- Real (underachieving) U.S. GDP
- Jim Rickards: “We may be in a recession already”
- Bad Fed behavior (plus, three forward-facing indicators)
- Greg Guenthner on AI’s “ugly reality check”
- Zach Scheidt: Semiconductors’ “sign of strength”)
- Food-label high jinks: Belgium and the “Prosecco of Beers”?
Real U.S. GDP clocked in worse than expected at an annualized 1.1% for the first quarter of 2023 (and down from 2.6% last quarter).
To contextualize that number: “The long-term growth trend for U.S. GDP is about 3%,” says Paradigm’s macro expert Jim Rickards. (The sky-high GDP in 2020: fake news, considering the ultra-low post-pandemic baseline.)
For a number of reasons we’ve explored in the past, GDP as a measure of “the economy” is hopelessly flawed — a meaningless statistical abstraction with little relevance to your daily life or standard of living.
However, with that caveat, GDP is intrinsic to the baseline definition of recession: two consecutive quarters of falling real GDP.
Looking at that chart? Hmm…
“In other words, we may be in a recession already,” says Jim.
“This is not widely reported because the media are focused on happy talk from Wall Street analysts about a Federal Reserve pivot to rate cuts.
“In fact, the Fed has made it clear repeatedly that it will not stop raising rates until it achieves the so-called terminal rate of 5.25%.” And Jim believes this will require another 0.25% rate hike in May; he’s not ruling out a similar hike in June either.
“The Fed is not even close to cutting rates… although they are causing a recession in the meantime,” he claims. Not that Powell and company would know it.
Because, on the whole, the Fed “looks backward at lagging indicators,” says Jim, especially skewed official unemployment stats.
“But what are the leading indicators that presage a recession?”
An inverted Treasury yield curve: “A normal yield curve is upward-sloping, which means that longer maturities carry higher yields,” Jim says. “If I’m going to lend you money for 10 years, I probably want a higher interest rate than if I’m going to lend you money for six months.
“Right now, the Treasury yield curve is steeply inverted,” he says. “This means that longer maturities actually have lower yields than shorter maturities.
“When investors accept lower yields on longer maturities, it means they expect yields to drop because of recession. Or worse.”
An inverted Eurodollar futures curve: “Eurodollar rates are basically short-term interest rates that big banks pay each other for dollars in unregulated markets,” Jim says. “Investors can buy futures contracts on these rates out to five years forward, although the one–two-year contracts are the most actively traded.
“Basically, these are long-term bets on short-term rates,” he notes. “Right now the June 2023 Eurodollar futures contract is priced at 94.6200 (priced as a percentage of par or 100.00). The September contract is 94.9650. The December 2023 contract is priced at 95.3300.
“Notice how the price goes up over time? Markets are betting short-term interest rates will be going lower — rates are expected to come down in a recession,” says Jim. “This inverted Eurodollar futures yield curve was also last seen in 2007–2008 ahead of the market crash.”
Negative Swap Spreads: “U.S. Treasury securities dealers buy long-term notes and finance them in overnight repo markets,” Jim says. “The swap is economically the same as owning the bond with two differences: There is no bond involved — it’s just a contract. Plus, the dealer takes on credit risk.
“It follows that the fixed-rate payment on the swap, then, should be slightly higher than the fixed-rate payment on the actual bond to account for this extra credit risk,” Jim says. Instead, today “fixed rates on interest rate swaps are significantly lower than what an investor can accrue on the actual Treasury note.
“Is this because dealers trust bank credit more than U.S. Treasury credit? Not at all,” he adds. Rather? “Treasury notes are in short supply whereas swaps can be written in unlimited quantities.
“A shortage of Treasury notes is indicative of ultra-tight monetary conditions, which lead to recessions,” Jim highlights.
“There’s a flood of hard data, too, including declining world trade, industrial production and real wages as well as deteriorating consumer credit — and many other indicators that all point to a recession.
“According to the best predictive indicators, a recession is definitely coming… or may be here already.” And Jim keeps it real: “The Fed will be the last to know because they’re looking in the rearview mirror at lagging indicators.”
[Closing curtain on the U.S. economy? Appropriately enough, Jim is getting ready to go live in a timely briefing with his close contact ‘The Banker’ TODAY at 7 p.m. EST.
Hear how this former hedge fund manager dominated one of the worst markets in history — netting a 190% return in his model portfolio, with real money and real-time investing.
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Today, Jim Rickards and his inner-circle contact will show how this strategy can crush inflation and withstand a pullback in the stock market.
You don’t have much time left. Your chance to RSVP to this event ends shortly.]
It’s a “game on” day at the market: The tech-heavy Nasdaq is getting some love… The index is up 2.15% to 12,110; the S&P 500 and Dow are likewise in the green — up 1.5% and 1.15% respectively.
Another Big Tech A-lister reported earnings yesterday afternoon…
- Meta (FB) joins Microsoft and Google, reporting several Q1 2023 earnings beats. Notably: “It’s the first quarter that Meta’s year-over-year revenue grew after three consecutive quarters of year-over-year quarterly revenue declines,” says Axios. “Our AI work is driving good results across our apps and business,” says Zuck, making sure to nail that attention-getting buzzword (AI).
As for the commodities complex, crude is up 1% to $75.10 for a barrel of West Texas Intermediate. And gold and silver are both pennies shy of $2,000 and $25 apiece.
