Top Three Videos – July 29, 2023

Quick Summary Bullets:

Economic Deterioration and Warning Signs

• The 12-month, 24-month, and 36-month rate of growth in bank credit is negative, which is highly unusual and indicates potential economic deterioration.
• The combination of a slowdown in money and bank deposits, contraction in bad credit, and a high real policy rate creates a “perfect storm” of economic deterioration.
• “If we feel that there is potentially substantial layoffs ahead, a real recession ahead, maybe something that pulls today’s highly richly valued markets down as a result, you know that’s going to be a lot more pain than they’ve felt so far this year.”
• The majority of people change their behavior only when the pain of continuing the status quo exceeds the pain of making a change, which can result in sudden and significant shifts in the economy during recessions.
• Lacy Hunt warns of a “perfect storm of economic deterioration” that we are currently facing.
• The credit cycle is showing signs of slowdown, with a significant decline in the money supply resembling levels last seen in 1933, which will inevitably lead to a contraction in credit creation and extension.
• Despite the recent market gains, there is a lag effect that will eventually lead to economic deterioration, according to Lacy Hunt.
• “Lacey Hunt shows the invisible implications of money supply, bank lending, real rates, and productivity, highlighting the economic deterioration we’re facing.”

Importance of Historical Analysis and Context

• Lacy Hunt emphasizes the importance of understanding history and recognizing false signs of recovery before experiencing a significant downturn.
• The presentations by Lacy Hunt at conferences are highly informative and comprehensive, described as “literally like a graduate level presentation.”
• Lacy Hunt emphasizes the importance of diving beneath the surface of headline news flashes to avoid taking them out of context.
• According to Hunt, there is typically a lag of about seven to nine quarters between a financial cycle peaking and a business cycle peaking, suggesting that we may currently be in the seventh quarter of this lag.
• Lacy Hunt’s approach to analyzing the economy is like a master mechanic looking under the hood of a car, focusing on data rather than popular market trends.
• According to Jeremy Grantham, we are potentially witnessing the bursting of a great bubble, which requires a different analysis from regular bull market cycles.

Investing and Portfolio Strategies

• Lacy Hunt predicts that treasury yields will continue to decline, indicating a long duration portfolio is warranted.
• Investing in U.S. treasuries may be attractive now due to the potential for a real return and the optionality of yields coming down.
• “We think this is one of the most challenging and treacherous times in history for investing.”

Transcript Summary:

