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EXPLORING CENTRAL BANK DIGITAL CURRENCY (CBDC): THE FUTURE OF MONEY

Fri, 14 Jul 2023 14:43:51 GMT

The financial landscape is evolving rapidly, and central banks worldwide are embracing the concept of Central Bank Digital Currency (CBDC) as a means to modernize their monetary systems. CBDCs are digital currencies issued by central banks with their value linked to the issuing country’s official currency. The idea of CBDCs is gaining traction globally, with 87 countries actively exploring their implementation ^[1] . These 87 countries represent over 90 percent of global GDP. In this week's update we will delve deeper into how CBDCs will work, their benefits, and the unnerving risks they present to privacy and freedom.

How Will CBDCs Work?

In theory, CBDCs have the potential to digitize and replace physical currency. They are digital representations of a country's official currency, and will be issued and regulated by that country's central bank. The main goal for digitizing traditional money is to make it more accessible, efficient, and secure. The emergence of cryptocurrencies like Bitcoin and the growing importance of digital payments have propelled the exploration of CBDCs as a modern financial tool.

CBDCs have the potential to revolutionize financial transactions by streamlining processes and reducing costs. In the current financial system, each bank operates its own payment tracking system, resulting in delays and inefficiencies when multiple banks are involved in a transaction ^[2] . However, since CBDCs would be handled by the central bank it would allow for all the transactions to be consolidated onto a single ledger, enabling instant clearing of payments and universal acceptance, regardless of the payment method or platform used ^[2] . Ultimately, if this idea comes to fruition, it will eliminate the need for banks that are not the central bank.

Benefits of CBDCs

CBDCs would require a complete overhaul of the financial system. Therefore, CBDCs must offer several significant advantages to justify that type of overhaul. Here are the some of the most prominent benefits for CBDCs:

Reduced Costs - One key benefit is the potential for reduced costs. By shifting focus from physical infrastructure to digital finance, financial-service providers could save an estimated $400 billion annually in direct costs ^[3] .
Increase speed - CBDCs have the capacity to enhance the speed and efficiency of electronic payment systems, benefiting both individuals and businesses.
Appeal to the unbanked - CBDCs offer a solution for people who do not have access to a bank account. According to a survey from 2016, 1.6 billion people around the world did not have a bank account. Another statistic shows that less than 5% of adults do not have a bank account ^[3] . CBDCs have the potential to increase financial inclusion, empowering those without bank accounts, but adoption isn’t a guarantee as many underbanked people may favor the total anonymity that comes with using cash.
Heightened Security - This is a byproduct of the speed and single bank ledger. Private key cryptography could be implemented for users to "sign off" on transactions digitally, and they would become finalized and unalterable in a short period of time ^[3] .

Risks and Concerns

While CBDCs offer numerous benefits, they also come with risks and concerns that must be carefully addressed. One major concern is the potential for increased governmental control. Although no central bank currently plans to restrict CBDC usage, the hypothetical possibility of the government deciding which purchases are permissible raises privacy and individual freedom concerns. Additionally, the traceability of digital currency may lead to increased taxation, as every transaction becomes easily traceable. Technological stability is another challenge, as evidenced by the temporary shutdown of the digital version of Eastern Caribbean DCash due to technical issues ^[4] .

Let's take a moment to go more in depth on the potential for governmental control. The following is a quote from professor Eswar Prasad. Prasad is a professor at Cornell University and the author of The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance. Prasad made this statement while speaking at the World Economic Forum's annual meeting of the new champions.

“You could have, as I argue in my book, potentially better and some people might see a darker world, where the government decides that unit, so central bank money can be used to purchase some things but not other things that are deemed less desirable, like, say, ammunition or drugs or pornography or something of the sort. And that is very powerful in terms of the use of a CBDC and I think also extremely dangerous for central banks” ^[5]

Prasad noted that he was only speaking hypothetically and said, “No central bank is contemplating any such uses for its CBDC but, as an academic, it is important for me to point out all the possibilities and potential—both good and bad—of a world in which all payments are digital and anonymity might be limited (relative to the use of cash).” ^[5]

This is possible because CBDCs are programmable. For example, a CBDC could be programmable where it can only be used for certain items or even have an expiration date – which would ultimately force spending. This allows for CBDCs to make it much easier for a centralized authority to dictate and control human behavior because they can restrict the flow and opportunities if you are not behaving in a manner that they're requesting. This is very evident in China's social credit system.

Use Cases for CBDCs

It's important to balance the potential benefits of CBDCs with concerns related to individual privacy and governmental control. This is highlighted by China's social credit system. The China social credit system is a broad regulatory framework intended to report on the ‘trustworthiness’ of individuals, corporations, and governmental entities across China ^[6] . China’s “Social Credit System” rates its citizens based on their behaviors, and those who score well get privileges; those who score poorly do not. A citizen with a high score is likely to enjoy various privileges—high-speed internet, the ability to travel freely, access to the best restaurants, golf courses and nightclubs—that fellow citizens do not ^[7] .

There are many ways to lose points and lower one’s social credit score, depending on the city where the offense takes place. Some of the more trivial score-lowering actions include: not visiting their parents on a frequent basis, jaywalking, walking a dog without putting it on a leash, smoking in a non-smoking zone, and cheating in online videogames ^[6] . A citizen with a poor social credit may experience one of these forms of punishment ^[6] :

Travel bans
Reports in 2019 indicated that 23 million people have been blacklisted from traveling by plane or train due to low social credit ratings maintained through China’s National Public Credit Information Center ^[6] .
School bans
The social credit score may prevent students from attending certain universities or schools if their parents have a poor social credit rating. For example, in 2018 a student was denied entry to University due to their father’s presence on a debtor blacklist ^[6] .
Reduced employment prospects
Employers will be able to consult blacklists when making their employment decisions. In addition, it is possible that some positions, such as government jobs, will be restricted to individuals who meet a certain social credit rating ^[6] .
Increased scrutiny
Businesses with poor scores may be subject to more audits or government inspections ^[6] .
Public shaming
In many cases, regulators have encouraged the ‘naming and shaming’ of individuals presented on blacklists. In addition, flow-on effects may make it difficult for businesses with low scores to build relationships with local partners who can be negatively impacted by their partnership ^[6] .

CBDCs can also allow the government to be more targeted in their efforts to manage economic growth. One such case is the ability to combat inflation effectively. With the flexibility of CBDCs, central banks can implement different interest rates on specific balances or accounts, allowing for more precise monetary policy implementation. CBDCs also have the potential to support targeted stimulus efforts by directing funds to designated sectors or implementing expiration dates to encourage spending ^[8] .

Implementation Timelines

The timeline for CBDC implementation varies by country. In the United States, the Federal Reserve is already taking steps to address transaction inefficiencies by launching the FedNow digital payments system by the end of July 2023. This system aims to provide low-cost bill payments, money transfers, paychecks, government disbursements, and other consumer activities ^[9] . Time will tell when this will be fully implemented in the United States, but many see the implementation of FedNow as the first step toward a CBDC.

Globally, a recent survey suggests that by 2030, approximately 24 central banks will have implemented digital currencies. This projection highlights the increasing global adoption and recognition of CBDCs as a fundamental part of future financial systems ^[10] .

It is not a foregone conclusion that CBDCs will be implemented as there is plenty of opposition to the idea. Senator Cruz from Texas and Governor DeSantis from Florida have both introduced legislation to prohibit the Fed from establishing a CBDC ^[11][12] . If CBDCs take over the financial system, it appears there will be minimal options for those who do not want to participate in the system. Some of those options may include: using bitcoin that is established on a decentralized platform with options for privacy and anonymity, using physical precious metals like gold and silver, and/or exchanging value for value like in an archaic bartering system.

Conclusion

Central Bank Digital Currencies have the potential to revolutionize the way we transact and interact with financial systems. By leveraging digital technologies, CBDCs can offer reduced costs, increased speed, improved financial inclusion, and heightened security. However, careful consideration must be given to the risks associated with potential governmental control, privacy concerns, and technological stability. As countries progress toward a digital economy, CBDCs will play a pivotal role in shaping the future of money, transforming financial systems and enhancing economic efficiency on a global scale.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situati on.

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THE WARNING SIRENS: RISING INTEREST RATES AND SLOWING BUSINESS PERFORMANCE ARE HARBINGERS OF ECONOMIC CHALLENGES

Fri, 07 Jul 2023 13:53:37 GMT

The global economy is facing increasing pressures, and there are growing concerns about a potential recession on the horizon. Two significant indicators that have historically foreshadowed economic downturns are an inverted yield curve and Purchasing Managers' Index (PMI) readings below 50. Over the past couple of months these two indicators have continued to point in the direction of an impending recession. In this week’s update, we will explore the historical context and significance of these indicators and analyze their current implications for the economy.

Understanding the Inverted Yield Curve:

An inverted yield curve occurs when short-term interest rates exceed long-term rates, typically reflected in the inversion of the two-year and 10-year Treasury yields. An inverted yield curve is often viewed as an indicator of a troubled economy because it deviates from the normal yield curve shape, where longer-term interest rates are typically higher than shorter-term rates. In an inverted yield curve scenario, short-term interest rates exceed long-term rates, implying that investors have lower expectations for future economic growth and inflation.

This phenomenon has been a reliable recession predictor in the past, and suggests that the global economy is headed toward a recession despite the stock market trading near all-time highs ¹ . The Fed chose to pause rate hikes during their June meeting, but many expect the rate hikes to continue in the future ² . Persistently raising short-term rates in an inverted yield curve environment can increase the risk of an economic slowdown or recession. The inversion of the yield curve itself is often seen as a reliable predictor of economic downturns. By continuing to tighten monetary policy in this scenario, the Fed may unintentionally contribute to a deeper and more prolonged recessionary environment.

PMIs Indicating Economic Contraction:

PMIs, or Purchasing Managers' Indexes, are widely used economic indicators that provide valuable insights into the health and performance of various sectors within an economy. They are based on surveys conducted among purchasing managers in manufacturing, services, construction, or other sectors. The purpose of PMIs is to gauge the prevailing business conditions, sentiment, and trends within a specific sector or the overall economy.

When a PMI reading falls below 50, it indicates economic contraction. The US manufacturing sector's recent contraction, raises concerns about the overall economic health and suggests a challenging road ahead ³ . The ISM Manufacturing PMI came in at 46 in June, down from 46.9 in May. This is the lowest reading since July 2020 ³ . The manufacturing sector is followed closely due to it strong linkages with other sectors of the economy. Changes in manufacturing activity can impact supply chains, employment levels, and the performance of related industries. Manufacturing job losses can have a cascading effect on the economy, impacting consumer spending and business investment, and further contributing to the likelihood of a recession.

Analysis of Current Economic Indicators:

Above is a historical chart of the S&P 500 with previous recessions highlighted in the gray. This chart provides over 40 years of data for the S&P 500. Using the red vertical line, I've marked every time the manufacturing PMI dropped below 50 while the yield curve was inverted. You will see that a recession followed every time these two events were occurring simultaneously. This doesn't guarantee that a recession will occur but it strongly suggests to me that the economy is showing significant signs of contracting.

Conclusion:

As the global economy faces mounting pressures, the warning signs from an inverted yield curve and PMIs below 50 cannot be ignored. Historical evidence points to the significance of these indicators in foreshadowing recessions. The recent inversion of the yield curve and the contraction in the manufacturing sector raise concerns about the economy's overall health and the potential for a recession. It's crucial to monitor these indicators closely and consider other factors that may influence the outcome. Our Directional Portfolios aim to build a portfolio that will adjust with the business cycle. If you'd like to learn more, you can call or text at 678.884.8841 or email us at connect@findabundance.com .

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RESILIENCE AND VULNERABILITIES: DECODING THE GLOBAL ECONOMY'S STORY

Fri, 30 Jun 2023 14:37:51 GMT

Amidst upwardly revised GDP growth and declining jobless claims, underlying risks such as banks prioritizing financial stability and a decline in global manufacturing cast a shadow of uncertainty. In this week's update, we delve into crucial economic factors that are currently shaping the global landscape. By examining manufacturing PMI, banks' defensive stance, and the resilience observed in the US economy, we aim to provide valuable insights into the current state of affairs.

Manufacturing PMI and Recession Signals

The S&P Global Flash US Manufacturing PMI™ is a widely recognized economic indicator that measures the performance of the manufacturing sector. In June 2023, the PMI dropped to 46.9 ^[1] , raising concerns about a potential recession. The PMI measures the performance of the manufacturing sector based on surveys conducted among purchasing managers. It provides an overview of various aspects, including new orders, production levels, employment, supplier deliveries, and inventories. A reading above 50 indicates expansion, while a reading below 50 suggests contraction.

This decline from 51.0 in May marks the lowest reading since February 2020. The contraction in the manufacturing sector is primarily driven by a slowdown in new orders and production ^[1] . Manufacturing PMI is an important indicator as it reflects the overall economic health of a country. The slowdown in new orders and production can be influenced by various factors such as changes in consumer demand, supply chain disruptions, labor shortages, trade policies, and global economic conditions. However, in this instance, the largest contributors are a drop in consumer demand and global economic conditions.

Historically, there is a correlation between manufacturing PMI contractions and economic recessions. For instance, during the global financial crisis of 2008-2009, the PMI readings dropped significantly, signaling an economic downturn. Similarly, the PMI contraction in 2020 preceded the economic recession triggered by the COVID-19 pandemic. This makes it an important signal for investors and businesses to monitor ^[1] .

Defensive Posture of Banks Worldwide

Banks worldwide have been adopting a defensive posture, which further signals potential trouble ahead ^[2] . A defensive posture means that banks are taking measures to mitigate potential risks and ensure financial stability. Specific actions can include increasing capital reserves, tightening lending standards, reducing exposure to high-risk assets, enhancing risk management practices, and diversifying their portfolios to minimize vulnerabilities.

The cautious approach of banks reflects their awareness of potential risks in the economy. By adopting a defensive posture, banks aim to protect themselves from financial shocks, economic downturns, and uncertainties. This cautious approach contributes to overall economic stability by reducing the likelihood of systemic risks and enhancing the resilience of the financial system. When banks take this defensive posture, it becomes a greater priority to be fiscally stable than make loans - which are the main revenue source for banks.

In my opinion, this is something to watch as many commerical real estate loans come due in the next 12-18 months. As interest rates have significantly increased over the past 12 months, it will be challenging for businesses to renew those loans which will negatively impact the banks and their revenue ^[3] .

Signs of Resilience in the US Economy

Despite concerns highlighted by manufacturing PMI numbers and the defensive posture of banks, positive news emerges from the US economy. First-quarter GDP growth has been revised up to 2.0% from 1.3% ^[4] , indicating ongoing economic expansion. The revision of first-quarter GDP growth from 1.3% to 2.0% indicates that the US economy is expanding at a slightly faster pace than previously estimated. This upward revision suggests stronger economic performance and reflects positive momentum.

Additionally, weekly jobless claims in the United States fell to their lowest level since October 2021 ^[4] . The decline in jobless claims to their lowest level since October 2021 signifies a that the labor market is showing signs of resilience. In previous weeks we've discussed the impact of labor hoarding and how it could be affecting these weekly numbers.

The revised GDP growth and the decline in jobless claims reflect the resilience of the US economy. However, it is important to note that the economy is growing at a slower pace compared to previous quarters ^[4] . The Federal Reserve's efforts to combat inflation may influence future economic growth. While positive indicators exist, rising inflation and external factors such as the war in Ukraine could impact the possibility of a future recession ^[4] .