Despite SEC chair Gary Gensler jawboning to crypto exchanges — you “must come into compliance, register with us and deal with conflicts of interest” — cryptocurrencies Bitcoin and Ethereum are rallying today. At the time of writing, Bitcoin’s up 2.65% to $29,250 and Ethereum’s up 2% to $1,900.
For more market news, we give the floor to Paradigm market analyst Greg Guenthner…
“Artificial intelligence pure plays are getting an ugly reality check this week,” says Greg.
“The AI stocks didn’t get a ton of press during the 2022 meltdown,” he says. “And they weren’t exactly lumped in with the tech-growth trade that dominated the speculative landscape. In fact, AI didn’t even debut on the market until December 2020, just before the final exhaustion highs registered in early 2021. Bad timing!
“C3.ai Inc. (AI) is the poster child for the frothy sector,” Greg says. “Shares shot up as much as 200% so far this year, after ChatGPT took the internet by storm in late 2022.
“AI was hit hard earlier this month by an analyst’s short report that raised some serious questions about C3.ai’s accounting practices,” Greg explains. “Following weeks of choppy consolidation — and a few wild rallies — AI and other speculative names are losing key levels…
“Now we’re seeing follow-through to the downside as AI breaks below the critical $20 level that acted as support since the explosive January rally.”
Greg’s key takeaway: “It’s usually a good idea to get out of the way of a trend once it has caught mainstream fire. Perhaps a serious hard reset is in order here,” he says, “after a price breakdown.”
“I’ve had my eye on semiconductor stocks for some time now,” agrees Paradigm’s income-investing ace Zach Scheidt.
“Because computer chips go into just about everything we buy, demand for computer chips is a good barometer for how the overall economy is faring. When computer chip stocks do well, it’s a sign of strength for many other important areas of the market.
“So far this year, semiconductor stocks have been trending higher,” Zach says.
- “Demand from the auto industry, artificial intelligence applications, cryptocurrency mining and many other end markets has been high
- “And last year’s CHIPS Act has given computer chip manufacturers an incentive to build new production plants here in the U.S.
“In short, the fundamental case for semiconductor stocks has been relatively strong, which is why I’ve been watching the VanEck Semiconductor ETF (SMH) — which invests in a basket of semiconductor stocks — very closely this year.
“Take a look at the chart below and see if anything stands out to you…
Source: Rich Retirement Letter
“What I want you to notice is that SMH has been trending higher,” Zach says. “But over the past two weeks, the fund’s pulled back a bit.
“Today, SMH is sitting very close to its 50-day moving average (the green line on the chart). This is an important spot for the fund and computer chip stocks in general.
“When stocks (or groups of stocks like SMH) are in a strong trend, a pullback to the 50-day average can turn out to be a great buying opportunity,” adds Zach.
“There’s nothing magical about this line. But it does give traders like me a good sense of which way a stock is trending and whether the trend is still intact or not.
“Also, when lots of traders are looking at a specific indicator like this, it can turn out to be a self-fulfilling situation. If traders decide to buy at the 50-day average, their buy orders will push the stock (or the fund in this case) higher.
“So the key support level may hold just because investors expect it to hold.
“One final point about this particular support line: If the line is decisively breached, that also gives us some helpful information. It tells us that the bullish trend may be in jeopardy and it’s probably a good idea to close out short-term bullish trades.”
Zach concludes: “Using key chart indicators like the one for SMH — when a support line like this fails — it gives us a good exit warning and allows us to sell before losses start to add up.”
The Champagne lobby in Belgium has a lot of pull: “Belgian customs officials have destroyed [more] than 2,000 cans of the beer Miller High Life,” Reason reports.
In The 5’s history of tracking food-label shenanigans, I find this story most tragic. (Full disclosure: I’m a Miller High Life Stan.)
Source: Twitter
“The Comité Champagne — a trade association representing ‘the common interests of Champagne houses and growers’ — objected to Miller High Life’s slogan: ‘The Champagne of Beers,’” Reason says. A slogan which Miller High Life has used for over 100 years.
But the EU has strict rules about the use of the word “Champagne,” which is exclusively reserved for sparkling wines derived from grapes grown in the Champagne region of France.
“Molson Coors Beverage Co., which owns the Miller High Life brand, does not currently export it to the EU,” the AP notes.
Instead, an anonymous customer in Germany ordered the cases of Miller High Life, which were confiscated and unceremoniously decanted at the port in Antwerp.
And we’d wager that German “customer” will stay anonymous, too… because German beer versus Miller High Life? Like drinking Prosecco from a Champagne flute.
We’ll be back with more of The 5 tomorrow… Until then, take care!
Best regards,
Emily Clancy
The 5 Min. Forecast
P.S. Fed chair Jay Powell got the Christine Lagarde treatment, eh?
Earlier this month, The 5 detailed how a Russian comedy duo, known as Vovan and Lexus, punked European Central Bank chief Christine Lagarde into believing she was on a conference call with Ukraine’s President Volodymyr Zelenskyy.
Today, Bloomberg reports that Powell was similarly snookered by the Russian pranksters back in January; in fact, Powell had a wide-ranging convo about everything from the Russian Central Bank to inflation. (A conversation aired on Russian state television, by the way.)
Source: Twitter
During the call, Powell intimates the Fed will stay the QT course while conceding that a U.S. recession is likely. “This is what it takes to get inflation down.”
All of which jibes with Jim Rickards’ studied opinion today: The Fed is sorely “lagging,” using backward-looking economic information. With Powell’s latest faux pas, it’s further confirmation the clueless Fed seems to be operating according to a “glitch in the matrix.”
