YouSaid · the spoken record

Mike Singleton

lines on the record: 83
first: 2023-08-28
most recent: 2023-08-28
sittings or episodes: 1
sources: podcast

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“So you can check us out at invictus research.com. We produce a variety of research products. The flagship product is probably the daily edge. It goes over all the most important economic data releases from the day prior, puts them into the context of the business cycle, provides some backtesting and whatnot. And all of our research is delivered over video. So it's not just another boring PDF in your inbox. It's five or ten minutes, all the data real quick, hopefully some appealing, intuitive graphics that make everything easy to understand. And that's what we do. And you can also find us at Invictus Macro on Twitter.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, well, it's interesting. I feel like the first two points, I definitely agree with you on those latter. Companies who have factories in other countries to bring them factories back, is that better for growth than like stocks buying back their own shares? Maybe it is. I don't know. And again, maybe just because it wasn't in the past doesn't mean it's in the future. But Mike, you've been great sport. Thanks for sharing your views here. How can people find out more about you and Victor's research?”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Spending gets larger as the federal debt continues to increase as a percentage of GDP. That'll be a headwind to long term growth. It has been for the last 40 years. And I see no reason for that relationship to change unless Warren Buffett starts allocating capital for the U.S. instead of Berkshire.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Right, right. And that's double trouble, so to speak. Second, it's stimulative, right? Because people start to spend that money, you know, goose is consumption. It's a tailwind for whatever industries are the recipients of those funds. The third longer-term impact, the really long-term impact is slower long-term real economic growth because the government crowds out productive investment. And generally, governments, federal governments in particular, central governments are not very good allocators of capital. And so you see resources poured into things that are not accretive to real GDP growth. You also listen, you'll hear dialogue to the effect of, well, maybe GDP growth is not the best long-term measure of economic well-being. Maybe not, but you probably need to see something like real positive GDP growth to see long real-term earnings growth for corporations and strong performance from stocks. So over the long term, it really matters quite a bit. And as DEF”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“A good question. It's a little bit of a wild card, it's a little bit challenging to predict. So maybe I'll think about it over three different time horizons and I'll go over it quickly. So first, when the treasury has to issue new securities, that's a headwind for financial conditions, right? You generally see rates go up as more securities are introduced to the markets. That's generally bad for stock prices, bad for bond prices, especially in the quantities that we're talking about in the back half of 2023, right? When you're talking about $500 billion, a billion dollars, or excuse me, a trillion dollars, two trillion dollars, right? These are enormous volumes of issuance.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“One thing we haven't talked about, which really supports your thesis, and which I agree with you on, is just bank leases and bank loans have been stagnant since January. And typically for an economic expansion to continue, you need bank credit growth to continue. I guess one argument that expansion could continue without credit growth is just the government spending so much money. What do you make of that argument of fiscal deficits are so large, the chips act, the inflation reduction act, stimulus, tax credits, tax brackets being adjusted higher because of inflation, cost of living adjustments for Social Security? So inflation, begetting inflation, which causes inflationary adjustments, which causes more inflation. Just like the US, yeah, yes, normally in a business cycle, all these things would tend to a recession, but the government is spending so much money that it is the economy is still going to run hot.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“You're going to see a big boom in housing and subsequently goods. And then the Fed Titan really aggressively. Now they're saying you need to fire everyone again. So there are logistical constraints in terms of hiring and firing and hiring and firing again. And there's also reputational constraints, right? That's a bad look if you are continuing to fire and hire people in rapid succession like that. It's possible that manufacturing companies are saying like, look, I'm just going to wait it out. Maybe we'll conduct a few rounds of layoffs here and there, but we're not going to let go of 25 or 30 percent of our workforce the way that we might have 20 years ago because, you know, it just doesn't make any sense. In the long term, reputational damage to our business just doesn't warrant that. So, you know, and I could go through maybe some other hypotheticals, but there are plenty of ways in which the business cycle could be extended. I don't think that the business cycle can completely start over without a change in Fed policy.