the year.  The 10-year yield bottomed around 1% in February and has trended towards the positive from July thru September.  All the while the 10-year has moved from an early quarter 1.4% to 1.48% near quarter-end.  High yield spreads have widened slightly from 3.05 to 3.20 at the end of the quarter, and the steepening of the yield curve remains for the most part unchanged.  The bond market is a great foreteller of the economy and the equity markets.  Given the recent metrics and the unwavering of spreads during the recent bouts of episodic volatility, we maintain that we are still in a growth-oriented market.  Bitcoin is currently around $47,000/coin as the dollar fails to maintain strength and interest rates and inflation remain unabated.

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During mid-3rd quarter, the 10-year depressed and with it came some concerns that the market was expressing a slow-down.  In response, we harvested some energy and industrials sector gains.  We used this cash to incrementally add gold and utilities as well as add to our existing REIT exposure.  Shortly after, bull market trends became clearer and our stagnant market fears quickly dissipated.  We exited those positions in order to increase our energy, real estate investment trust (over weighted in public storage and apartment rentals) and commodity exposures.  We do anticipate adding gold and utilities again and with significant weights.  However, timing is very important.  Gold needs more than inflation to appreciate.  Specifically, it doesn’t like rising interest rates like we are seeing with an increasing 10-year treasury.  Utilities usually perform well during depressed growth and moderate inflationary environments.  We anticipate adding those positions sometime 2nd quarter of 2022. 

As we speak, the longest shipping regatta in history is waiting to set sail in Long Beach California.  Currently there are 60 ships backed up in the West Coast harbor.  This is a good illustration of increased demand and continued supply chain bottlenecks.  We think that these supply chain issues will continue thru the beginning of next year and help to maintain upward pressure on inflation, CPI (Consumer Pricing Index) and PPI (Producer Pricing Index).

Please remember we are not in the game of timing the markets, but we can adjust and look to ride the areas where the volatility is manageable and the opportunities for growth seem best positioned.  To time the market, would require us to be precisely correct when to sell and it would also require us to be precisely correct when to buy.  Rarely are both done with precision.  Portfolio rebalancing and reallocating our gains to opportunities that haven’t appreciated is the most efficient way to protect the portfolio.   We look forward to discussing more with you at our next meeting or over the phone when it is convenient for you.  And with that, we are going to get back at it.  Cheers to another strong quarter.

The 401(k) Match is Archaic

We’ll admit it. The title of this article is intended to be provocative.  Yet, we stand by our claim and will defend the fact that 401(k) matching contributions really are akin to dinosaurs in the modern employee rewards portfolio. 

First, let’s recognize why matching contributions exist in the first place.  As 401(k) plans began to surge and outnumber traditional pension plans, the responsibility and cost of creating an income stream in retirement shifted from employers to employees.  Employers deemed it a shared responsibility with the employee to save for one’s retirement.  To execute on that shared responsibility, employers offered matching contributions within the 401(k) plan, meaning that an employee would only receive the company contributions to their account as long as they made contributions from their own money as well. Matching contributions incent employees to save money in the 401(k).

Next, we need to realize that 401(k)s are simply one type of tax advantaged vehicle competing for the hard-earned dollars of employees.  In addition, we’ve got IRAs, Health Savings Accounts (HSAs), Flexible Spending Arrangements (FSAs), 529 College accounts, and the list goes on. All of these ‘accounts’ provide a tax advantage to the person contributing to those accounts. Of particular importance is one of the newest allowed by the tax code: the HSA.  Of even more importance is that HSAs are the most tax-advantaged of any of the accounts noted above.  Many refer to this as the triple tax advantage, and a discussion of such advantage is beyond the scope of this discussion. Rather, we will simply summarize by saying HSAs are better than 401(k)s.

Lets summarize the facts so far. 1) Matching contributions incent employees to save money in the 401(k). 2) HSAs are better than 401(k)s. When summarized together, it’s easy to see how 401(k) matching contributions have become an archaic plan design. 401(k) matching contributions incent employees to save money in a sub-optimal manner, or in an account without the greatest tax advantages to the employees, or in an account that is inferior to another type of account. In the absence of any matching contributions, employees would be advised to put their money into the best account available – the HSA.  This would provide the greatest benefit and advantage to the employee. 

Fortunately, modifying and modernizing the rewards portfolios is relatively easy.  Rather than creating the greatest incentive for employees to save into the 401(k), we might suggest creating the greatest incentive for employees to save into the HSA. Now, if you still want to have a matching contribution in the 401(k) at an even or lesser rate than the HSA match, we’re okay with that too! 

Contributed by Brian Riefepeters of Calder Consulting Group

Connect: (e) Brian@Riefepeters.com (o) 616.235.2442