Conclusion

In summary, considering the manufacturing PMI numbers, the defensive stance of banks, and the positive indicators in the US economy, the outlook for the next 6-12 months remains uncertain as we are getting mixed signals across the global economy. There are some encouraging signs for the US economy as the labor market appears to be resilient. However, there's an undertone of vulnerability that warns of potential risks that could lead to a sharper downturn if not carefully managed. Our Directional Portfolios aim to build a portfolio that will adjust with the business cycle. If you'd like to learn more, you can call or text at 678.884.8841 or email us at connect@findabundance.com .

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CHINA'S RATE CUTS AND THEIR GLOBAL IMPLICATIONS

Fri, 23 Jun 2023 14:59:01 GMT

Introduction

The global economy is showing worrisome signs of a synchronized deflationary recession, with China's recent interest rate cut serving as a significant indicator. However, central banks worldwide remain focused on inflation and tight labor markets, overlooking the potential risks associated with increasing rates during an economic slowdown. In this week's article, we will explore the implications of these trends and highlight the importance of a comprehensive approach to address the challenges ahead.

Overview of Recent Rate Cuts in China

China's decision to cut lending benchmarks comes as authorities seek to revitalize a slowing economic recovery. The one-year loan prime rate (LPR) was lowered by 0.1 percent to 3.55%, while the five-year LPR was reduced by the same margin to 4.20% ^[1] . Although the cuts were anticipated, the smaller-than-expected reduction in the five-year rate disappointed some investors, leading to a drop in the Hang Seng Mainland Properties Index and a dip in broader Asian stock markets.

These rate cuts aim to lower the cost of new loans and ease interest payments on existing loans ^[1 . While they are expected to offer modest support to economic activity, weak credit demand may prevent a sharp acceleration in credit growth. As one of the world's largest economies, China's actions often foreshadow wider economic shifts. In my opinion, this rate cut serves as a cautionary signal that should not be ignored in assessing the current economic landscape.

Divergent Monetary Policy Worldwide

The global landscape of monetary policy reveals a divergence in approaches among major central banks. Central banks typically prioritize inflation as a key economic indicator, while the labor market's tightness also plays a crucial role ^[2] . However, an exclusive focus on inflation may lead to an incomplete understanding of the overall economic health. Neglecting signs of an economic slowdown, such as a tight labor market, can hinder effective policymaking and response strategies.

The European Central Bank (ECB) recently hiked rates and signaled a worsening inflation outlook. In contrast, the Federal Reserve opted to pause rate hikes during their most recent meeting but have suggested future rate hikes later this year. These central banks are creating a hyper focus on inflation because they believe that the labor markets are in good shape as unemployment numbers have stayed a good level. Yet, according to a Skynova survey in February, 91% of businesses are actively labor hoarding ^[3] .

Labor hoarding is where businesses retain a larger workforce than necessary ^[3] . The rationale behind this practice lies in the long-term cost-benefit analysis and the desire to maintain a positive outlook for the firm. I believe this is happening because many business owners expect a shallow recession. Therefore, it's more cost effective to hold on to labor and make it through a shallow recession than it is to lay off and rehire a large amount of your workforce.

However, if the China rate cuts are signaling a greater economic slowdown, businesses will be forced to lay off the excess labor they have been retaining, magnifying the impact of the recession.

Global Implications of China's Rate Cuts

China's rate cuts hold significant implications for the global economy. As the second-largest economy in the world, China's actions have a ripple effect on global trade, investment, and financial markets. The rate cuts are expected to reduce loan costs and provide some support to economic activity, which could have positive effects on global trade dynamics.

We'll see if China's rate cuts could influence the decisions of other major central banks. The Federal Reserve, for example, may consider the global economic environment and China's actions when determining its future rate hike plans. The ECB, which recently hiked rates and expressed the likelihood of further increases, may also be influenced by China's monetary policy decisions. These interconnected relationships emphasize the importance of monitoring China's actions and their potential implications for global monetary policy coordination.

Conclusion

As the world's second-largest economy, China's monetary policy decisions carry significant weight that should not be overlooked. While the rate cuts are expected to provide support to economic activity in China, their impact on the global stage is also of great importance. In general, rate cuts signal that an economy needs to be stimulated due to a lack of demand. I believe we're already seeing signs of a globally synchronized recession as Germany technically entered a recession in May ^[4] and New Zealand technically fell into a recession in the past couple of weeks ^[5] . Our Directional Portfolios aim to build a portfolio that will adjust with the business cycle. If you'd like to learn more, you can call or text at 678.884.8841 or email us at connect@findabundance.com .

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situati on.

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NAVIGATING THE PARADOX: A NEW TECHNICAL BULL MARKET IN THE FACE OF A SLOWING ECONOMY

Fri, 16 Jun 2023 18:55:46 GMT

In the past week the stock market has technically entered a new bull market. Bull and bear markets are technically defined by a 20% move from the recent low. We recently saw the S&P cross this threshold as it surged 20% since the lows in October 2022 ^[1] .

In the world of investing, the emergence of a new bull market is often met with excitement and optimism. However, the current situation is marked by an intriguing contradiction—the markets have technically entered a new bull market while the broader economy shows signs of a slowdown. In this week’s update, we will explore this paradox, examining the indicators of a new bull market while considering the challenges posed by a sluggish economy.

Market Resurgence: A Technical New Bull Market

Despite the economic headwinds, numerous experts argue that the markets have entered a new bull market. There is a lot of enthusiasm around the market gains and the newly declared bull market. Yet, it's important to realize that the market is not always a good judge of the economy. In fact, it's a better measure on how people feel about where the market is heading. A positive move in the market is suggesting a positive outlook.

One way to determine this sentiment is to follow CNN's Fear and Greed Index. The Fear & Greed Index is a way to gauge stock market movements and whether stocks are fairly priced. The theory is based on the logic that excessive fear tends to drive down share prices, and too much greed tends to have the opposite effect ^[2] . The index has a rating of 0-100, and we're currently sitting at a level of 82 which is categorized as "extreme greed" ^[3] . What does this mean for the future of the markets? I don't know … time will tell, but there are a definitely a handful of signs that point to a slowing economy that could quickly shift the renewed optimism back to pessimism.

Economic Concerns: Signs of a Slowing Economy

Amidst the market's resurgence, it's essential to acknowledge the concerning state of the economy. US manufacturing is experiencing minimal growth, while inventories have reached levels that hinder future expansion ^[4] . Additionally, the labor market, although the numbers have stayed strong, exhibits signs of strain. In my opinion, the data is suggesting that demand is slowing and it's forcing businesses into making difficult financial decisions. Essentially, cutting labor force is the last and final option to reduce costs. Things have stayed very stable but we're starting to see initial claims of unemployment continue to tick up each week ^[5] . We're also seeing companies resort to labor hoarding ^[6] and reducing hours worked ^[7] to retain employees.

Labor hoarding is a sign that businesses are worried about the future and are trying to protect themselves from a potential recession. There are a number of reasons why businesses are hoarding labor. One reason is that the labor market is very tight, with unemployment at a record low. This makes it difficult for businesses to find qualified workers, and businesses are reluctant to lay off workers who they may need in the future. ^[6]

Another reason for labor hoarding is that businesses are worried about a potential recession. If a recession does occur, businesses may need to reduce production or even close down. By hoarding labor, businesses can ensure that they have the staff they need to weather a recession. ^[6]

The Lingering Banking Crisis

The other major red flag for me are the signs of the lingering banking crisis. This is not something that has stayed in the headlines. In fact, I believe part of the optimism in the current markets is due to the fact that many believed the banking crisis that occurred earlier this year would have a major impact on the labor markets. Therefore, it makes sense why optimism would return when the crisis seems to have passed with little impact to the labor markets.

Despite outward signs of recovery, it does not appear that banks have returned to their normal lending activities. This is highlighted by the idea that a well known real estate developer in Texas is having a difficult time finding a bank willing to lend to them for their projects ^[8] .

Despite a demand for new apartments, Howard Hughes Corp., a real estate developer backed by hedge fund manager Bill Ackman, is struggling to find financing for new apartment projects. The company has reached out to dozens of lenders, but none have shown interest in providing funding. This is due to a number of factors, including rising interest rates and concerns about the overall health of the real estate market. As a result, Howard Hughes is having to delay or cancel some of its planned projects. ^[8]

This is a sign of the challenges facing the real estate industry, as lenders become more cautious about lending money for new projects. This is also a sign that banks are not back to business as usual because lending is the life blood of their business model. This can be signaling that banks are not confident about the future and doing everything they can to avoid risk and potential default.

Conclusion:

To comprehend this paradox, it is crucial to consider the interplay between market sentiment and economic indicators. While economic indicators reflect the current state of affairs, market sentiment often guides investor behavior. The surge in the market, despite a sluggish economy, underscores the influence of sentiment over economic realities. Solely relying on economic indicators may not capture the complexities of the market.

This presents investors with a unique challenge—managing a new bull market amidst a slowing economy. While the markets display renewed vigor, economic indicators warn of potential hurdles. To navigate this paradox, a balanced approach is crucial and we must remain attentive to both market sentiment and economic realities. Our Directional Portfolios aim to build a portfolio that will adjust with the business cycle. If you'd like to learn more, you can call or text at 678.884.8841 or email us at connect@findabundance.com .

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situati on.

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THE CASE FOR A SOFT LANDING: ARGUMENTS FALTERING AS GLOBAL ECONOMY FACES CHALLENGES

Thu, 08 Jun 2023 19:48:30 GMT

The soft landing narrative is on its last leg. In economics, a soft landing refers to a smooth transition from a period of rapid growth to a more sustainable level. Many experts had hoped that the global economy would experience a soft landing, supported by three main arguments. However, as we delve deeper into the current economic landscape, it becomes apparent that these arguments are not playing out as expected. This week's article aims to explore the reasons behind the diminishing likelihood of a soft landing, with a specific focus on the faltering arguments surrounding China's reopening, Europe's struggle to rebound, and the deteriorating US job market.

China's Reopening: A Disappointing Boost to the Economy

One of the key arguments put forth for a soft landing was the expectation that China's reopening would stimulate global economic growth. However, recent developments indicate that China's reopening is not proceeding as anticipated. The economic data reported for China in the month of May shows declining trade and an economic slowdown. The country's trade volumes have decreased, resulting in a contraction in exports and reduced consumer spending. According to the report, China shows a 7.5% decline in exports from last May and a 4.5% decline in imports ^[1] .

April’s “disappointing activity data” suggests “China’s domestic demand recovery has lost steam following the reopening-induced bounce,” Said Lloyd Chan of Oxford Economics ^[1] . These factors have hindered the expected economic boost, highlighting the challenges faced by China and its potential impact on the global economy.

Europe's Struggle: Failing to Rebound After Energy Crisis

Another argument for a soft landing revolved around the belief that Europe would rebound following the energy crisis that ended around March of this year ^[2] . However, there continues to be a slowing of global economies, with a particular emphasis on Germany. German factory orders, a significant indicator for Europe's largest economy, have dipped, indicating a disappointing start to the second quarter. Furthermore, Germany experienced a contraction in its gross domestic product (GDP) during the first quarter of the year, marking a potential recession ^[3] . Germany is traditionally one of the strongest economies in Europe. These developments raise concerns about Europe's economic recovery and its ability to rebound as initially anticipated.

In addition to what we're seeing in Germany, there is supporting evidence that economic slowdowns are happening across the world. A World Bank report estimates that the international economy will expand just 2.1% in 2023 after growing 3.1% in 2022 ^[4] . Indermit Gill, the World Bank’s chief economist, called the latest findings “another gloomy report." The bank, he said, expects “last year’s sharp and synchronized slowdown to continue to this year into a sharp slowdown.” ^[4]

US Job Market: Struggling Amid Rising Jobless Claims

The final argument being made for the soft landing was a strong jobs market. For the most part the US job market remains strong but is beginning to face some challenges. As of this past week, jobless claims in the US are at their highest levels since 2021 ^[5] . This rise in jobless claims signifies a weakening job market, with economic uncertainty and reduced business activity as contributing factors. The struggling job market in the US has significant implications for the overall health of the economy and casts doubt on the likelihood of a soft landing. The job market serves as a crucial indicator of economic stability and consumer confidence, making this downturn a cause for concern.

Conclusion

As we analyze the current state of the global economy, it becomes evident that the arguments supporting a soft landing are losing traction. China's reopening has not generated the expected economic boost, with declining trade and reduced consumer spending dampening its impact. Europe, specifically Germany, is facing economic challenges, as seen in the slowing factory orders and the potential onset of a recession. The US job market is also struggling, as evidenced by the increase in jobless claims. These factors collectively question the feasibility of a soft landing in the global economy.

In conclusion, while hopes were high for a soft landing, the reality is painting a different picture. The arguments surrounding China's reopening, Europe's rebound, and the strength of the US job market are not playing out as anticipated. By acknowledging these challenges and adapting our strategies, we can better navigate the evolving economic landscape and work towards achieving a sustainable and resilient global economy. Our Directional Portfolios aim to build a portfolio that will adjust with the business cycle. If you'd like to learn more, you can call or text at 678.884.8841 or email us at connect@findabundance.com .

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situati on.

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DEBT CEILING COUNTDOWN: HOW IT COULD SHAKE UP THE JOB MARKET AND YOUR FINANCES

Fri, 02 Jun 2023 19:52:52 GMT

In a time of significant challenges, the United States is currently facing two critical issues: the debt ceiling debate and the state of the job market. The consequences of inaction in these areas can have far-reaching impacts on the economy, financial markets, and individual livelihoods. In this article, we will delve into the potential consequences of inaction, proposed amendments, the resilience of the job market, and the implications for financial markets. It is vital to address these challenges promptly and thoughtfully to ensure economic stability and maintain investor confidence.

Understanding the Debt Ceiling and Consequences of Inaction

Having discussed the debt ceiling in previous weeks we will not dive deep into the ramifications of potential default as we know failure to pass the debt ceiling bill by the June 5 deadline could result in an inability to meet financial obligations, including debt payments, Social Security benefits, and military salaries. This scenario would trigger a severe financial crisis, impacting not only the government but also businesses and individuals. The uncertainty surrounding a potential default would most likely lead to market volatility and a loss of investor confidence.

Lawmakers have proposed amendments to the debt ceiling bill, aiming to introduce spending cuts and increase defense spending ^[1] . However, any changes to the bill would require it to be sent back to the House for review, potentially causing delays and creating additional uncertainty. It is essential for lawmakers to find common ground, foster bipartisan cooperation, and consider alternative solutions that can ensure the timely passage of the debt ceiling bill. A swift resolution to this debate is critical to instill market stability and investor trust.

Job Market Resilience, Challenges, and Industry Impact

This past week the Federal reserve published one of their Beige Book reports. It provides a qualitative assessment of the current economic conditions in each of the 12 Federal Reserve districts across the United States. The report gathers information from various sources, including businesses, economists, market experts, and other contacts within each district. In addition to their report, we've seen a recent uptick in unemployment claims and layoffs in May.

In spite of a recent increase in Americans filing for unemployment benefits, the job market has shown resilience. Employers, faced with challenges in finding qualified employees, have generally held onto their workforce. However, certain industries, such as technology and interest rate-sensitive sectors, have experienced job cuts due to economic uncertainties. These challenges highlight the need for measures and initiatives to address industry-specific issues and foster a sustainable job market recovery.

Economists predict a slowdown in job growth, but there are hopes that the unemployment rate is will rise only slightly ^[2] . The Federal Reserve's Beige Book report describes the job market as strong, but it also highlights that some businesses are pausing hiring or reducing their workforce due to weaker demand or economic uncertainties. This cautious approach may impact consumer spending and overall economic growth. Furthermore, a default or prolonged debate on the debt ceiling could have long-term implications for the economy, including higher borrowing costs, reduced business investment, and diminished consumer confidence.