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“So fundamentally, it would have to be interest rates, right? I think interest rates will have to come down in order for there to be a real growth recovery of any kind and the data that matters, the production data, the housing data. But I think that's very unlikely, especially when you see wage growth comping at 4% or 5%. I just don't think that there's any way the Fed can cut interest rates from here. You know, to see a new business cycle, I think you'd have to see a change in interest rates. But we could be proven wrong in terms of timing by factors other than interest rates. So for example, I don't think it's impossible that manufacturing companies are slow to fire people at the same rate that they have through historical slowdowns. And you could just think about that logistically, right? There was a big round of layoffs through COVID. Then the Fed stimulated really aggressively, which is essentially the Fed's way of telling manufacturing companies, how you need to start hiring again.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Mike, my final question for you is if in December or January the unemployment rate is still at 3.5%, consumer spending is still very high, what are the reasons you think that the thesis hasn't played out? And do you think, oh, the thesis, it's just going to play out maybe in June of mid-2024? Or what would cause you to fundamentally change your thesis that actually this is not the end of a business cycle? This is, you know, beginning of a new one.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“So, just in terms of setting expectations by looking at history, historically most recessions result in a 25 to 30 percent drawdown in corporate profits from peak. Right now we're about 12% off of the peak. So another 20 points from here wouldn't be unreasonable if it's a severe recession, which we think it could be. Maybe we see a 35% drawdown from peak. In any case, it's hard to imagine that stocks perform super well through an environment like that unless the Fed is pulling out the bazooka in terms of stimulus, which we don't think that they'll do. I think that the Fed is likely to be slow to stimulate, again, the cycle and through this recession if we get one. And I think the perhaps the obvious reason is that they just got burned with inflation from stimulating too hard last time. So, you know, we'll pay attention and be data dependent. But our base cases is, you know, we're going to see a rather dramatic decline in corporate profits. And the Fed will be slow.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Corporate profits are about 12% off of their cycle peak. Again, that's consistent with the beginning of historical recessions. It's consistent with the beginning of periods where corporations are beginning to lay off more workers. So I would say probably I would track the fundamentals first and the stock price afterward. And more specifically, I would really be looking at manufacturing payrolls because again, that's the canary in the coal mine of the labor market, right? And you're almost always going to see layoffs in those important cyclical leading industries before you see them anywhere else. So when you're seeing layoffs in manufacturing, residential construction, trucking, temp payrolls, et cetera, that's when you should really be looking for broader weakness in the labor market in the coming to six months.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“So, I think the short answer is yes on the margins. And if you look at how change rate of change in household net worth and compare it to consumption, it's a positive leading correlation. But that's that it's not a primary driver. I think the primary driver that you want to look at is probably corporate profits and corporate margins. And when we look at the corporate sector at Invictus, what we see is margins that are about 300 to 310 basis points off of their peak in aggregate. which is consistent with historical recessions. That's generally the amount of margin contraction you'd need to see to induce layoffs. That said, we're coming off of a very, very high peak, right?”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“High stock market, a rallying stock market is an impediment to their mandate to restrict inflation. Yeah, so they have to keep on hiking. The higher the stock market goes, the higher interest rates have to go. That worked, that thinking worked very well last year. This year, not so much in terms of what's being priced into the future. But yeah, I mean, do you think that a S&P 500 at 4400, 4,500 is just one that is companies are going to be much less inclined to shed workers than if the stock market was at 3,000?”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“In 2023, and perhaps we could see too. I think right now the odds of two hikes is Pencil didn't at about 4% or 5%, not penciled in, but priced in by the Federal Fed Funds Futures market. I think it's probably higher than 5%. You know, it's not to say it's over 50%, but maybe it's 10 or 15% or 20%. So under your question about interest rates, where do rates go through if we see a 7% unemployment rate? Boy, it's a good question. I don't know if it's a call that I'm prepared to make quite yet. I think maybe I could reframe it in easier terms. Will rates go back down to zero again? Like, will we see zero interest rate policy again? Probably not, unless there's some sort of systemic shock, which I don't think I can predict at this point in the cycle. I think, you know, maybe we see 2% Fed funds rate through the trough of this recession. But I'm inclined to think that zero.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Inflation wage growth, income growth, etc. And on top of that, we've seen a 13% price increase in the price of oil month over month. Oil tends to lead CPI inflation by about three months with a 75% correlation. So that indicates that we're probably going to see a little bit of an increase in one energy inflation, but probably goods inflation as well, heading into September, October, November. And again, that's against the backdrop of services that are continuing to run pretty high. So we do think that perhaps over a 12-month basis, inflation is going to come down because recessions are always disinflationary events. But next two or three months, I think we're very likely to see inflation hooking back up toward 4%. And the question is, are investors ready for that? Are policymakers ready for that? I don't think that's clear. I think that'll probably be the catalyst for policy surprise. It's why we think that at least one more interest rate is highly likely.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“To think about what's driving services inflation, and it's really wage growth, right? If you look at the Atlanta Fed's wage growth tracker and you compare it to CPI services inflation X energy, so really the wage sensitive driver of inflation, the correlation is almost 90% going back 20 years. So as long as wage growth is compinging in the 4% to 5% range, depending on what you look at, right, the employment cost index, the wage tracker, average hour earnings, they're kind of all in that range of 4 to 5%. We would expect services inflation to sort of tend toward that range as well. So we've been committed disinflationists since June of last year, really before June of last year. We were early to that call. But we've been saying that we don't want to raise the flag of victory yet because services inflation and the drivers of services inflation are still running pretty hot, particularly the drivers of services.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“So it's a very good question. I'll start with inflation. So obviously inflation peaked in June of last year, around 9%. If we're looking at the CPI data, and it's declined pretty dramatically since then to around 3%. And we saw, I think, 12 consecutive declines in the year-over-year data, which is a very rapid decline. So what was declining or what was driving that decline in inflation? And the answer is it was mostly durable goods and non-durable goods. It was mostly not services. We saw the big shift in spending from goods into services. The question now is what's driving services inflation? So now durable goods inflation is kind of stabilized. Maybe it's declining a little bit, but we don't expect it to be a big driver of disinflation anymore from here. You know, perhaps when the labor market breaks, it will be. But until then, probably not. We've seen most of the major disinflation from goods and durable goods. The question is, what's going to happen with services?”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Aggregate, right? The big counter example is through the great financial crisis, which was sort of much more housing related than a typical recession. We saw home prices decline 25%. But I think the supply situation is so different now than the great financial crisis that an analogy doesn't really make any sense. Like I mentioned earlier, total active listings are down 75% from 2007 against the backdrop of a US population that's 15% larger, 15% more people that need shelter. You know, unless interest rates go to 10%, which is certainly not my base case, it's hard for me to imagine that we see a dramatic decline in home prices from here.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Poorly through a recession, as well as furniture makers, as well as companies like Whirlpool or RH. I will say home builders probably will Houses are big, expensive. If you see income growth go from 6% to 0%, you're probably going to see home builders take a hit. I wouldn't want to own homebuilders through a recession. I probably want to be nimble and sort of risk manage around those positions with the hope of buying the dip in those names. I'll also say something that you mentioned earlier. Do home prices go down through recessions? And the rate of change in home price appreciation usually declines, but it's actually somewhat unusual to see home prices decline in absolute terms through recessions.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, durable goods will be probably hit the hardest, right? So auto, there's an obvious example, extremely cyclical. You see, sometimes upwards of 50% declines and auto volumes through a recession. The data has actually been pretty good in autos recently, not because demand has been super strong relative to history, but because there have been a ton of supply chain constraints that are being removed. What's interesting is if you look at the stock of companies like GM or Ford traditional automakers, they're performing absolutely terribly. I mean, they're still down, I think over 40, maybe 45% from their cycle peaks. You know, the charts are a total mess. They're clearly still in very formal downtrends, right? Lower highs and lower lows. And I think that's symptomatic of, you know, yes, supply chains are improving, but they're improving against the backdrop of very weak demand where the cost of financing is very, very high. And the median car buyer, you know, the median US consumer is really not all that strong. So we would expect autos to perform.