Navigating the Challenges and Ensuring Economic Stability

At the time of this writing, the debt ceiling bill has been approved in the House and passed to the Senate for the final stamp of approval ^[1] . The debt ceiling debate and the state of the job market have significant implications for financial markets. Uncertainty surrounding the debt ceiling can lead to increased market volatility, as investors become cautious about the government's ability to meet its financial obligations. Investors will closely monitor the progress of the debt ceiling bill, and any signs of prolonged debate or a potential default can impact market sentiment. Therefore, a timely resolution to the debt ceiling debate is crucial for restoring and maintaining investor confidence.

Conclusion:

The outcome of the debt ceiling debate and the state of the job market have significant implications for financial markets. Investor confidence is closely tied to the government's ability to manage its financial obligations and maintain economic stability. Any signs of prolonged debate or a potential default can lead to increased market volatility and a loss of investor trust. Therefore, a swift resolution to the debt ceiling issue is crucial for restoring and maintaining market stability.

Furthermore, the long-term implications of these challenges should not be overlooked. A default or prolonged debate could result in higher borrowing costs, reduced business investment, and diminished consumer confidence. This can hamper economic growth and have far-reaching consequences across various sectors. Policymakers must consider the potential ripple effects and work towards mitigating risks to ensure a sustainable and inclusive recovery.

In conclusion, the debt ceiling debate and the state of the job market pose critical challenges for the United States. Swift action is necessary to pass the debt ceiling bill, avoid a potential default, and maintain investor confidence. The resilience of the job market is commendable, but efforts should be made to address industry-specific issues and foster a sustainable recovery. By prioritizing economic stability, finding common ground, and investing in initiatives that support growth and innovation, we can navigate these challenges and build a stronger and more inclusive economy for the future.

Sources:

THE IMPACT OF A US DEBT DEFAULT ON EVERYDAY AMERICANS: EXPLORING POTENTIAL CONSEQUENCES

Thu, 25 May 2023 21:03:47 GMT

The markets have started to increasingly feel uncertain without a clear resolution coming for the debt ceiling. Failing to come to a timely decision raising concerns about the possibility of an unprecedented US debt default. The potential consequences of such a scenario would have far-reaching implications for everyday Americans. In this article, we will delve into the possible effects of a US debt default on the lives of ordinary citizens and the ripple effects that will take place in the markets.

The US debt ceiling, also known as the debt limit, is a statutory limit on the total amount of debt that the US government can legally borrow. It represents the maximum level of debt the government can accumulate to fund its operations and meet its financial obligations. The US financial system is often referred to as a debt-based system because it relies heavily on borrowing and lending activities to fuel economic growth and facilitate various transactions.

Without coming to a new arrangement, the government would not be able to keep funding their operations as they are today. The factors that could potentially lead to a US debt default range from political gridlock and excessive spending to a global economic crisis.

Immediate Impact on Financial Markets

A US debt default would trigger a wave of uncertainty in financial markets. Stock markets would experience heightened volatility, causing disruptions for investors and potentially eroding retirement savings. For example, during the 2011 debt ceiling debate the S&P 500 declined close to 15%. ^[1]

A default would also most likely result in a downgrade for the US credit rating. A downgrade in rating would cause borrowing costs to skyrocket and affect mortgages, loans, and credit card interest rates. Moreover, the US dollar may face devaluation, reducing Americans' purchasing power and raising the cost of imported goods.

Job Market and Employment

The economic contraction resulting from a debt default would have adverse effects on businesses. Naturally the demand for goods and services would fall as everyone would be seeking to save their money and avoid large losses from the stock market. A decline in demand would negatively impact revenue and sales which will ultimately lead to job losses and increased unemployment rates. Finding new employment opportunities would become increasingly challenging as companies struggle to stay afloat amidst the economic turmoil. The ripple effect of reduced consumer spending would exacerbate the job market's instability.

Government Services and Social Programs

A debt default would force the government to implement significant budget cuts to reduce spending. Essential services such as healthcare, education, and infrastructure maintenance could face severe funding reductions, negatively impacting Americans' quality of life. Additionally, social programs like Social Security and Medicare may face uncertainty, leaving retirees and vulnerable populations in a state of financial insecurity.

This would have a severe impact on the income of many retirees. According to the National Committee to Preserve Social Security and Medicare, social security payments are responsible for 50% of the household income for two-thirds of those who receive social security, and for 40% of recipients their social security benefits consist of 90% of their income ^[2] .

Higher Cost of Living

Economic instability resulting from a debt default often leads to inflationary pressures. As the value of the dollar declines, the cost of goods and services tends to rise. Everyday Americans would face the burden of a higher cost of living, affecting their household budgets and diminishing their disposable income. Basic necessities such as food, utilities, and transportation would become more expensive, and magnify the financial strain that many people have been feeling for the past year.

International Reputation and Trade

A US debt default would erode the trust and credibility of the United States in global financial markets. Foreign investors may hesitate to invest in the US economy, leading to reduced foreign direct investment and limited access to capital. The decline in international trade would further impede economic growth, potentially causing long-term damage to the US economy.

Conclusion

The potential consequences of a US debt default are far-reaching and would significantly impact everyday Americans. From the immediate effects on financial markets and increased borrowing costs to job losses, reduced government services, and higher living expenses, the ramifications would be felt across various aspects of life. In my opinion, because of all these ramifications, a default is unlikely. I anticipate a decision to be made before the anticipated date of June 1st, but also anticipate increased market volatility while we wait for a decision. Our Directional Portfolios aim to build a portfolio that will adjust with the business cycle. If you'd like to learn more, you can call or text at 678.884.8841 or email us at connect@findabundance.com .

End Notes:

CHINA'S REOPENING FALLOUT: UNRAVELING THE CHALLENGES FACING THE WORLD ECONOMY

Thu, 18 May 2023 20:28:29 GMT

The global economic landscape is constantly evolving, influenced by various factors and events. In the wake of global economic struggles, China's reopening was hailed as a beacon of hope for the world economy. However, as reality unfolds, it has become evident that the anticipated economic boom has encountered unexpected obstacles. China's slowing industrial profit and factory output, coupled with shifting consumer spending habits and an impending decline in commercial real estate, paint a somber picture. This article delves into the intricacies of these interconnected factors, shedding light on the uncertain path ahead. Join us as we navigate the shadows cast by China's reopening, evolving consumer behavior, and the precipice of a global economic decline.

China's Reopening: A Different Reality

China's reopening after a second round of COVID-19 lockdowns is not unfolding as the rest of the world would've hoped ^[1] . At the beginning of the year, China reopened its borders after three years of COVID closures. Initially, optimism surrounded China's reopening as it could kick-start economies across the world, but recent data on industrial profit and factory output suggest a different reality ^[1] . China's economic momentum seems to be slowing down, with concerns over slack post-COVID economic growth ^[2] . China's economic data for April fell well below expectations. They only saw a 5.9% increase in industrial production when they expected close to 11% growth, and retail sales grew by 18% when many economists anticipated growth around 21% ^[1] .

The impact of China's economic performance extends beyond its borders, affecting global markets and trade dynamics. Here are a few reasons why China's economy is important to the rest of the world:

Size and Growth: China is the world's second-largest economy behind the United States. Its sheer size makes it a major player in global economic affairs. Over the past few decades, China has experienced rapid economic growth, lifting hundreds of millions of people out of poverty and creating a burgeoning middle class. The expansion of China's economy has had a profound impact on global trade and investment flows.
Consumption and Demand: As China's middle class continues to grow, so does its consumer market. Chinese consumers have become increasingly important drivers of global demand for goods and services. Many multinational companies consider China as a crucial market for their products and services, and the preferences and purchasing power of Chinese consumers have a significant influence on global industries such as automotive, luxury goods, technology, and more.
Investment and Capital Flows: China attracts substantial foreign investment, both in terms of direct investment and portfolio investment. Foreign companies seek opportunities to access China's large market, establish production facilities, or partner with Chinese firms. Moreover, China has actively invested in foreign assets, including infrastructure projects in developing countries, which can impact regional and global economic dynamics. Therefore, a reopening of their economy would help initiate the flow of money across global markets. Yet, if demand wanes (like it appears to be) then these opportunities go away and will not provide the opportunities that many hoped.
Global Economic Stability: Given its size and interconnectedness with the global economy, China's economic stability is crucial for overall global economic stability. Any significant disruptions in China's economy, such as a financial crisis or a severe slowdown, can have spillover effects on other countries through trade, financial, and confidence channels.

In summary, changes in China's economy can reverberate globally, affecting businesses, industries, and countries around the world.

Consumer Behavior Shift: Insights from Home Depot and Target Earnings

The earnings reports of Home Depot and Target provide valuable insights into changing consumer behavior ^[4][5] . Home Depot, reported it's first decline in earnings in over three years ^[4] . The decline in earnings is a sign that many consumers are becoming more cautious as they fear a recession. Home Depot saw a 6.6% decline in earnings per share from this time last year. Home Depot also revised their sales projections down by 2%-5% for the remainder of the year citing "continued uncertainty regarding consumer demand." ^[4]

Target's earnings report also revealed consumers' altered spending habits as they're seeing consumers spend more on essential items instead of clothing ^[5] . They've also experienced losses incurred by a rise in shoplifting due to organized retail crime. They estimate that this trend may cost them $500 million in profitability this year ^[5] . These shoplifters are resorting to this type of crime as a way to make money because they will resell the stolen items online.

Commercial Real Estate Challenges: A Looming Decline

The commercial real estate sector is facing significant challenges, raising concerns about a potential decline. A rise in distressed sales has become a clear signal of the beleaguered state of the office market ^[6] . These large investors are getting rid of properties at fire sale prices. Here are a few transactions:

Blackstone sold the Griffin Towers office complex in Santa Ana for $82 million, or about 36% less than the firm paid in 2014 ^[6] .
Principal Financial Group sold a Parsippany, N.J., office building for $14.3 million, down from the $52 million it paid in 2008 ^[6] .
The tower at 350 California in San Francisco, valued at $300 million in 2019, is expected to trade at about $60 million, or roughly 80% below that previous valuation ^[6] .

Various factors contribute to this situation, including remote work trends, changing office space requirements, and economic uncertainty. In my opinion, these transactions may be foreshadowing a large decline in commerical real estate values, and if that's the case, these investors are willing to take large losses now in order to prevent greater losses in the future. If the commercial real estate sector experiences a substantial decline, it could have far-reaching consequences for investors, businesses, and the overall economy.

Conclusion

China's reopening, changing consumer spending habits as indicated by Home Depot and Target earnings, and the challenges faced by the commercial real estate sector all contribute to the evolving global economic landscape. They're continual signs that both consumers and businesses are feeling the financial pressure. Abundance is here to help you prosper regardless of what happens next in the economy. Our Directional Portfolios aim to build a portfolio that will adjust with the business cycle. If you'd like to learn more, you can call or text at 678.884.8841 or email us at connect@findabundance.com .

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Sources:

[1] CNBC. (2023, May 16). China's industrial profit growth slows sharply in April. Retrieved from [ https://www.cnbc.com/2023/05/16/chinas-data-industrial-profit.html ]

[2] Reuters. (2023, May 16). China's factory output, consumption highlight slack post-COVID economic momentum. Retrieved from [ https://www.reuters.com/world/china/chinas-factory-output-consumption-highlight-slack-post-covid-economic-momentum-2023-05-16/ ]

[3] AP News. (2023, May 16). China exports boom but outlook gloomy as virus surges. Retrieved from [ https://apnews.com/article/china-economy-export-1c99e06f41260c5c56156fb5c0ea3626 ]

[4] Investors.com. (n.d.). Home Depot Earnings Beat, Dow Jones Giant Raises Outlook. Retrieved from [ https://www.investors.com/news/home-depot-earnings-dow-jones-hd-stock/ ]

[5] CNN Business. (2023, May 17). Target reports strong earnings as consumers shift spending habits. Retrieved from [

https://www.cnn.com/2023/05/17/business/target-earnings/index.html ]

[6] The Wall Street Journal. (n.d.). https://www.wsj.com/articles/rise-in-distressed-sales-signals-new-chapter-for-beleaguered-office-market-bbff313c

SMALL BUSINESS PESSIMISM, BANKING CRISIS, AND MANUFACTURING DECLINE: A RECIPE FOR DEFLATIONARY ECONOMY

Fri, 12 May 2023 19:18:13 GMT

Are we heading towards a deflationary economy? The recent decline in manufacturing orders, ongoing banking crises, and a drop in small business optimism all point towards potential future unemployment rates on the rise. A deflationary economy is when prices for things we buy go down instead of up. This might sound like a good thing, but it can actually be a problem because it can cause people to stop spending money. In this week’s article, we will analyze a few of the recent economic indicators that support the existence of a deflationary economy.

The Decline of German Manufacturing: What Does It Mean for the Rest of Europe?

First, let's take a look at the manufacturing sector in Germany. The manufacturing sector continued to perform poorly in April 2023, with the worst performance since May of 2020. ^[1] The factory sector has been contracting for ten consecutive months. This has put continued downward pressure on new orders due to customer hesitancy and efforts to unwind buffer stocks. Average purchase prices fell the most since December of 2019, and expectations ticked up to a 14-month high. ^[2] When the average purchasing price of is going down, it means that manufacturers are paying less for the raw materials and other inputs needed to produce their products.

Lower purchasing prices may seem like a good thing for manufacturers, as it means they can reduce their costs and potentially improve their profit margins. However, if prices continue to fall and the overall economy enters a deflationary period, it can have negative effects on the economy as a whole. In a deflationary environment, consumers and businesses delay spending and investment, expecting prices to continue to fall. This can lead to decreased demand, lower production, and ultimately, higher unemployment rates.

The German economy is one to watch as it has historically been a one of the strongest in Europe. when Germany's economy is weak, it can have a negative impact on the rest of Europe. A slowdown in German manufacturing can lead to reduced demand for goods and services from other European countries, which can lead to lower economic growth and higher unemployment. Germany is also a major trading partner for many European countries, so any changes in Germany's trade policies or trade relations with other countries can have significant consequences for the rest of Europe.

In addition, Germany plays a key role in the European Union (EU) and the Eurozone. As the largest economy in the Eurozone, Germany has a significant say in economic policy decisions that affect the entire region. Germany also provides significant financial support to other EU countries, particularly during times of economic crisis, so any changes in Germany's economic policies or priorities can have a ripple effect throughout the rest of Europe. It will be interesting to see how this develops as their economy could foreshadow what is next for the remainder of Europe.

Lower Inflation: A Double-Edged Sword for the Global Economy

The second indicator (or indicators) that we'll look at are inflation and employment data. The annual inflation rate for the US edged lower to 4.9% in April 2023, the lowest since April 2021, from 5% in March. ^[3] Food prices grew at a slower rate, and energy cost fell, namely gasoline and fuel oil. Shelter cost, which accounts for over 30% of the total CPI basket, slowed for the first time in two years. When you take out food and energy, the CPI rose 5.5% on the year and 0.4% on the month, in line with market forecasts. ^[4] Overall, the annual inflation rate in the US is expected to remain steady at 5% in April 2023, still much above the 2.1% average reported from 2000 to 2020. ^[5]

Keep in mind the Federal Reserve has a dual mandate to promote price stability and maximum employment. The first role of the Fed is to keep inflation in check. They want to maintain stable prices and avoid both deflation (falling prices) and excessive inflation (rising prices). This is important because high inflation can erode the value of money, reduce purchasing power, and create economic uncertainty.

The second role of the Fed is to promote maximum employment, which means achieving a level of unemployment that is consistent with full employment. This is important because high levels of unemployment can lead to reduced economic growth, lower consumer spending, and social problems.

As you can see, there is still plenty of work to do when it comes to getting inflation back down to 2%, and the April employment information may support a Fed decision to keep raising interest rates. Total nonfarm payroll employment rose by 253,000 in April, and the unemployment rate changed little at 3.4%. ^[6]

However, this month's report showed the change in total nonfarm payroll employment for February and March was revised down. With these revisions, employment in February and March combined is 149,000 lower than previously reported. ^[7] This is a sign that we're not adding jobs as fast as previously reported, which might mean that April's report could be revised down in the future.

Also, the NFIB Small Business Optimism Index for April fell to it's lowest level since January of 2013, and reported that 49% of owners were expecting better business conditions over the next six months. ^[8] In other words, the majority of the small business owners surveyed believe that business conditions will get worse over the next six months. Considering the decline of demand that we're seeing in the economy, it would make sense that has business owners feel pressure financially that they'll have to resort to laying off workers.

Banking crisis continues to cast a shadow on the economy

Finally, a continued banking crisis points to the potential of a deflationary economy. This past week, PacWest stock plunged 23% after losing 9.5% of deposits. ^[9] We continue to see that people are concerned about the safety of their money being held with regional banks. This is concerning because regional banks are the biggest source of loans for small businesses. A small business is defined as a business with less than 500 employees. Using that designation, about half of the employed population in the US is employed by a small business.

So let's connect the dots here. As regional banks continue to see their deposits decline, they will tighten their credit standards and be less willing to loan money. This will negatively impact small business loans and potentially place a heightened financial burden on the small businesses that are dependent on loans to keep operating. This will ultimately trickle down to the employees in the form of unemployment.

Conclusion

In conclusion, I think the economic indicators presented in this article support the beginning of a deflationary economy.

It is important to note that a deflationary economy can have serious consequences for both individuals and businesses. Inflation can erode the value of savings and investments, but deflation can lead to a decrease in economic activity, which in turn can lead to job losses and reduced spending power.

As consumers and business owners, it is crucial to pay attention to these economic indicators and adjust our strategies accordingly. For individuals, this may mean taking a more cautious approach to spending and investments, while for businesses, it may mean finding new ways to increase demand or streamline operations to reduce costs. Abundance is here to help you prosper regardless of what happens next in the economy. Our Directional Portfolios aim to build a portfolio that will adjust with the business cycle. If you'd like to learn more, you can call or text at 678.884.8841 or email us at connect@findabundance.com .

Endnotes:

HCOB Germany Manufacturing PMI, April 2023, https://www.markiteconomics.com/Public/Home/PressRelease/84c628d3c6e04e87a2660c3f940846a2
HCOB Germany Manufacturing PMI, April 2023, https://www.markiteconomics.com/Public/Home/PressRelease/84c628d3c6e04e87a2660c3f940846a2
Trading Economics, United States Inflation Rate, https://tradingeconomics.com/united-states/inflation-cpi
Trading Economics, United States Inflation Rate, https://tradingeconomics.com/united-states/inflation-cpi
Trading Economics, United States Inflation Rate Forecast, https://tradingeconomics.com/united-states/inflation-cpi/forecast
U.S. Bureau of Labor Statistics, The Employment Situation - April 2023, https://www.bls.gov/news.release/pdf/empsit.pdf
U.S. Bureau of Labor Statistics, The Employment Situation - April 2023, https://www.bls.gov/news.release/pdf/empsit.pdf
National Federation of Independent Business, NFIB Small Business Optimism Index - April 2023, https://www.nfib.com/surveys/small-business-economic-trends/
Yahoo Finance, PacWest Stock Plummets 23% After Losing 9.5% of Deposits, https://finance.yahoo.com/news/pacwest-stock-plummets-23-losing-001937377.html

WHY RAISING INTEREST RATES IN A BANKING CRISIS COULD CRASH THE ECONOMY

Thu, 04 May 2023 21:58:21 GMT

Are you worried about your money in the bank? You're not alone. According to a recent poll by Gallup, nearly half of Americans are concerned about the safety of their money in banks. And with the continued failures of mid-size banks, those worries may not be unfounded. Despite this, the Federal Reserve has increased interest rates for the tenth consecutive time in an effort to curb inflation. But is inflation really the most pressing issue for the economy right now? In this week's update, we'll take a closer look at the potential risks of the Fed continuing to raise interest rates in the midst of a banking crisis, and explore the potential outcomes of such a move.

Another Rate Hike

Last week, the Federal Reserve increased interest rates by 0.25% for the tenth consecutive time. As previously discussed, this was done to curb inflation. However, as mid-sized banks continue to fail, it is becoming increasingly clear that inflation is not the most pressing issue for the economy. In fact, raising rates during a banking crisis can potentially cause significant damage to the economy.

Fed Chair Powell stated that the banking system is "sound and resilient." However, the general public seems to disagree. A recent Gallup poll conducted from April 3-25, 2023, before the most recent failure of First Republic Bank, showed that nearly half of Americans are concerned about the safety of their money in banks.

In our opinion, the Fed's margin of error is slim. Let's examine the potential outcomes if the Fed continues to raise rates during a banking crisis:

Less money: By raising interest rates, the Fed would make it more expensive for banks to borrow money. This could lead to a reduction in liquidity in the banking system, making it harder for banks to meet their obligations and worsening the banking crisis.
Increased defaults: Higher interest rates could also result in an increase in defaults on loans, as borrowers struggle to repay their debts. This could further weaken banks' financial position, as they may need to write off bad loans and incur additional losses.
Slow economic growth: Raising interest rates during a banking crisis could also have a negative impact on the broader economy by slowing down economic growth. Higher interest rates can lead to a decrease in consumer spending and business investment, which can result in lower economic output and potentially lead to a recession.
Negative market reaction: The announcement of a rate hike during a banking crisis could trigger a negative reaction in financial markets, as investors may perceive it as a sign that the Fed is not doing enough to support the economy. This could lead to a further decline in asset prices and an increase in market volatility.

We are already seeing signs of a negative market reaction, as eleven banks were down more than 17.5% last week, and PacWest Bank saw a decline of over 70%. These are not indicators of a banking system that is "sound and resilient."

Crashing The Economy

At the beginning of the year, there was a lot of talk about a "soft landing." A soft landing occurs when the economy slows down or stabilizes without leading to a full-blown economic downturn or recession. This is characterized by a gradual decline in economic growth and inflation, and a smooth adjustment to new levels of economic activity. This can also be referred to as disinflation.

A soft landing is desirable because it allows the economy to adjust to new levels of growth without experiencing the negative effects of a recession, such as rising unemployment, falling incomes, and decreased economic activity. Essentially, disinflation is slowing down the rate of inflation to allow things to normalize. However, this is not the path we are currently on.

All signs point to an economic slowdown or deflation. Deflation is a sustained decrease in the general price level of goods and services in an economy over time. Deflation can be problematic for several reasons. Firstly, it can discourage spending by consumers and businesses because they know that prices are likely to be lower in the future, so they delay purchases. This can lead to a decrease in demand for goods and services, which can result in lower economic growth and increased unemployment.

Secondly, deflation can make it more difficult for borrowers to repay their loans. This can lead to defaults and bankruptcies, which can result in a decrease in the availability of credit, making it harder for businesses to invest and grow.

Thirdly, deflation can reduce profits for companies, which can lead to lower stock prices and a decrease in wealth for investors.

Conclusion

In conclusion, the decision to raise interest rates during a banking crisis is a delicate balancing act for the Federal Reserve. While their primary goal is to curb inflation, they must also take into account the potential negative impacts on the banking system and the broader economy. The risks of raising rates during a banking crisis include reduced liquidity, increased defaults, slower economic growth, and a negative market reaction.

On the other hand, avoiding deflation and maintaining stable inflation is equally important for the health of the economy. The Federal Reserve must continue to carefully evaluate the situation and make decisions that prioritize both inflation and banking stability. With these factors in mind, we foresee turbulent times ahead. Abundance is here to help you prosper regardless of what happens next in the economy. Our Directional Portfolios aim to build a portfolio that will adjust with the business cycle. If you'd like to learn more, you can call or text at 678.884.8841 or email us at connect@findabundance.com .

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

WHY THE NEGATIVE GROWTH RATE IN MONEY SUPPLY IS A WARNING SIGN FOR THE US ECONOMY

Thu, 27 Apr 2023 20:12:42 GMT

The world of finance is vast and complex, with countless terms, concepts, and theories that can be daunting to understand. One such concept is the M2 money supply rate of change, which is an essential economic indicator used by economists to measure the amount of money available in an economy. The latest data shows a negative growth rate in M2, which is a concerning trend that has raised many questions among experts and investors alike. In today's post, you will discover the importance of the money supply rate of change and why it can be an ominous sign for the economy and financial markets when it shrinks.

Simply Put: There's less money out there

Money supply is an economic indicator that many economists pay attention to in order to get a gauge on the economy. Most economists specifically watch the section of money supply that measures cash, checking accounts, savings accounts, money market mutual funds, and other similar deposits. This measurement of money supply is called M2.

Essentially, M2 reflects the amount of money that is available to be spent or invested in an economy. An increase in M2 can stimulate economic growth by making it easier for businesses and individuals to obtain credit and spend money. On the other hand, a decrease in M2 can indicate a tightening of credit and reduced economic activity.

It becomes concerning when the money supply growth rate turns negative. A negative growth means that the amount of money circulating in the economy is shrinking. The M2 data for the month of March shows a -4.05% growth rate in comparison to March of 2022. That's following negative growth rates for both January and February at -1.7% and -2.2% respectively. ^[1]

This is concerning because, for the most part, money supply is either growing or staying flat ^[2] .The money supply has now fallen by $1.7 trillion (or eight percent) since the peak in April 2022 ^[1] . The speed at which the money supply is shrinking is in a large part due to the FED increasing interest rates and the banking crises that started to rear it's ugly head in March.

Both situations are making it more difficult to obtain money through loans. This will create a ripple effect into the labor markets as companies who've become accustomed to borrowing money at low rates in order to maintain their operations. These businesses will be left with making difficult cost decisions as the prices of goods rise due to inflation and financial institutions become more strict on their lending practices. These indicators seem to be cracks underneath the surface as the S&P 500 has produced over a 7% return in 2023.

The Illusion of Growth

At the time of this writing the S&P 500 has a year to date return of 7.26%. Yet, when you dig a little deeper you'll find that the top 8 companies are driving those results. Jim Bianco of Bianco Research recently point out that the other 492 stocks in the S&P 500 are producing a negative year to date return ^[3] . The top 8 companies driving the performance are Facebook/Meta, Apple, Amazon, Netflix, Google, Microsoft, NVidia, and Tesla. Yet, the news continually reports that these companies are experiencing massive layoffs ^[4] .

It's undeniable that economic growth is slowing. The first quarter GDP numbers reported that the economy grew by 1.1% on a year over year basis. This was lower than most economists expected as they were anticipating a growth rate close to 2% year over year ^[5] . In our opinion, these numbers will continue to slow and most likely produce a negative growth number before years end.

Bottom line: We think the S&P 500 performance to start the year can give the faulty perception that the worst is behind us.

Conclusion

While the S&P 500 has shown strong performance so far this year, it may be masking underlying economic challenges. The negative growth rate of M2 and slower GDP growth rates suggest that the economy may be slowing down. This could have significant consequences for businesses and individuals seeking credit and making financial decisions. It's important for policymakers and investors to closely monitor these economic indicators and take appropriate actions to promote economic growth and stability. Abundance is here to help you prosper regardless of what happens next in the economy. Our Directional Portfolios aim to build a portfolio that will adjust with the business cycle. If you'd like to learn more, you can call or text at 678.884.8841 or email us at connect@findabundance.com .

[1] https://www.zerohedge.com/economics/money-supply-growth-fell-50-year-low-feb-will-fed-panic

[2] https://fred.stlouisfed.org/series/M2SL

[3] https://twitter.com/biancoresearch/status/1651587517777420288

[4] https://arstechnica.com/gadgets/2023/04/apple-joins-amazon-google-and-microsoft-in-tech-industry-layoffs/

[5] https://finance.yahoo.com/news/gdp-us-economy-grows-11-in-q1-slower-than-expected-125947873.html#:~:text=Economists%20surveyed%20by%20Bloomberg%20had,2.9%25%20and%203.2%25%20respectively .

COLLATERAL CRUNCH: HOW A SHORTAGE OF HIGH-QUALITY COLLATERAL IS AFFECTING FINANCIAL INSTITUTIONS

Fri, 21 Apr 2023 15:12:13 GMT

Understanding the current state of the financial market can be a daunting task, especially when it comes to deciphering the importance of various rates and indicators. However, the Reverse Repurchase Program (RRP) and T-bill rates are two key factors that cannot be ignored. In short, the RRP rate is the interest rate paid by the Federal Reserve to financial institutions for borrowing money and using Treasury securities as collateral. On the other hand, the T-bill rate is the interest rate paid by the US government to investors for buying short-term securities to fund its operations.

Currently, there are concerns over the significant difference between the RRP and T-bill rates, which suggests that large institutions are prioritizing safety and risk management over higher returns. This situation could potentially lead to a further shortage of collateral and negative impacts on the overall economy. In this article, we'll explain what these rates are, why they matter, and what they might be signaling for the future market and economy.

What are RRP and T-bill rates?

The Reverse Repurchase Program (RRP) is a tool used by the Federal Reserve to manage the money supply and short-term interest rates. In simple terms, the Fed borrows money from financial institutions and offers Treasury securities as collateral. The interest rate paid by the Fed to the institutions for this borrowing is called the RRP rate.

On the other hand, Treasury bills are short-term securities issued by the US government to fund its operations. These securities are considered low-risk, which makes them an attractive investment option for financial institutions. The interest rate paid by the government to the investors for buying T-bills is called the T-bill rate.

Why do RRP and T-bill rates matter?

RRP and T-bill rates are important indicators of the supply and demand for high-quality collateral in the market. Financial institutions, such as banks, need high-quality collateral to secure their borrowing and lending activities. This collateral is often required by regulators to manage the risks that financial institutions take on in their day to day operations. High-quality collateral, such as U.S. Treasury bills, is considered safe and low risk, providing lenders with assurance that they will be able to recover their funds in case of default.

When the demand for such collateral exceeds the supply, it can cause the rates to diverge significantly. This can indicate a lack of confidence in the economy and could be a sign of an impending financial crisis.

Moreover, these rates can affect the overall monetary policy of the Federal Reserve. If the RRP rate is significantly higher than the T-bill rate, it may cause financial institutions to prefer lending money to the Fed instead of investing in T-bills. This could lead to a shortage of T-bills in the market, which may negatively impact the overall economy.

Current concerns

Currently, there are concerns over the significant difference between the RRP and T-bill rates. As of April 20, 2023, the RRP rate was 4.83%, while the 4-week T-bill rate was 3.289%. This creates concern because it suggests that there is an underlying shift where large institutions are looking for safe investments. Let's take a look at how this works.

First, you need to understand how the relationship between the price and interest rates work for fixed income investments. In essence, the rate of return on a fixed income investment goes down as the price goes up. For example, bonds are a common fixed income investment and generally trade at $1,000 per bond. Therefore, a 4% yield on a $1,000 bond will generate $40 of interest.

Now, if those 4% bonds are in high demand then you may have to pay $1,100 for that bond instead of the $1,000. That bond will still pay the $40 of interest (…hence the name fixed income. The interest payment is fixed). However, since you paid $1,100 for the $40 of interest your return of investment is now 3.63%.

Intuitively, it should make sense that your rate of return will be less if you pay more for an investment that will produce the same amount of cash flow of $40.