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“And what industries, when you say manufacturing, factories, what industries are going to be hit? Because we know it's not going to be home builders, right? Because home builders are going to be on a tear because of low inventory. So people are going to build houses, people are going to be selling new houses not existing. But what are you thinking? Is it cars, durable goods? Is there any particular area of weakness that you're kind of flagging?”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“This is going to continue to reduce demand for a lot of the services and products that these companies provide. And as business conditions get worse, they're more likely to weigh people off. That will put upward pressure on the unemployment rate if it gets bad enough and we think it will, which will hit incomes and spending, which we'll be spending on services, not just goods, right? And that's how you see weakness metastasized into the services sector. You'll start to see people working at restaurants lose their jobs or people in the entertainment industry and so on and so forth, financial services. You could go on and on. So manufacturing tends to lead weakness in the labor market. And through some recessions, it spreads into services. Through others, it doesn't. But historically, most of the time, even the weakness in the cyclical parts of the economy is enough to induce an NVER recession and poor performance from stocks.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“So I think it'll be manufacturing layoffs, right? And layoffs and cyclical interest rate sensitive parts of the economy. So if you look at the, I realize I'm cherry-picking a kind of a bearish data point here, but if you look at the ADP, non-form payrolls data for manufacturing, there were 36,000 net layoffs last month. So that's net of new hires. And if you look back over the last five months, we're at nearly 200,000 net layoffs. I think you have to ask yourself, why are manufacturing companies laying people off like this? If they expect business conditions to improve, they probably wouldn't do so. But they are. And eventually these manufacturing, we're also seeing this, like I said, in temporary payrolls. We're seeing it in trucking services. We're seeing it in residential construction. The question is, will it metastasize? Will we continue to see layoffs in these sectors? And at Invictus, the house view is that the answer is yes, right? As long as mortgage rates are above 7%, the tenure is increasing and we think it continues to increase.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“So, consumer spending can be decomposed into two parts growth and employment and growth in salaries and wages. Generally, those two things are related. They both reflect supply and demand for labor. I think the short answer is a higher unemployment rate. If the unemployment rate goes up, wage growth goes down. Obviously, growth in payrolls is probably negative. That means income goes from 6% or 6.5% today to something below zero. With no more incomes, people stop spending as much money. I think that's the how I would set my expectations going forward.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Got it. Okay, so now let's talk about spending. I think real services spending is up 7.5% year over year. Adjusting for inflation, it's up 2% year over year. So, I mean, Americans are just spending, spending, spending. And hard for there to be a recession when people are spending this bunch of money. What stops this?”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“So we generally spend more time looking at the ISM data, and Vectus, it tends to be sort of the gold standard for the PMI data, in our view. And the reason that we, the reason that I say that is for a few reasons. I mean, it's timely, it's relatively accurate. But another big reason is that it's got a long, long history for backtesting, and it tends to have a very close correlation with a lot of tradable risk exposures. So if you look at the performance of the S&P 500, it tends to trade pretty closely atop the ISM manufacturing PMI. If you look at credit spreads, generally trades inversely with the PMI data like we just talked about, the dollar, same thing. So the PMI data is really, really important. And what it represents is really, really important. You know, if you look at a composite and it's going higher than the manufacturing data, I guess first I would say that generally speaking, risk assets trade with a closer correlation to the manufacturing data and S&P 500 earnings tend to have a closer correlation with the manufacturing data. But there's probably...”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Going back to the PMI, so the composite PMI bottomed in, I guess, what, October or probably December actually, just about 45, 44, but it's gone up since then. And manufacturing has also gone up since then and Composite is manufacturing and services. So yeah, why is the composite PMI gone from 46 to 52? And yeah, I mean, why do you expect it to decline?”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Net percentage of banks tightening their lending standards is very, very high. It's suggestive of credit spreads that are, I forget the exact number, but if you run a regression, it's 300 or 400 basis points higher than they are today. That would be recessionary if it were to take place. And I know you could make the case that, well, hey, this isn't a credit-driven business cycle. This is more of an income-driven business cycle. And I appreciate those nuances. That said, if the unemployment rate goes up, that's going to put downward pressure on incomes and consumption production likely as well. And that almost always leads to credit events, right? And if there is a credit event, we really see no other outcome other than higher spreads.