If you look at the chart above, you will see that 4-week T-Bill rate has been on decline since the beginning of April. This would indicate that investors are buying more of these bonds driving the price up which in turn drives the rate of return down.

So why is this a concern?

The main concern is that this significant difference may indicate a shortage of high-quality collateral in the financial markets. These institutions need collateral (like T-Bills) to meet their regulatory requirements and manage their risks. This is telling because it’s a sign that financial institutions are willing to make a lower return on their money to prioritize safety and risk management.

We see an example of how T-Bills were used as a risk management tool in Silicon Valley Bank. They were forced to sell their T-Bills as the customers of the bank were starting to take their money out. Since the bank didn't have all the deposits on hand they had to create cash by selling their T-Bills.

Another concern is that this situation could lead to a flight to safety by major financial institutions. If they perceive that there is a lack of confidence in the market, they may prefer to park their money in the safest possible option, such as US Treasury securities. This could cause a further shortage of collateral, which may negatively impact the overall economy.

These concerns should not be a surprise as we see an uptick, from commercial real estate to the US government , of people struggling to meet their loan obligations.

Conclusion

In conclusion, the significant difference between the RRP and T-bill rates is currently a cause for concern in the financial market. While it is not necessarily a sign of an impending financial crisis, it does indicate a shortage of high-quality collateral in the market, and leads us to believe that there are significant concerns about the markets and the economy. Abundance is here to help you prosper regardless of what happens next in the economy. Our Directional Portfolios aim to build a portfolio that will adjust with the business cycle. If you'd like to learn more, you can call or text at 678.884.8841 or email us at connect@findabundance.com .

_{[Chart sources:} _{RRP rate} _and _{4 week T-Bill Rate} _]

WHY THE RISE IN SHELTER CPI IS A WARNING SIGN FOR THE ECONOMY

Thu, 13 Apr 2023 19:33:35 GMT

The latest Consumer Price Index (CPI) release is out, and it's raising some red flags. Consumer prices rose at a slower pace in March, with inflation showing signs of easing. The Consumer Price Index (CPI) revealed that headline inflation rose by just 0.1% over last month and 5.0% over the prior year. This is a slowdown from the increase that we saw in February. While it's still above the Federal Reserve's 2% target, it's the slowest increase since May 2021. ^[1]

While most welcome a slowdown in inflation, it's the details buried within the report that are causing concern. Specifically, the shelter portion of the CORE CPI, which measures the cost of housing. The shelter index increased 8.2% over the last year, accounting for over 60% of the total increase in core inflation. ^[1]

In this week's article, we'll take a closer look at the latest CPI release, focusing specifically on the rise of the shelter portion of CORE CPI and what it means for the economy. We'll explore the potential implications of declining demand and discuss what steps businesses and consumers can take to weather any economic slowdowns that may be on the horizon.

Core CPI

On a "core" basis, which strips out the more volatile costs of food and gas, prices in March climbed 0.4% over the prior month and 5.6% over last year. This was in-line with economist expectations. However, core inflation remained especially sticky last month amid surging rents. The index for rent and the index for owners’ equivalent rent both rose 0.5% in March following larger increases in the previous month. ^[1]

The Fed has been raising interest rates to try to bring down inflation, but the central bank risks sending the economy into a recession by hiking rates too high too fast. According to data from the CME Group, markets are anticipating that the Federal Reserve raises rates by another 0.25% in May, and forecasts from the central bank released last month suggested one additional 0.25% rate increase was likely this year.

Pay Attention to Shelter

When the shelter portion of the core Consumer Price Index (CPI) is increasing significantly more than the rest, it generally indicates that there is upward pressure on the cost of housing and rent, which can have a number of implications for the overall economy.

On the positive side, an increase in the shelter component of core CPI may reflect a healthy housing market, with increased demand for housing driving up prices. This can be a positive sign for the economy, as it can lead to increased construction activity and job creation in the housing industry.

However, if the increase in the shelter component is driven by a lack of affordable housing or a shortage of rental units, it can have negative implications for the economy. For example, if housing costs become too expensive, it can lead to decreased consumer purchasing power and reduced spending on other goods and services. Additionally, if rental prices rise too quickly, it can lead to increased homelessness or overcrowding, which can have negative social and economic impacts.

In our opinion, increase of the shelter CPI is a result of housing being less affordable. Recent research reveals that 39% of Americans have skipped meals to make housing payments. ^[2] The labor market is also flashing signs of a potential recession as job openings have started to decline ^[3] and there was a recent uptick in claims for unemployment ^[4] .

Historical Precedent

One such example is the period between 2006 and 2009, during the U.S. housing market crash and subsequent recession. During this time, the shelter CPI increased significantly due to the high number of foreclosures and the subsequent decrease in the supply of available housing. At the same time, other components of core CPI, such as the prices of goods and services, were decreasing due to the overall economic downturn.

Another example is the period between 1979 and 1983, during which the United States experienced high inflation due to a combination of factors, including rising energy prices and increased government spending. During this time, the shelter CPI increased while other components of core CPI were decreasing, partly due to a decline in the demand for goods and services.

Here are a few points to consider about these two periods of time:

Both periods saw a rise in oil prices which is similar to what we've seen over the past couple of weeks
2006 started a wave of defaults on mortgages. The decline in the housing market and the resulting losses in the financial sector led to a credit crunch, as banks and other lenders became hesitant to lend money to each other or to consumers and businesses. This further slowed down the economy and contributed to the decline in the stock market.
Other factors that contributed to the decline in the stock market in 2008, include high levels of consumer debt, rising oil prices, and the failure of several large financial institutions, such as Lehman Brothers, which further eroded investor confidence.
The U.S. Federal Reserve continued to raise interest rates throughout 1980, which further slowed economic growth and contributed to the decline in the stock market.

Conclusion

While a slowdown in inflation is generally welcomed, the increase in the cost of housing and rent can have negative implications for the economy, especially if it's driven by a lack of affordable housing. The historical precedent suggests that a rise in shelter CPI, coupled with declining demand, could lead to a downturn. It remains to be seen how the Federal Reserve will respond to these indicators, and if the current rate hikes could potentially send the economy into a recession. Abundance is here to help you prosper regardless of the economy. Our Directional Portfolios aim to build a portfolio that will adjust with the business cycle. If you'd like to learn more, you can call or text at 678.884.8841 or email us at connect@findabundance.com .

Sources:

MANUFACTURING PMI PLUMMETS: IMPLICATIONS FOR THE FUTURE OF THE U.S. ECONOMY

Wed, 05 Apr 2023 17:55:18 GMT

Are we headed for a recession? Recent data from the Institute for Supply Management (ISM) suggests so. In March, the manufacturing Purchasing Managers' Index (PMI) in the United States fell to the lowest level since May 2020, indicating a contraction in the sector for the fourth consecutive month.

This is significant because manufacturing is often viewed as a leading indicator of the economy's overall health. Additionally, OPEC's decision to cut oil production by 1.6 million barrels per day has sent oil prices soaring and could be a sign that the global economy is moving towards a recession. In this week’s economic update, we'll explore what these indicators mean for the economy and what steps you can take to prepare for potential changes in the market.

Manufacturing PMI for March

The ISM reported on Monday that its manufacturing PMI fell in March to the lowest level since May 2020. It was the first time since 2009 that all subcomponents of the manufacturing PMI fell below the 50 threshold. [1]

OPEC cut oil production by 1.6 million barrels per day

Less energy needed to produce stuff because less stuff is going to be produced
Less energy needed to ship stuff because less stuff is going to be shipped
Less energy being needed so prices will fall - therefore reduce production to keep prices steady

In March, the Manufacturing PMI® was 46.3 percent, which is 1.4 percentage points lower than February's 47.7 percent. This means that the manufacturing sector in the United States has been contracting for the fourth month in a row after expanding for 30 months. This is the lowest Manufacturing PMI® reading since May 2020 when it was 43.5 percent. Below are some more detailed metrics from March's survey results ^[2] .

New Orders Index (measures the number of new orders received during a certain period of time) was at 44.3 percent, 2.7 percentage points lower than February's 47 percent.
Production Index (measures the level of production activity) reading was 47.8 percent, which is a slight increase of 0.5 percentage points compared to February's 47.3 percent.
Prices Index (measures the change in the prices of raw materials and supplies) was at 49.2 percent, down 2.1 percentage points from February's 51.3 percent.
Backlog of Orders Index (measures the amount of work that has not yet been completed, but has been ordered and is awaiting production) was at 43.9 percent, 1.2 percentage points lower than February's 45.1 percent.
Employment Index (measure of the number of employees in the manufacturing sector) was at 46.9 percent, down 2.2 percentage points from February's 49.1 percent.
Supplier Deliveries Index (how quickly suppliers are able to deliver materials to manufacturers) figure was 44.8 percent, 0.4 percentage points lower than February's 45.2 percent, which is the lowest it has been since March 2009.
Inventories Index (measures the level of raw materials and finished goods held in stock by manufacturers) was at 47.5 percent, which is 2.6 percentage points lower than February's 50.1 percent.
New Export Orders Index (measures the number of new orders received from international customers during a certain period of time) reading was at 47.6 percent, 2.3 percentage points lower than February's 49.9 percent.
Imports Index (measure of the amount of goods and services purchased from other countries by domestic companies) continued in contraction territory at 47.9 percent, which is 2 percentage points below February's 49.9 percent.

To put it plainly … these are further signs that the economy is slowing down. This shows that American factories are making fewer things because people are buying less. This is causing some companies to slow down how much they are making. It's not good news because this could mean that fewer people will have jobs.

Manufacturing is often considered a leading indicator of economic health because it involves the production of goods and equipment, which are used by businesses and consumers in other sectors of the economy, and a decline in manufacturing activity can lead to reduced employment and lower consumer spending, which can have a ripple effect throughout the economy.

Oil Production Being Reduced

You may have also noticed that the largest oil producing countries surprisingly decided cut oil production by 1.6 million barrels per day ^[3] and caused oil prices to spike above $80 per barrel. An analyst from Goldman Sachs said the OPEC+ move was unexpected but “consistent with the new OPEC+ doctrine to act pre-emptively because they can, without significant losses in market share.” ^[3]

It's important to think through what that means: They're pre-emptively taking action in order to maintain market share.

OPEC+ countries want to keep oil prices at a good level for their economies, so they limit the amount of oil they produce to make sure there is not too much oil on the market.
Reducing oil production can help countries maintain their oil market share by supporting oil prices. When they produce less, there is not enough oil for everyone who wants it, so the price goes up. This helps countries that sell oil because they can make more money.

Reading between the lines … these OPEC+ nations must believe that the global economy is moving toward a recession and the demand for oil is going to be reduced. For instance, energy is used in producing and shipping goods. Therefore, less energy will be needed to produce and ship goods.

As the market cycle continues through the contraction stage, the next logical step is for companies to start cutting back on their employees.

If that's the case, our goal at Abundance is to help you prosper regardless of the economy. Our Directional Portfolios aim to build a portfolio that will adjust with the business cycle. If you'd like to learn more, you can call or text at 678.884.8841 or email us at connect@findabundance.com .

Sources:

THE GREAT SLOWDOWN: 10 REASONS WHY THE ECONOMY WILL STRUGGLE IN Q2

Thu, 30 Mar 2023 20:31:15 GMT

The new quarter is here, but unfortunately, we're still seeing the same bad trend as before. There are several problems we're facing, such as lost pricing power, tighter credit, not having enough money to spend, and more situations that are making things harder for people. It's also affecting the way businesses are performing.

We need to be careful because the situation is fragile and there are risks involved. We need to update our plans and be vigilant as we potentially go deeper into the woods of the bear market. It's crucial that we carefully watch out for what might happen next.

For a while now, there have been a lot of problems building up in this economy where we've seen a slowdown in growth and increase of inflation. Here are 10 indicators that suggest economic conditions will continue to decline in Q2.

1. Real Goods consumption has been in a downward trend since March 2021 ^[1]

When people stop buying things they need, like food, clothes, and electronics, it can cause big problems for the economy. This is because when people aren't buying goods, companies aren't making money, and they may have to lay off workers. When more people lose their jobs, they have less money to spend, which means they buy even fewer things. This creates a cycle where the economy slows down and things get worse for everyone.

One reason people might stop buying things is if prices are too high. When prices are high, people may decide they don't need to buy as much, or they might look for cheaper options. This can cause companies to lose money and may force them to cut jobs or raise prices even more. Another reason people might stop buying things is if they don't have enough money. When people are struggling financially, they may prioritize paying bills over buying new things, which can hurt the economy.

2. Real manufacturing orders have been going down since mid 2022 ^[2]

Real manufacturing orders are a measure of the amount of goods that companies are ordering from manufacturers. When real manufacturing orders are going down, it means that companies are not buying as many goods from manufacturers as they used to. This can be a sign that the economy is slowing down because if companies are not buying as many goods, it may be a sign that they are not selling as much to their customers either.

This decline in real manufacturing orders can also lead to a decrease in employment because if companies are not buying as many goods from manufacturers, then the manufacturers may need to lay off workers. This can lead to a ripple effect throughout the economy as those laid off workers may have less money to spend on other goods and services, which can further slow down the economy. Additionally, if there is a decrease in demand for goods, it can also lead to a decrease in production, which can impact the profitability of manufacturers and other related industries.

3. Capital Expenditures is going down since March of 2022 ^[3]

Capital expenditures (also known as CapEx) is the money that businesses spend on long-term investments such as building new factories, buying equipment, or developing new technology. When businesses are spending less on these types of investments, it often means that they are not confident about the future of the economy.

When capital expenditures are going down, it can have a ripple effect throughout the economy. For example, if a business is not investing in new equipment, it may mean that they are not expanding their production capacity. This could lead to a decrease in jobs, as there is less demand for labor. It could also mean that the business is not able to keep up with the competition, which could eventually lead to lower profits or even bankruptcy.

Additionally, when capital expenditures are going down, it can also mean that there is less innovation happening in the economy. Without new investments in technology or research and development, businesses may struggle to stay competitive in the long term. This could slow down overall economic growth and potentially lead to a recession.

4. Purchasing power is in trouble as real earnings growth has been negative since January 2021 ^[4]

When real earnings growth is negative, it means that people's income is not keeping up with the rising cost of living. In other words, people are not making enough money to buy the same amount of goods and services as they used to. This is not good for the economy because it can lead to decreased consumer spending. When people have less money to spend, they are less likely to buy things, which can hurt businesses and their ability to grow and hire new employees.

Negative real earnings growth can also have a ripple effect on the stock market. Companies may see their profits decrease if consumers are not buying their products or services, which can lead to lower stock prices. Additionally, if people are struggling financially, they may not be able to invest in the stock market, which can further depress stock prices. Overall, negative real earnings growth can be a sign of an unhealthy economy that may need intervention from policymakers to stimulate growth and increase incomes for workers.

5. Consumer credit squeeze ^[5]

Credit card balances are on the rise while interest rates are increasing while people's personal financial situation is in one of the worst positions in a long time.

When credit card balances are on the rise, it means that people are spending more money on their credit cards than they can pay back. This is a problem because they will have to pay interest on that balance, which makes it harder to pay off in the future. Meanwhile, if interest rates are increasing, it means that the cost of borrowing money is going up. This can make it even harder for people to pay off their credit card balances, as the interest they owe will also increase.

When people's personal financial situation is in one of the worst positions in a long time, it means that they are struggling to make ends meet. This can be due to a variety of factors, such as job loss or an increase in expenses. If people are struggling to make ends meet, they may be more likely to rely on credit cards to cover their expenses, which can lead to an increase in credit card balances. This can create a cycle of debt that can be difficult to break free from. Overall, an increase in credit card balances and a worsening personal financial situation can be indicators of financial stress and economic hardship for individuals and the economy as a whole.

6. Inventories investments have been declining ^[6]

When inventories investments decline, it means that businesses are not stocking up on goods as much as they used to. This can indicate a few things about the economy. First, it may mean that demand for goods is slowing down, so businesses don't need to hold as much inventory to meet customer needs. Second, it may mean that businesses are uncertain about the future and don't want to take on the risk of holding large amounts of inventory that may not sell.

Either way, declining inventory investments can have ripple effects on the economy. For example, if businesses are not purchasing as many goods from suppliers, suppliers may see a decrease in sales and revenue. This, in turn, could lead to job losses and a decline in consumer spending. Additionally, if demand for goods does not pick up, it could lead to a slowdown in production and even a recession. Therefore, it's important for economists and policymakers to keep an eye on inventory investment trends and take action if necessary to support businesses and the overall economy.

7. Housing affordability at an all time low ^[7]

Housing affordability is a measure of how easy or difficult it is for people to afford to buy a home. When housing affordability is at an all-time low, it means that homes are becoming more and more expensive and it's becoming harder for people to afford to buy them. This can have a big impact on the economy as a whole.

For one, it can lead to a decline in the number of people who are able to buy homes, which can hurt the real estate industry. This, in turn, can lead to a slowdown in construction activity, which can have a ripple effect on other industries that rely on the construction sector. Additionally, when fewer people are buying homes, it can lead to a decline in consumer spending, as people are less likely to spend money on furnishings and other goods associated with homeownership.

Moreover, when housing affordability is low, it can also lead to social and economic inequality, as those who are unable to afford a home may be forced to rent or live in substandard housing, which can have negative impacts on their health and well-being. It can also exacerbate wealth inequality, as those who own homes may see their wealth increase, while those who don't may struggle to get by. All of these factors can have a significant impact on the economy, and it's important for policymakers to address them in order to ensure a healthy and stable housing market.

8. ISM services is reading as a contraction ^[8]

When the ISM services reading is in contraction, it means that the service sector of the economy is shrinking instead of growing. The Institute of Supply Management (ISM) releases monthly data on the performance of the service sector, which includes industries such as healthcare, finance, and retail. The data is based on a survey of purchasing managers in these industries and provides an important indicator of economic activity.

A contraction in the service sector is significant because it accounts for a large portion of the US economy. When businesses and individuals spend less on services, it can indicate a slowdown in consumer demand and overall economic growth. It can also mean that companies are cutting back on their hiring and investment plans, which can lead to higher unemployment and lower wages. Policymakers may use this information to adjust monetary and fiscal policies to stimulate economic growth and support businesses and households.

9. M2 - Money supply has been in the worst position since 1930s ^[9]

M2, also known as the money supply, is an important measure of the amount of money circulating in the economy. When M2 is in a bad position, it means that there is less money available to spend, invest, or lend. This can have a big impact on the economy, as people and businesses may struggle to access the funds they need to grow or make purchases.

The fact that M2 is in the worst position since 1929 is concerning, as this was the start of the Great Depression, a period of severe economic downturn. This suggests that the economy may be headed for another downturn or recession, as there may be less money available for businesses to invest, consumers to spend, and banks to lend. This can lead to a cycle of declining economic activity, job losses, and reduced consumer spending, which can further exacerbate the problem. It's important for policymakers and economists to monitor M2 and take steps to address any underlying issues that may be contributing to the decline in money supply.

10. ISM leads margin is lowering ^[10]

When we talk about the "ISM lead margin," we are referring to the gap between the prices that manufacturers pay for raw materials and the prices they can charge for finished goods. When this lead margin is decreasing, it means that manufacturers are paying more for raw materials than they can sell their finished products for. This is not a good sign for the economy, as it indicates that manufacturing is becoming less profitable.

When manufacturing becomes less profitable, it can lead to several negative effects on the economy. For example, manufacturers may cut back on production or lay off workers to save money. This can cause a ripple effect throughout the economy, as workers who have lost their jobs may have less money to spend on goods and services, leading to a decrease in demand for those goods and services. Additionally, if manufacturers are not making as much money, they may be less likely to invest in new equipment or technology, which can slow down innovation and economic growth over time. Therefore, a decreasing ISM lead margin is a warning sign for the economy that requires careful attention and analysis.

As these market conditions persist, it's going to be even harder to get money from banks, and people and businesses are going to have a hard time getting the money they need. This is because there are too many problems with things like prices going up and people not having jobs.

These problems are going to keep building up and things will only get worse. We can't be sure exactly when something really bad will happen, but we need to be ready for it because it could happen at any time.

Moving Forward

In tough times, people want to find something they can count on. In Quad 4, that "thing" is a group of three things: Gold, the US dollar, and Duration. Most things are getting cheaper because people aren't buying as much, but Gold has been going up in value.

We don't know how bad things will get because of decisions made by people in charge, but we do know that eventually they will have to do something to fix it. When that happens, they will probably print more money. Investors who know this are buying Gold now, so they can make money later when its value goes up even more. Gold is like a safe place to put your money when things are going bad.

Without a well thought out plan, your wealth is most likely to contract as the market and economy contracts.

Our goal at Abundance is to help you prosper regardless of the economy. Our Directional Portfolios aim to build a portfolio that will adjust with the business cycle. If you'd like to learn more, you can call or text at 678.884.8841 or email us at connect@findabundance.com .

Sources

FROM BOOM TO BUST: HOW A BANKING FAILURE CAN REVEAL THE HIDDEN RHYTHMS OF THE ECONOMY

Thu, 23 Mar 2023 18:39:28 GMT

The business cycle is a complex phenomenon that describes the ups and downs of economic activity over time. At its heart, the business cycle is driven by the forces of supply and demand, as well as other factors like government policy, technological change, and global events.

One of the most dramatic manifestations of the business cycle is a banking failure, which can signal the beginning of a downturn and have far-reaching effects on the economy as a whole. Today, we will explore how a banking failure can highlight where we are in the business cycle and provide clues about what is likely to come next.

What Is The Business Cycle

The business cycle is a pattern that shows how the economy changes over time. It goes through different stages, from when it is doing really well, to when it is not doing so well. The business cycle has four main stages: expansion, peak, contraction, and trough.

Expansion stage: During this stage the economy is growing and people are spending more money. This means businesses are making more profit and hiring more workers.
Peak stage: This is when the economy is doing the best it can. At this point, businesses are making the most money and unemployment is at its lowest.
Contraction stage: This is when the economy starts to slow down and people spend less money. Businesses start to make less profit and some people may lose their jobs.
Trough stage: This is when the economy is doing the worst it can. This is when unemployment is at its highest and businesses are struggling to make a profit.

The business cycle is always changing and going through these stages. Understanding the business cycle can help us prepare for what's coming and make better decisions for our future.

Make Better Decisions By Keeping It In Perspective

Making the best decisions requires that you "watch the movie" instead of "looking at photographs". Let me explain using a story from the Titanic.

One of the most famous and enduring legends of the tragic sinking of the Titanic is the story of the band continuing to play while the luxurious ocean liner sank in the frigid waters of the Atlantic in 1912.

The Titanic had a seven-member band, led by Wallace Hartley, which was hired to provide entertainment for the passengers during the voyage. As the ship began to sink, the band members assembled on the deck to play music to calm the passengers and keep up their spirits.

Eyewitnesses who survived the disaster reported that the band played together until the very end, even as the ship tilted precariously and the lifeboats were being launched. Some accounts say that the band continued to play as the Titanic sank beneath the waves.

Now, here's the difference between "watching the movie" and "looking at photographs".

The image above is a picture from the 1997 film, "Titanic" ^[1] .

Just looking at the image you may come to the conclusion that these three men are preparing for an important performance. The untrained eye would have no clue that these men are surrounded by the chaos of passengers fighting for their lives. It is very easy to come to faulty conclusions by simply looking at the image.

However, it is not difficult to understand what is happening when you've been watching the movie. You know that these men are on sinking ship, and the purpose of their music is an effort to calm frantic passengers who are fighting for their lives.

Banking Failures Can Signal The Contraction Phase

The contraction phase is often triggered by a shock to the economy, such as a financial crisis, a recession, or a natural disaster. During this phase, consumer and business confidence may decline, leading to a reduction in spending and investment. In the past couple of weeks there have been large banks across the world that have failed.

Yet, there are narratives that will spin the idea that "this time it's different".

In our photo versus movie analogy … those narratives are the equivalent of the photo.

Global banking failures have occurred throughout history and have been characterized by a variety of economic and financial developments. However, there are some common patterns and trends that have been observed in many of these failures. Here are three:

Reduced lending: One common feature of global banking failures is a sharp contraction in credit and lending activities, as banks become more cautious and risk-averse. This can lead to a severe credit crunch, where businesses and consumers are unable to obtain the loans they need to finance their activities, leading to a decline in economic activity and rising unemployment.
Bank runs: Another common feature of global banking failures is a significant increase in the number of bank failures and bank runs. As depositor confidence in the banking system erodes, people may start withdrawing their deposits from banks, leading to liquidity problems and potentially causing banks to fail. In some cases, governments may need to step in and provide financial support to prevent widespread bank failures and restore confidence in the banking system.
Economic uncertainty: Global banking failures can also be characterized by a period of economic turmoil and uncertainty, as investors and businesses struggle to adjust to changing market conditions and shifting economic trends. This can lead to market volatility, currency fluctuations, and a decline in global trade and investment flows.

The recent bank failures seem like this could just be the beginning. At the time of this writing, PacWest bank has borrowed up to $15 billion as they saw a 20% decline in deposits [2], and there may be some early indicators that Capitol One Bank may follow suit with Credit Suisse ^[3] .

Conclusion

Logically speaking, if these bank failures are signaling the contraction phase in the business cycle, then the trough phase is still ahead. The trough is the lowest point of the economic cycle, when the economy is at or near bottom, and growth rates begin to recover. Prices and inflation may begin to fall, and there may be some signs of deflation in certain sectors or industries.

This may take some time as GDP has been consistently slowing and there are estimates that the next two quarters could report negative GDP growth. If so, this would just be another sign that the economy is contracting and the trough of the cycle has not occurred.

Sources:

BANKING ON SHAKY GROUND: UNDERSTANDING THE CAUSES AND CONSEQUENCES OF THE RECENT BANK FAILURES

Thu, 16 Mar 2023 20:01:38 GMT

The recent bank failures have been a cause of concern for many investors and market analysts. The impact of these failures on the financial markets is still to be determined. While some believe that the failures will have a limited impact on the markets, others are predicting a significant ripple effect that could have far-reaching consequences. In this article, we will explore the recent bank failures, their underlying causes, and the potential impacts on the financial markets.

Why Banks Fail

Banks can sometimes fail when the money they have isn't worth as much as the money they owe to other people. This is tracked on a company’s balance sheet in terms of assets and liabilities. Essentially, failure can happen when a bank's liabilities are greater than their assets. Ultimately, this occurs when banks make poor choices with their money.

When you put your money in a bank, the bank uses it in different ways. First, they keep some in reserves so they can satisfy requests from clients who need to take money out of their accounts. Second, banks lend most of it to other people who need money. They charge interest on these loans, which helps the bank make money. Third, they might invest some of the money in the stock market or other places where they can make even more money. Finally, they use some of the money to pay for things like rent and salaries.

Therefore, a bank gets into trouble when they don't have enough money to meet withdrawal requests from clients. When this happens, it might try to borrow money from other banks that are still doing well. This is so it can give money back to the people who trusted it with their savings.

But if the bank can't pay those people, they might all get scared and try to take their money out at once. This is called a "bank panic." It can make things even worse for the bank that's already struggling, because it will have less money left over when everyone takes their cash out.

Silicon Valley Bank Failure

This is where Silicon Valley Bank (SVB) found itself recently. SVB was the premier place for new business startups and their investors. The bank had more than $200 billion in deposits in early 2022, which is no small feat. However, some of that money was more than the amount that is protected by the government through FDIC insurance. To handle all that extra money, SVB invested most of it in U.S. Treasury and government-backed mortgage securities with a fixed interest rate.

Essentially, these investments are making loans to the government, and the investment sets a fixed interest rate and time duration on the investment. For SVB, they were holding 10 year treasury bonds that were yielding on average 1.79% interest annually. ^[2]

Historically, these investments are low risk and as long as they held the bond for the full 10 years they would recoup their initial investment along with all the interest payments. Risk can creep in if you're forced to sell these bonds before the time frame that is designated by the investment (…in this case, 10 years for SVB).

In a nut shell, due to the current struggles in the economy, many of SVBs clients were requesting to make withdrawals. In order to meet the requests, SVB had to start selling their US Treasury and government back mortgage investments before the full term of the investment.

This created a huge loss for the bank because the value of these investments will decrease when interest rates rise. So, the average 1.79% interest rate of their 10-year Treasury bonds was well below the current yield in the market that is over 3%. This caused SVB to recognize a $1.8 billion loss.

That’s billion with a "B".

At that point the writing was on the wall. Once investors and clients heard about the large loss they were concerned and were prompted to get their money out of the bank...which SVB couldn't handle. In the following days, we've seen other banks show signs of struggling and failure.

Is This A Repeat of 2008?

In 2008, a lot of banks failed because they made bad loans and didn't check if the people they were giving money to could pay it back. This was widespread in the industry and over 600 banks failed by the end of the Great Recession. The banking crisis today is different because it's less about making risk loans and more about poor money management.

They invested heavily into treasury bonds on the thought that interest rates would stay low, and didn't make a plan in case they were wrong. When inflation went up, interest rates went up too. By 2022, the banks lost a lot of money because the loans and bonds they invested in weren't worth as much.

Secondly, they operated under the assumption that their customers would always keep their money in the bank, even if they had more money than what the government usually protects. But when things got tough, the customers took their money out of the bank, which made things worse.

What's Next?

This creates a sticky situation for the FED to navigate. Inflation is still high and they have hinted at raising rates longer. Yet, these bank failures could be warning signs that the aggressive rate hikes have been too much and created cracks in the foundation. Many are calling for the FED to ease off the rate hikes in an effort to help make money and growth more accessible.

EJ Antoni is a research analyst with The Heritage Foundation’s Center for Data Analysis. He recently said, "The FDIC doesn’t have enough funds to cover these losses. If it did, the Federal Reserve would not have had to establish an emergency lending fund on a Sunday evening to backstop the operation. The Fed can simply create the money to cover the losses at these failed banks, which will cause inflation, or the FDIC can do what they did in the last financial crisis and simply get the money from the Treasury, which is a direct cost to taxpayers. Either the American people are on the hook through the hidden tax of inflation or explicit taxes sent to the Treasury." ^[3]

No one is clear on what will happen next, but we're not inclined to think that we're out of the woods regarding the bear market. The economy seems to be in a period of contraction and we anticipate that to become more evident as GDP numbers get released over the next couple of quarters.

Our goal is to create a portfolio that helps you meet your goals, and one of the best ways to do that is by creating a portfolio that is flexible when the market changes.

Sources:

WHEN TOO MUCH MONEY IS A BAD THING: THE RIPPLE EFFECTS OF ASSET BUBBLES

Thu, 09 Mar 2023 23:16:24 GMT

"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." - John Maynard Keynes

John Maynard Keynes warned about the risks of investing in things that might not work out and not investing enough in industries that make useful things. In this article, you'll discover the historical precedent that has been set when money gets injected too quickly into the economy.

Keynes thought that greed for quick profits often drives people to engage in speculation instead of focusing on long-term growth and stability. He warned that this kind of behavior could cause financial instability and bubbles in the market, as investors become overly optimistic about their returns.