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“That said, 75% correlation isn't that high. Credit spreads leading into the great financial crisis, which was the biggest credit event since the 1930s. Credit spreads weren't a great leading indicator. They were very, very flat heading into the recession. Or COVID for that example, right? Credit spreads were very, very tight leading into COVID. They weren't a great leading indicator. There were other leading indicators if you looked at stock market internals, if you looked at the FX markets, obviously, but credit spreads weren't really it. So that's just to say, while credit spreads are important and we do pay close attention to credit spreads, they're not the end all be all. They're not all-knowing. They're just one input. I'll also add one more note. I think this is probably been discussed on your show before, but generally speaking, credit spreads tend to track the net percentage of commercial banks tightening their lending standards, which makes sense. You could almost think of one as private financing and one as sort of public financing for larger companies.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Is growth going to reaccelerate or are credit spreads eventually going to expand again? It's always a question of the weight of the evidence, right? Anytime you're trying to evaluate the economy or financial asset and figure out which way it's going, you're looking at the weight of the evidence. And there's always going to be evidence that things are going to get better and there's always going to be some evidence that things are getting worse. And you just have to determine where is the evidence most persuasive. And in our view, Invictus, we think most of the evidence points to the fact that growth is going to continue to slow when the labor market, you know, if and when the labor market gives out, you'll see the rate of change of that slowdown become much more dramatic. And we think in that environment, credit spreads probably do expand. I'll also add that while credit spreads are a decent leading indicator for growth, if you look at the relationship between, say, triple C spreads in the ISM manufacturing PMI, the correlation is about negative 75%. They're inverse, and credit spreads lead by a month.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“So, I guess a few things. First of all, we're clearly not in a recession right now. That's what credit spreads are saying. It's also just apparent from looking at the unemployment rate. A lot of the questions about strong, why does the economy seem so resilient? It's just when you're at 3.5% unemployment and when you're seeing 5% wage growth, that necessarily mean income means income growth is strong and that you're going to see a lot of money getting spent on stuff. Why are credit spread so narrow despite the fact that in rate of change terms, growth has been slowing? I mean, that's a great question, right? It's a divergence relative to history. Usually when growth is slowing, credit spreads are expanding. It's kind of more risk-off in nature. And when growth is accelerating, credit spreads are contracting. Credit spreads have been contracting since June, despite the fact that most of the growth data we track has continued to slow. So I think the question when you see an economic divergence like this is which way does the divergence resolve?”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Got it. So, how do you also interpret the very tightness in credit spreads, meaning investors are not really demanding a lot of compensation for taking credit risk for buying investment grade or high yield bonds? And there's kind of a boom in private credits now. I mean, if we're headed for a recession, isn't the bond market supposed to be smart? I mean, if we're A headed for recession, that's imminent and going to be big, and B, the bond market is the truth. By the way, I'm more convinced of A than I am of B, but I'm skeptical of both. If A and B are true, then the following would likely happen, right? Long-term bonds would be rallying and credit spreads would be widening. We're seeing the exact opposite. Credit spreads are tightening and they've been very tight. So the credit mark has loose. And then long-term bonds, the 10-year, the 30 year are selling off in droves. So what's going on there?”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Right, yeah. I mean, there's no doubt that if there's a recession, homebuilders, the correlations are going to go to one. On top of that, homebuilding is a consumer discretionary sub industry, right? And homes are the biggest, most expensive discretionary decisions that people make. So it's not a recession call. It's just an acknowledgement that the fundamental conditions for long-term outperformance are there, and even short-term outperformance. It's just more on a 12-month basis having any, you know, having a lot of exposure to equities is just a challenge for us. That said, we do spend some time on longer term themes. Like what's going on with homebuilders, like long-term drivers of productivity and the labor force. So we're not just tactical, even though we do spend a lot of time on economic regimes and market regimes that tend to last 18 months or so in duration. It's helpful to understand the long term, even if you're more focused on the short term from the perspective of making investment.