This type of speculation can occur when money is injected into the economy too quickly. When the money supply grows too quickly, it can lead to asset bubbles and financial instability, as seen in several examples from US history.

The Roaring Twenties and the Stock Market Crash of 1929

One of the most famous examples of excessive money supply growth leading to an asset bubble and financial crisis is the stock market crash of 1929. In the 1920s, the US economy was booming, with a surge in industrial production and consumer spending. The Federal Reserve, the central bank of the US, pursued a loose monetary policy during this time, keeping interest rates low and increasing the money supply to stimulate economic growth.

This loose monetary policy helped fuel a stock market bubble, as investors poured money into the market in the hopes of making quick profits. Stock prices soared to unsustainable levels, and many companies that were not profitable on paper saw their stock prices rise sharply.

However, in October 1929, the stock market crashed, wiping out many investors' fortunes and leading to a prolonged economic downturn known as the Great Depression. The bursting of the stock market bubble contributed to the severity of the Depression, which lasted for over a decade and caused widespread unemployment and hardship.

The Dot-Com Bubble of the Late 1990s and Early 2000s

Another example of excessive money supply growth creating an asset bubble and financial instability is the dot-com bubble of the late 1990s and early 2000s. During this time, the internet was emerging as a powerful force in the economy, and many investors saw huge potential in internet-related stocks.

The Federal Reserve once again pursued a loose monetary policy during this time, keeping interest rates low and increasing the money supply to promote economic growth. This policy helped fuel a stock market bubble, as investors poured money into internet-related companies regardless of their actual profitability.

However, in the early 2000s, the dot-com bubble burst, and many of these companies went bankrupt. The burst of the bubble led to a mild recession and highlighted the dangers of excessive speculation and loose monetary policy.

The Housing Market Boom and Subsequent Financial Crisis of the 2000s

Perhaps the most recent example of excessive money supply growth creating an asset bubble and financial instability is the housing market boom of the 2000s. During this time, there was a surge in demand for housing and mortgages, and many people who could not previously afford homes were able to take out loans.

The Federal Reserve once again pursued a loose monetary policy during this time, keeping interest rates low and increasing the money supply to promote economic growth. This policy helped fuel a housing market bubble, as banks and other lenders made risky loans to people who could not afford them.

However, in 2007 and 2008, the housing market bubble burst, leading to a financial crisis that had global implications. Many of the loans made during the housing market boom went into default, leading to a wave of foreclosures and bankruptcies. The financial system itself was also severely affected, as many banks and other financial institutions held large amounts of toxic mortgage debt.

Bear Market Rallies

It's important to keep in mind that during these bear markets there were significant movements that looked like maybe the bear market was ending. There were five separate bear market rallies that were selling opportunities during the 1929-32 decline. ^[1]

After the stock market crash in November 1929, the stock market went up by 47% from the lows in November to the highs in March 1930. But then the market went down again, by almost 46%, from that secondary peak.
Another rally started in December 1930 and ended in March 1931, with a gain of almost 24%. But then the market declined by 38% into June 1931.
The third rally was very short, but stocks went up by 29% until July 1931. Then another major sell-off brought stocks down by 45% into October 1931.
During the fourth rally, stocks gained 38% until November. But then they went down again by 42% until January 1932.
The fifth and final rally moved stocks up by 32% until May 1932. But from that point, the stock market declined again until July 1932, with the DJIA down 55%.

When the dot-com bubble began to burst around March of 2000, the market (particularly the tech-heavy Nasdaq Composite Index) declined for over two years before entering bull territory in late 2002. Over the course of this bear market, the Nasdaq Composite saw eight rallies of 15% or more, and the S&P 500 saw eight rallies of 5% or more before the market eventually reached its true bottom in the summer of 2002.

Starting in October 2007 and ending in March 2009, there was a bear market because of problems with subprime mortgages. During these 17 months, the S&P went down by around 57%, but it didn't go down all at once. There were 12 times when the market went up by 5% to 24% even though it was still a bear market. Finally, the market hit its real lowest point. ^[2]

Conclusion

The duration of asset bubbles varies, and it's difficult to give a specific time frame. However, in general, asset bubbles tend to last until the market realizes that asset prices have become detached from their underlying fundamentals. When this happens, investors begin to sell off their holdings, causing prices to drop sharply.

In conclusion, there are a lot of parallels between these three examples from US history and the current markets and economy. The large sums of money that were quickly injected into the economy following the months of the COVID lockdowns seemed to lead to large amounts of speculation into higher risk investments as interest rates remained low. Essentially setting the stage for a difficult bear market.

Unfortunately, there is not a crystal ball to what will come next. Yet, these three examples demonstrate the dangers of what can follow when high amounts of cash get injected into an economy with low interest rates. In each case, the Federal Reserve pursued policies designed to promote economic growth, but these policies also created asset bubbles and financial instability. The bursting of these bubbles led to economic downturns and had far-reaching consequences for the broader economy.

In spite of the aggressive increase of interest rates, the FED's most recent comments suggest that there is a long way to go in this fight against inflation. Essentially, the only way to bring inflation down is to decrease the amount of demand for goods and services. With a basic understanding of economics, you know that the price of a good or service will go down when demand goes down.

Essentially, the way to reduce demand is by reducing the amount of money that is available to be used on goods and services. One way this happens is by increasing interest rates because borrowing money at higher interest rates is less attractive. Another way money supply gets suppressed is through an increase of unemployment because people can’t spend money that they don’t earn.

In our estimation, there will most likely be a domino effect. If the FED continues to increase interest rates it should naturally decrease demand for goods and services. As demand falls businesses will have a fall off in revenue and look to cut costs. Employees are usually the largest cost in a business. So, if this happens, we should expect to see an increase of unemployment in the coming months.

At Abundance, our goal is to create an investment product that is adaptable to any market conditions. If the recent market gains are a "bear rally" we want to avoid chasing gains and be positioned for success over the long term.

Sources:

[1] https://us.tradezero.co/blog/the-bear-growls-for-thursday-the-1929-1932-model-90-year-cycle/783/

[2] https://www.thestreet.com/dictionary/b/bear-market-rally

TRACKING THE WORLD'S ECONOMIC HEALTH: PMI AND GLOBAL ECONOMIC INDICATORS

Thu, 02 Mar 2023 17:50:04 GMT

In February 2023, S&P Global released its report on the state of the global manufacturing sector. The report provides important insights into the performance of the manufacturing industry, which is a crucial component of the global economy. In this post, we will explore the key highlights from the global manufacturing data, highlighting the trends and patterns that are shaping the world economy.

According to the report, the S&P Global Manufacturing PMI was 50.8 in February 2023. ^[1] This is the first time the global number has been above 50 since June of 2022. Why is it so important to be above 50? 50 is the threshold that differentiates between contraction and expansion.

Simply put: above 50 is a sign of growth and below 50 could point to signs of decline.

What is PMI and why does it matter?

Economists watch PMI (Purchasing Managers' Index) as an important factor of economic growth because it provides valuable insights into the health and direction of the manufacturing sector. The manufacturing sector is a crucial component of the economy, and its performance is closely linked to overall economic growth. The PMI is an indicator of the health of the manufacturing sector and is based on a survey of purchasing managers in the sector.

The PMI provides a timely and reliable assessment of manufacturing activity, as it is released on a monthly basis. It measures a range of factors, such as new orders, production, employment, and supplier delivery times, and is used to gauge the level of business activity and confidence in the sector.

Since the manufacturing sector is closely linked to other sectors of the economy, such as transportation, construction, and retail, the PMI is often used as a way to forecast economic growth. If the manufacturing sector is expanding, this can lead to increased business activity, employment, and consumer spending, which can drive economic growth. Conversely, if the manufacturing sector is contracting, this can lead to decreased business activity, employment, and consumer spending, which can lead to a slowdown or recession.

February PMI Data Around The World

The report also provides insights into the performance of individual countries and regions. Here are some of the key findings:

United States: The S&P Global Manufacturing PMI for the US was 47.3 in February 2023, slightly up from 46.9 in January 2023. Besides the supply chain disruption that occurred during COVID, this continues to signal one of the steepest downturns since 2009. ^[2]

The report showed that manufacturing activity went down for the fourth month in a row, but not as fast as before. This happened because companies had fewer orders from customers both in their own country and in other countries. As a result, they spent less money and reduced the amount of things they had in stock. However, this meant that suppliers were able to deliver goods faster than they have been able to in many years. Companies hired more people to help them catch up with the work they had to do. Prices went up because companies were spending more money, but it was not as much as they had been spending before.

China: The S&P Global Manufacturing PMI for China was 52.6 in February 2023, up from 50.1 in January 2023. This indicates that the sector is still expanding, although at a slightly slower pace than in the previous month. ^[3]

Eurozone: The S&P Global Manufacturing PMI for the eurozone was 48.5 in February 2023, down from 49.8 in January 2023 and the eighth straight month of falling factory activity. ^[4]

The amount of things being made, new orders, and jobs available in the manufacturing industry were all positive. The amount of things being made stayed the same and did not go down for the first time in eight months. The cost of getting the things they need to make products went down considerably, and the prices of things people buy did not go up very much.

Japan: The S&P Global Manufacturing PMI for Japan was 47.7 in February 2023, down from 48.9 in January 2023. This is the fourth time in a row that things are getting worse for the manufacturing industry in Japan. The amount of things being made and the number of orders for new things have gone down the most in over two-and-a-half years. Also, the amount of orders from other countries has gone down substantially, which has been happening for a whole year. ^[5]

United Kingdom: The S&P Global Manufacturing PMI for the UK was 49.4 in February 2023, up from 49.2 in January 2023. ^[6] This is the smallest decline in seven months. Things were not going well for some time, but now they are starting to get better. Companies are making more things again because people want to buy them, and they are able to get the materials they need more easily. Even though not as many new orders are coming in, the prices of things are not going up as quickly as before. Companies are also able to get the things they need to make their products more quickly than before. However, they are still not hiring very many new workers.

Moving Forward

Asia saw the biggest increase in manufacturing, and Thailand, India, and the Philippines were the countries with the most growth for the second month in a row. Indonesia also did well, and both China and Vietnam started growing again. Overall, manufacturing around the world is improving. However, North America had the weakest manufacturing growth, with production dropping for a fourth month. The US had a hard time, but Canada and Mexico did better.

This is not ideal. Many companies are having trouble selling their products, which is causing a decrease in new orders. This may be because companies are trying to save money by reducing their inventory, and their customers are not feeling confident about spending money.

In short: This is not a good sign for the US economy.

Our goal is to help you navigate through different market conditions and make sound investment decisions. Whether you're a seasoned investor or just starting, we're here to guide you every step of the way. Don't hesitate to contact us today to learn more about how we can help you achieve your financial goals.

Citations:

[1] https://www.spglobal.com/marketintelligence/en/mi/research-analysis/global-factory-output-returns-to-growth-amid-chinas-reopening-and-supply-chain-improvements-February2023.html

[2] https://www.spglobal.com/marketintelligence/en/mi/research-analysis/us-pmi-data-highlight-ongoing-plight-of-manufacturing-amid-falling-demand-and-inventory-reduction-Mar23.html

[3] http://www.stats.gov.cn/english/PressRelease/202303/t20230301_1920496.html#:~:text=Purchasing%20Managers%20Index%20for%20February%202023&text=In%20February%2C%20the%20Purchasing%20Manager,manufacturing%20industry%20continued%20to%20rise .

[4] https://www.pmi.spglobal.com/Public/Home/PressRelease/5bfa7b6357b84861bdedcda9624e8447

[5] https://tradingeconomics.com/japan/manufacturing-pmi#:~:text=Japan%20Manufacturing%20Revised%20Slightly%20Higher,the%20sector%20since%20September%202020 .

[6] https://tradingeconomics.com/united-kingdom/manufacturing-pmi

BRACE YOURSELF: THE INFLATION DRAG IS ACCELERATING

Thu, 23 Feb 2023 18:36:42 GMT

“If inflation doesn’t start to come down, you risk this replay of the 1970s where you had 15 years where you’re trying to battle the inflation drag." ^[1]

This was a recent statement from St. Louis Fed President James Bullard, and Bullard is referring to a period in economic history that some economists have referred to as "the greatest failure of American macroeconomic policy in the postwar period." ^[2]. Let's break down how our current economic environment is a potential setup to revisit this deep failure.

The great inflation period lasted from 1965-1982 where there were four economic recessions, two severe energy shortages, and poorly managed wage and price controls. In a 15 year span, the United states saw inflation rise to 13.5% in 1980 from 1.6% level in 1965. ^[3] Therefore your ears should perk up and listen if there is legitimate concern of repeating one of the greatest failures of American macroeconomic policy.

Contributing Factors to The Great Inflation

The inflation of the 1970s was primarily caused by a combination of factors, including:

Oil Shock: In 1973, the Organization of the Petroleum Exporting Countries (OPEC) imposed an oil embargo on the United States and other countries that supported Israel in the Yom Kippur War. This led to a significant increase in oil prices, which resulted in higher prices for gasoline and other goods that relied on oil for production and transportation.

Expansionary monetary policy: The Federal Reserve, the central bank of the United States, pursued an expansionary monetary policy in the 1960s and early 1970s, which led to an increase in the money supply and lower interest rates. This policy was intended to stimulate economic growth and reduce unemployment, but it also contributed to inflation.

Wage-price spiral: As prices began to rise, workers demanded higher wages to maintain their purchasing power. This led to an increase in labor costs, which were then passed on to consumers in the form of higher prices. This cycle continued, with wages and prices rising in tandem, fueling inflation.

Cost-push inflation: In addition to the increase in oil prices, other factors such as rising food prices and wage demands from unions contributed to cost-push inflation. This occurs when the cost of producing goods and services increases, leading to higher prices for consumers.

Expectations: Finally, expectations of future inflation also played a role in the 1970s inflation. As people anticipated that prices would continue to rise, they adjusted their behavior accordingly, demanding higher wages and raising prices themselves. This reinforced the inflationary spiral and made it more difficult to control.

It's not difficult to see how our current environment could replay what happened in the 1970s.

The Negative Effects of Inflation On Your Investments

In general, stocks and bonds have not performed well in periods of severe and high inflation. We saw this play out last year in 2022, but one data point does not make a trend.

To give you historical context, during periods of severe inflation (average annual rate of 15%) stocks had an average real return of -7.3% and bonds had an average real return of -12.2%.

During periods of high inflation (average annual rate of 6.4%) stocks have a positive average real return of 2.5% and bonds had an average real return of -2.8%. ^[4]

The real return of an investment is the return after inflation is taken into account by simply subtracting the inflation rate from the total return of the investment. Which, to put things into perspective, the most recent CPI rate from January was 6.4%.

What to Watch For

Based on Bullard's comments above, the Fed does not want inflation to hang around for an extended period of time. We expect them to continue increasing rates and possibly increase past their initial target of 5.25% and possibly raise rates to 5.75% or even 6.00%.

If so, this would create significant headwinds for stocks and bonds. Our goal with Directional Portfolios is to identify the current economic cycle and find the investments that have historically overperformed in that type of economic cycle.

Links to sources:

THE DELICATE BALANCE BETWEEN INFLATION AND LOW UNEMPLOYMENT

Thu, 16 Feb 2023 18:14:14 GMT

In Warren Buffet's 1986 Chairman's letter, he gave a unique insight into a piece of his strategy when it comes to entering and exiting his stock trades. Interestingly enough, it has nothing to do with timing or predicting market direction.

This is what he wrote about not having any stocks that meet his investing criteria.

"This statement in no way translates into a stock market prediction: we have no idea - and never have had - whether the market is going to go up, down, or sideways in the near- or intermediate term future. What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." ^[1]

Reread the final sentence because it's worth reviewing.