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Over the long term, we're just missing a lot of homes. There needs to be more supply introduced that's going to come from homebuilders. It can't come from anywhere else. And that's essentially the bulk case. So homebuilders are probably our favorite exposure. We like some semiconductor plays tactically on artificial intelligence, but candidly, our outlook on the stock market is not super bullish right now, right? Obviously, we think there's going to be a recession sort of beginning at the latest in early 2024. And through them, we're going to see, I think, financial conditions continuing to tighten as a result of $85 billion a month in QT, as a result of $2 trillion in treasury issuance in the back half of the year. There are just a lot of headwinds for financial conditions leading up into that recessionary time period that make it very constructive to be bullish on the broader indexes.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Has the dynamic changed? No, I think the NAHB index ticked down about six points in August. And I think a lot of people were like, well, this is it. It's rolling over. Homebuilders are going to roll over too. And this is the end of their little bull run. Maybe. But the fundamentals really haven't changed. The supply situation is still incredibly tight. If you look at total active listings, which is sort of the best, most comprehensive measure of supply, it's down 75% today from its high in 2007, right? That's kind of a longer-term statistic, but I think it's important for context. There really is just no supply out there. And if you look at the year-over-year rate of change in active listings or days on the market, they're all moving in the wrong direction. Not only is supply tight, but it's continuing to get tighter. Who benefits from this? Well, it's probably homebuilders. Could a recession derail that thesis temporarily because people just completely stop spending money as the unemployment rate goes up? Yes. But I think the truth is when you look at the supply situation,”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Tricky question right now. One of my favorite sectors or industries rather is home builders. From a tactical perspective, a lot of homebuilders are kind of right below support. If you look at XHB, which is a homebuilder ETF, it's right below, excuse me, resistance, not support. It's right below resistance at about $85 a share. Generally, in Victus, we don't like buying things right below resistance. We like to buy breakouts. However, when you consider the fundamental backdrop for home builders, I think it's quite constructive. I think it's quite constructive over the short term, call it the next two or three months. And I think it's quite constructive over the longer term, call it five years out. And the big reason, so in the short term, the big reason that the fundamental backdrop is constructive is because there's no inventory of existing homes.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Yes. Yeah, in 2023, cyclicals have outperformed defensives by pretty wide margin. And the question is, was that outperformance attributable to faster economic growth? Maybe especially to the extent that we have seen spending squeeze into services, but a lot of it was policy, right? A lot of it was what the Fed was doing. So not to make this all about the Fed, but it is really, really important.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“More or less, I would say, but you have to be a little bit careful because policy also matters quite a bit. And if you look at the beginning of 2023, the growth situation wasn't great, but you saw cyclicals outperform defensives by a very wide margin. And that's really because if you look at the constituents of the various cyclical sectors, there's a lot of technology in the US, a lot of discretionary, which again, in the US includes things like Amazon, which are sort of more technology-oriented communications is essentially technology. And so when you're buying cyclicals, you're also buying quite a bit of duration risk. And as a result of the drawdown in the Treasury General account and as a result of the Fed expanding its balance sheets its balance sheet rates went down and you saw all of these cyclical sectors really, really outperform. And so that's just to say.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so I'm going to take a guess and say that your models also say that when the economy is slowing down, overweight stocks relative to bonds on an asset allocation, overweight cyclicals, excuse me, overweight consumer staples and healthcare and maybe technology and underweight cyclical things like energy materials home builders, is that your recommended asset allocation now or is it slightly different?”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Exactly right. Yeah. So the long and short of the story is if you want to get bonds right, you have to really watch the Fed. And it's important to track the economy as well. But the Fed is what matters most. And when you're looking at the economy, it helps to look at it the way the Fed looks at it. So when the Fed says, these are the criteria we're looking at in terms of making policy decisions about hiking or cutting rates. Even if you think the Fed is stupid, even if you think Jay Powell is a terrible Fed chair or whatever, you have to invest according to his criteria. You can't invest according to your own or you're going to buy the long-term treasury bond and draw down 30% over 15 months in the safest asset in the world.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Because the unemployment rate is 3.5, and I think that's related to my point of if the economy slows from 5% growth to 1% growth, the unemployment rate's probably going to tick up and the pressure is going to be on the Fed to cut rates or at least stop hiking them. But when you slow from 12% growth to 6% growth, that's still a boom, not as hot of a boom, but it's still a booming economy. And the unemployment rate is going to be at 3.5%. Inflation's hot. So yeah, Fed is going to hike, hike, hike, and then bonds don't do well.