His modest goal: simply be fearful when others are greedy and be greedy only when others are fearful.

If this is the case, now would be the time to think contrarian to the market because it's operating in a place of greed. According to CNN's Fear and Greed Index, the market sentiment has been in an area of extreme greed for most of February. ^[2]

Their fear and greed index have five different points of measuring the market sentiment: extreme fear, fear, neutral, greed, and extreme greed. As of this writing, the index is currently in the "greed zone".

At this point, you should be asking yourself: why?

Why is the market sentiment teetering between greed and extreme greed?

The Law of Cause and Effect

We don't believe that it's possible to know the exact reason but we do think there is enough evidence to come to a conclusion with conviction because we're all familiar with the universal law of cause and effect. The law states that every single effect within our world has an original starting point.

Let's assess a few things:

2022 was a difficult year for portfolio returns that left many investors afraid and grasping for hope as a recession seemed inevitable.
Markets have sustained a positive rally since October 2022 with many people suggesting that the bottom of the bear market has taken place.
Inflation has slowed and come down from the high of 9.1% in June which suggests that the Fed's aggressive increasing of interest rates is working.
The January unemployment numbers were below the Fed's 4%-5% target for unemployment and suggests that the labor market is strong.

These are a few of the primary factors that are leading people to believe that the economy is fine and the Federal Reserve will change its stance on aggressively increasing rates.

This narrative is music to the ears of all the investors who are eager to see gains in their portfolio after a year where stocks and bonds both took a beating.

But we have to ask ourselves: does this position make sense? Is it realistic for inflation to get under control if the Fed pivots on increasing rates…especially in a low unemployment environment?

The Challenge of Low Unemployment

When the economy is operating at low unemployment, it typically means that there is high demand for labor, and therefore, high demand for goods and services. This high demand can lead to higher prices for goods and services, which in turn can contribute to inflation.

In addition, when unemployment is low, employers may have to pay higher wages to attract and retain workers. These higher wages can lead to higher costs of production, which can also contribute to higher prices and inflation.

Another factor that contributes to inflation is the level of government spending. When the government spends more money than it collects in taxes, it may need to borrow money by issuing bonds. This can increase the money supply, which can lead to higher inflation if the economy is already operating at or near full capacity.

In this scenario, raising interest rates may not be enough to bring down inflation if the economy is already operating with low unemployment, high demand for goods and services, and rising costs of production.

Therefore, the Fed shifting its stance on rising interest rates could encourage more consumer spending which naturally leads to an increase in the prices of goods and services.

We just don't see that happening because consumers are already struggling to keep pace at the current levels of inflation. In the final three months of 2022, we saw credit card debt hit an all-time high and delinquencies among borrowers accelerate.

Wilbert van der Klaauw, an economic research advisor at the New York Fed, said, “Although historically low unemployment has kept consumer's financial footing generally strong, stubbornly high prices and climbing interest rates may be testing some borrowers' ability to repay their debts," ^[3]

On top of these concerns, many of the largest companies in the US have lowered their earnings projections since the beginning of the year. Among the S&P 500, 288 companies have had their consensus 2023 EPS lowered since the end of 2022.

That's 58% of the largest companies with negative revisions compared to 52% of the S&P 500 companies having positive earnings revisions this time last year. ^[4]

Our Modest Goal

In our opinion, there is wisdom in holding tightly to Warren Buffet's advice of being fearful when others are greedy. Our goal for Directional Portfolios is multi-faceted: 1.) We want to position the portfolio to be properly aligned with the overall economic cycle and 2.) We want to be on the right side of the market swings that take place inside that economic cycle.

Our modest goal is to build upon this proactive approach in order to be more agile for our clients in changing markets.

Links to sources:

RECESSION OR SOFT LANDING?

Thu, 09 Feb 2023 18:33:19 GMT

One of the biggest pieces of economic news from the past week was the January jobs report that reported a shocking increase of 517,000 jobs to the nonfarm payrolls, and the unemployment rate fell to 3.4%. Both numbers beat the estimates of 187,000 jobs and 3.6% unemployment rate.

Receiving such a positive report added fuel to the fire of the "soft landing" versus an impending recession debate. In order to win in these markets, it becomes crucial to be able to accurately discern what is noise and what is news (aka … noteworthy information).

If you're not a regular student of economic reports, the nonfarm payroll measures the number of workers in the U.S. except those in farming, private households, proprietors, non-profit employees, and active military. The report contains insights into the labor force that directly impact the economy, the stock market, the value of the U.S. dollar, the value of Treasuries, and the price of gold.

The goal today is to cut through the noise of the soft landing versus recession debate by reviewing how the essential players are currently positioned.

Soft Landing Versus Recession Debate

In economics, a soft landing is a slowdown in economic growth that avoids a recession. A recession is a significant and prolonged downturn in economic activity. You will typically hear experts reference the rule of thumb that a recession occurs when there are two consecutive quarters of negative GDP.

Essentially, no one is debating whether or not the economy is slowing down. They're debating how painful the slowdown will be.

Soft landing = a relatively short and painless slowdown

Recession = a prolonged pain

The Main Economic Players

The Federal Reserve - Historically, the Fed's role in the economy is 1.) maintain stable prices and 2.) achieve full employment. These goals are met when annual inflation is around 2% and unemployment is around 4% to 5%.

The US Government - The government has an impact on the economy through government spending and taxation. Taxation is the government's revenue source to cover national spending, and national debt occurs when national spending is greater than the tax revenue.

Businesses - Businesses play a vital role in the economy because they provide goods and services to satisfy the needs and wants of the people, they create jobs and income that allow people to have a higher quality of life, and they create growth through innovation. Their innovations and efficiencies can increase the quality of products and make them more affordable.

Consumers - Consumers are important because they drive the need for the goods and services provided by businesses. Without the consumer, businesses and the government would not have way to generate revenue. Therefore, it's important for the consumer to have income that can be taxed and circulated back into businesses.

Hopefully, you can see how all these pieces fit together.

Where Are We Now?

Let's start with the linchpin of the economy … the consumers. Yes, the unemployment rate of 3.4% and increase of jobs is encouraging to the consumer. This is a positive sign they have a way to generate income - which ultimately flows to businesses through goods and services and the government via taxes. However, there are signs of increasing financial pressures for the consumer due to high inflation. There has been a rise in credit card debt and a decrease in people paying off their balances every month (See source).

To add to these financial pressures, there have been declines in Americans ability to save money. According to the Federal Reserve Bank of St. Louis, the personal savings rate for Americans fell to 3.3% in the third quarter of 2022. This is 88% lower than rates in 2020 when Americans were saving money at high rates, and 61% below the savings rates before the pandemic. ( source )

Businesses are also seeing a decline in their earnings. The companies that consist of the S&P 500 (the top 500 US publicly traded companies) have reported earnings decline of 3% or more for three straight quarters. ( source ). On top of these declines in earnings, many of the most well-known companies in the US have announced large layoffs. Some of these companies include Amazon, Microsoft, Disney, Google, Salesforce, IBM, and Goldman Sachs ( Source ).

Let's move to the US government. The US hit its $31.4 trillion debt ceiling on January 19, 2023. The debt ceiling was put in place to set a limit on how much debt the US could incur to cover its obligations. Any changes to the debt ceiling require majority approval by both chambers of Congress. ( source ). If congress cannot reach an agreement by June, economists warn that there could be dire consequences to the economy, including default. A default would mean that the federal government would have a difficult time serving the American people.

What's Next?

Despite the strong start to the market in 2023, in my opinion, all of these factors create tremendous headwinds for the Fed to navigate a soft landing during this economic slowdown. In fact, the leaders of large corporations may agree with me as they've been selling large amounts of shares into this rally to begin the year.

This can be tracked using the "insider buy/sell ratio". This ratio shows the balance between buys and sells for any officer, director, or person with 10% or more ownership in a publicly traded company. These high-level leaders are required to report the transactions they make on their company stock to prevent them from profiting from any inside information.

Since the beginning of the year, insiders have sold their company shares 4-6 times more than they have bought (See source) . This could be a sign that they don't expect a lot of growth from their shares and are getting out while the market is up.

As of now, we believe the strong performance to start the year is a bull rally and anticipate a recessionary period in 2023 with a recovery in 2024. Until this conviction changes, our goal with Directional Portfolios is to stay the course with investments that have a history of outperforming in periods where inflation and economic growth decline simultaneously.

IS THIS OPTIMISM BIAS OR A NEW BULL MARKET?

Mon, 06 Feb 2023 14:30:00 GMT

"When your gut and body tell you one thing is happening, and the instruments say another thing is happening, the instruments are probably right."

The quote above is apparently a lesson taught to pilots when they're learning how to fly, and is referenced in a 2011 Business Insider article titled, "AIR FRANCE CRASH: Pilots Screwed Up — Thought Instrument Was Broken When It Said Plane Was Plunging Toward Atlantic At 15,000 Feet A Minute" .

This is an example of optimism bias.

The optimism bias is when people dismiss danger and opt for optimism even in the face of clear evidence that there are dangers or reasons for pessimism.

The US stock market is off to a very strong start for 2023. In January, The Dow nearly gained 3%, the S&P 500 grew 6% and the NASDAQ almost grew 11%. Alongside of these strong returns is the narrative that it is the beginning of a new bull market.

Time will tell if that is the case, but some major economic indicators could be signaling that the legs of this market rally are a result of the optimism bias instead of the fundamental data. In particular, there are two economic indicators that that have a track record of signaling a recession.

1.) An Inverted Yield curve

Many economists will compare the 10 year treasury bond rates with the 2 year treasury bond rates to determine the health of the economy. Normally, 10 year treasury rates are going to be higher than 2 year treasury rates. This is simple to understand because, as an investor, you would expect to receive a higher return on your money if it was going to be invested longer. The yield curve becomes "inverted" when 2 year treasury bonds have higher rates than 10 year bonds.

At the time of this writing the 2-year treasury rate is 4.09%, the 10 year treasury rate is 3.39%. This is a result of the FED aggressively raising interest rates. This an alert because during normal economic expansion, short-term yields will be lower, and long-term yields will head higher.

An inverted yield doesn't necessarily mean a recession but it has foreshadowed every recession since the 1970s.

2.) The Purchasing Managers Index

The Purchasing Mangers Index (PMI) indicates the level of demand for products by measuring the amount of ordering activity at the nation's factories. Essentially, any reading above 50 indicates an expansion of the manufacturing segment compared to the previous month. A reading of 50 means no change. A reading below 50 suggests contraction.

The most recent PMI print on February 1, 2023 came in around 42. Using the rule of thumb above, this number would indicate that the economy is entering in a period of contraction. Also, in the past 40 years, a recession has come every time this number has dipped below 40.

The goal of Directional Portfolios is to be correctly aligned with the market as it runs through it's various cycles. The strong start to 2023 is encouraging but there are multiple factors that would suggest not getting caught in the hype and chasing the hot start.

abundance

EXPLORING CENTRAL BANK DIGITAL CURRENCY (CBDC): THE FUTURE OF MONEY

How Will CBDCs Work?

Benefits of CBDCs

Risks and Concerns

Use Cases for CBDCs

Implementation Timelines

Conclusion

THE WARNING SIRENS: RISING INTEREST RATES AND SLOWING BUSINESS PERFORMANCE ARE HARBINGERS OF ECONOMIC CHALLENGES

Understanding the Inverted Yield Curve:

PMIs Indicating Economic Contraction:

Analysis of Current Economic Indicators:

Conclusion:

Sources:

RESILIENCE AND VULNERABILITIES: DECODING THE GLOBAL ECONOMY'S STORY

Manufacturing PMI and Recession Signals

Defensive Posture of Banks Worldwide

Signs of Resilience in the US Economy

Conclusion

CHINA'S RATE CUTS AND THEIR GLOBAL IMPLICATIONS

Introduction

Overview of Recent Rate Cuts in China

Divergent Monetary Policy Worldwide

Global Implications of China's Rate Cuts

Conclusion

NAVIGATING THE PARADOX: A NEW TECHNICAL BULL MARKET IN THE FACE OF A SLOWING ECONOMY

Market Resurgence: A Technical New Bull Market

Economic Concerns: Signs of a Slowing Economy

The Lingering Banking Crisis

Conclusion:

THE CASE FOR A SOFT LANDING: ARGUMENTS FALTERING AS GLOBAL ECONOMY FACES CHALLENGES

China's Reopening: A Disappointing Boost to the Economy

Europe's Struggle: Failing to Rebound After Energy Crisis

US Job Market: Struggling Amid Rising Jobless Claims

Conclusion

Sources:

DEBT CEILING COUNTDOWN: HOW IT COULD SHAKE UP THE JOB MARKET AND YOUR FINANCES

Understanding the Debt Ceiling and Consequences of Inaction

Job Market Resilience, Challenges, and Industry Impact

Navigating the Challenges and Ensuring Economic Stability

Conclusion:

THE IMPACT OF A US DEBT DEFAULT ON EVERYDAY AMERICANS: EXPLORING POTENTIAL CONSEQUENCES

Immediate Impact on Financial Markets

Job Market and Employment

Government Services and Social Programs

Higher Cost of Living

International Reputation and Trade

Conclusion

CHINA'S REOPENING FALLOUT: UNRAVELING THE CHALLENGES FACING THE WORLD ECONOMY

China's Reopening: A Different Reality

Consumer Behavior Shift: Insights from Home Depot and Target Earnings

Commercial Real Estate Challenges: A Looming Decline

Conclusion

SMALL BUSINESS PESSIMISM, BANKING CRISIS, AND MANUFACTURING DECLINE: A RECIPE FOR DEFLATIONARY ECONOMY

The Decline of German Manufacturing: What Does It Mean for the Rest of Europe?

Lower Inflation: A Double-Edged Sword for the Global Economy

Banking crisis continues to cast a shadow on the economy

Conclusion

WHY RAISING INTEREST RATES IN A BANKING CRISIS COULD CRASH THE ECONOMY

Another Rate Hike

Crashing The Economy

Conclusion

WHY THE NEGATIVE GROWTH RATE IN MONEY SUPPLY IS A WARNING SIGN FOR THE US ECONOMY

Simply Put: There's less money out there

The Illusion of Growth

Conclusion

COLLATERAL CRUNCH: HOW A SHORTAGE OF HIGH-QUALITY COLLATERAL IS AFFECTING FINANCIAL INSTITUTIONS

What are RRP and T-bill rates?

Why do RRP and T-bill rates matter?

Current concerns

Conclusion

WHY THE RISE IN SHELTER CPI IS A WARNING SIGN FOR THE ECONOMY

Historical Precedent

Conclusion

MANUFACTURING PMI PLUMMETS: IMPLICATIONS FOR THE FUTURE OF THE U.S. ECONOMY

Manufacturing PMI for March

Oil Production Being Reduced

THE GREAT SLOWDOWN: 10 REASONS WHY THE ECONOMY WILL STRUGGLE IN Q2

1. Real Goods consumption has been in a downward trend since March 2021 [1]

2. Real manufacturing orders have been going down since mid 2022 [2]

1. Real Goods consumption has been in a downward trend since March 2021 ^[1]

2. Real manufacturing orders have been going down since mid 2022 ^[2]

3. Capital Expenditures is going down since March of 2022 ^[3]

4. Purchasing power is in trouble as real earnings growth has been negative since January 2021 ^[4]

5. Consumer credit squeeze ^[5]

6. Inventories investments have been declining ^[6]

7. Housing affordability at an all time low ^[7]

8. ISM services is reading as a contraction ^[8]

9. M2 - Money supply has been in the worst position since 1930s ^[9]

10. ISM leads margin is lowering ^[10]