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Drivers of inflation, low productivity, rapid income growth, like I said, between six and six and a half percent. The Fed has not had the breathing room to cut rates or even to stop raising rates.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Right. And you brought up a great point earlier. So if you look at any backtest and economic growth and you look at it, the performance of bonds, especially government bonds, they're all going to say that bonds perform better when growth is slowing. But growth is not the direct driver of bond performance or of bond yields. The direct driver or the most direct driver is Fed policy, right? So if you were to run an attribution, you'd see that Fed policy accounts for about 95% of the price action in short rates and it accounts for about 80% of the price action even in long rates. So the first reason that we've seen bonds perform really, really poorly despite slowing growth is that we've seen inflation run hot and the Fed has kept rates high. That's really the important thing. You have to understand that the principal driver of rates, it's not economic growth even though growth does matter. It's what the Fed is doing. So because inflation is still really hot and because the underlying”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“So, PMIs for as long as PMIs have been existed until 2019. They've had a strong correlation, as you said. When PMIs go down, typically interest rates go down. When PMIs go down, the stock market performs not as well. When PMI goes up, interest rates go up, spending goes up. But I feel like has a correlation broken down over the past three years given that, I mean, yeah, PMIs went from 60 to 45 and interest rates went up. That is a pretty big question mark. That's a pretty, you throw in a wrench in the model, right?”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Yes, that's true. You can also look at other measures of output. So, for example, if you took the sum of growth in the labor market, right, growth in payrolls, and you added to it growth in productivity, that's another measure of output that's likewise been very shockingly soft, mostly because of weak productivity data.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Right. Yeah, that's exactly right. Well, and if you think about it, industrial production is a measure of output, which isn't to say it's unaffected by inflation or money printing, but it tends to naturally track real statistics a little bit better.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Most of them. So look at real GDP. It never recovered its level of trend growth. That's, I think, what most people think is the most comprehensive measure. You could look at personal income or real personal income, West transfers, which is kind of the level that the NBER looks at. The thing that's really above trend is consumption, and that's largely a result of money printing. And when the difference in growth in consumption outpaces the difference in growth in output, that's when you see inflation, hence, you know, the highest inflation since the 1970s.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Right. So I agree with what you're saying, a few comments. Yeah, they're all below trend, right? So the economic recovery has, you know, there has been an economic recovery, but it's not like the U.S. economy is so, so hot relative to history.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Recession, but 9% sounds like a pretty good growth period for me. So now we're at 6% growth and we definitely are probably slowing down more. So maybe that argument has reached its conclusion because we're getting down pretty close. But on the PMIs, if the economy is booming, for example, if there's like an airline PMI, there's not, but there, let's just say, maybe, I mean, it is probably the hottest time to be an airline since a very, very, very long time right now. But if it's slowing down, that would be a PMI of 45. But it's slowing down from such absurdly high levels that a slowdown from absurdly high levels is not a recession. It's just less insanely high. Likewise, bank lending standards were incredibly loose in 2022, and so they're net tightening from absurdly loose levels.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT
“Got it. Okay. And so from the beginning of the IS, first of all, you know, the PMI above reading above 50 indicates growth, a reading above, below 50 indicates contraction. This is a real key point I want to ask you about, which is about base effects, which is that a rate going down is not the same as the underlying phenomenon going down. For example, in Q4 of 2021, I was talking to a really smart macro investor. And he said, well, gross going to go down, so it's time to buy bonds. And I don't make a good point often. I probably make a good point maybe, you know, once or twice a quarter. So when I do make a good point, I remember it. So growth was at 12%. I said, if growth goes down from 12% to 9%, is that really a good time to buy bonds? Just because your back test says yes, because in your back test, your growth wasn't at 12%. When growth goes from 5% to 1%, that's a great time to buy bonds because the economy is entering a slowdown.”
2023-08-28 · Forward Guidance · Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton · IDENTIFIED FROM THE TRANSCRIPT