• 00:00 Consumers should be prepared for potential economic vulnerabilities as bank credit lending tightens, with negative growth in bank credit for the past 12, 24, and 36 months indicating a challenging economic outlook, and the average credit card loan rate now over 20 percent.
  • Consumers need to prepare for potential economic vulnerabilities as bank credit lending is tightening, which is a powerful contractionary force that is layered on top of what the Federal Reserve is doing, and historically, the negative growth in bank credit is a lagging indicator that doesn’t become negative until a recession is already underway, but currently, it has been negative for the past 12, 24, and 36 months, which is extremely unusual.
  • The current economic situation is a perfect storm of a slowdown in money and bank deposits, contraction in bad credit, and a high real policy rate, indicating economic deterioration, with the lag effects of policy decisions still to come.
  • The economy is experiencing pressure and potential risks, and it is advised for consumers to be cautious and prepared for a challenging economic outlook.
  • The average credit card loan rate is now over 20 percent, and the household sector needs to be aware of compound interest and get their financial house in order to protect themselves from potential economic vulnerabilities.
  • Consumers tend to change their behavior when the pain of continuing the status quo exceeds the pain of changing, and currently, many people are trying to maintain their pre-pandemic lifestyle by relying on revolving credit, which could lead to economic injury when they can no longer continue.
  • Hunt discusses the stages of the business cycle, including expansion and recession, and warns of potential economic deterioration due to declining components of the economy and rising commodity prices.
• 15:11 Despite the current market rally, the speaker warns of a potential recession and explains the significance of the inverted yield curve in predicting long-term yield reductions, suggesting that investing in U.S. treasuries may be attractive.
  • Hunt discusses the expectation of a recession that never happened and the current market rally, but warns that from a macro standpoint, we are not out of the woods and provides an academic economic explanation for what to expect.
  • The stock market is not a reliable indicator of the economy and has historically provided little warning of critical turning points, making it unimportant to discuss as an economic indicator.
  • Hunt advises against using a certain indicator and expresses gratitude for the discussion, mentioning upcoming conferences and the detailed presentations given.
  • Treasury yields are expected to decrease in the future, and despite last year’s loss, a long duration portfolio is still believed to be warranted due to the critical forward elements and the highly inverted Unicron.
  • The inverted yield curve, which has been present for over a year and is currently at an extreme level, is reinforcing the decline in money supply, bank credit, and high real policy rates, and historically, extreme inversions have preceded substantial reductions in long-term yields.
  • Investing in U.S. treasuries may be attractive now due to the potential for higher returns and the optionality of yields coming down, but the speaker was more excited about investing in treasuries in 1981 when they were able to purchase them at close to 15 percent.
• 24:02 Lacy Hunt warns of economic deterioration, highlighting the decline in the automobile sector and the stock market’s imbalance, while predicting a peak in the financial cycle by Q4 2021.
  • Lacy Hunt will be the keynote speaker at a conference in October and his quarterly letter will be available for free on wealthyon.com.
  • Lacy Hunt provides valuable insights on economic deterioration and helps us understand the context behind misleading news headlines.
  • Recent GDP numbers show that a significant portion of growth was driven by the automobile sector, which is now starting to decline, indicating a narrowing of economic advancement.
  • The stock market is showing signs of trouble as a few stocks dominate the market while others deteriorate.
  • Lacy Hunt predicts that the financial cycle will peak in the fourth quarter of 2021, with a typical lag of seven to nine quarters before the business cycle peaks.
• 29:16 Market slowdowns and a disconnect between the market and the true health of the economy are leading to a credit crunch, with investors ignoring warning signs and a potential bursting of a great bubble in the market.
  • Market slowdowns in key areas of the economy, such as the credit cycle and money supply, are leading to a contraction in credit and a disconnect between the market and the true health of the underlying economy.
  • Lacey Hunt, an experienced economist, predicts a credit crunch based on his analysis of economic data.
  • Investors who enjoyed a decade of easy market gains are now ignoring warning signs and believing in a false promise of continued success, but the data suggests that economic deterioration is imminent.
  • Lacy Hunt and Jeremy Grantham discuss the potential bursting of a great bubble in the market, with Grantham noting that speculative assets tend to be hit first, followed by a recovery and then a series of unexpected events that catch investors by surprise.
  • The market has experienced a rare super bubble and super sell-off, with the majority of gains concentrated in a small number of stocks and driven by multiple expansion rather than increased earnings.
  • Expensive assets have become even more expensive, but without economic justification, the current high valuations are unprecedented in history.
• 40:01 The current economic conditions are extreme and cannot be compared to prior episodes, leading to a potential perfect storm of economic deterioration, so it is important to listen to experienced investors and have a plan in place.
  • There is a problem with relying on historical data to predict market outcomes because current conditions are extreme and cannot be compared to prior episodes, and it is important to listen to experienced investors who understand these distinct moments.
  • Productivity has been weakening and the only way to fix it is through layoffs to align the cost of the workforce with its volume of production.
  • A bad recession is likely to occur in the future due to periods of extreme inflation leading to extreme recession, as indicated by various experts and leading indicators.
  • The future may be riskier than experts are suggesting, so it is important to have a plan in place for potential economic deterioration.
  • Momentum in markets can be powerful, but it can also lead to chasing performance and panic selling, so it’s important to be cautious when valuations are high and use tools like momentum indicators wisely.
  • Position sizing is crucial when implementing a momentum-driven strategy in the market.
• 47:29 Hunt predicts a potential weakening in the job market due to the economic downturn, with the labor market possibly being impacted later this year or in the first half of next year, and warns of the risk of suffering a decline that erases years or decades of financial security.
  • The economic downturn has led to a decline in quarterly revenue growth for Robert Half, a staffing company that typically hires temporary workers to optimize their workforce.
  • The speaker predicts a potential weakening in the job market as companies begin to rationalize their workforce, with job numbers typically looking good at the beginning of a recession and bottoming out when the recession is ending, suggesting that the labor market may be impacted later this year or in the first half of next year due to the slow-moving nature of these economic factors and the distortions caused by current circumstances.
  • Hunt emphasizes the impact of their work on people’s lives.
  • The biggest risk for clients is not waiting for the last bit of juice in an overvalued market, but suffering a decline that erases years or decades of their financial security, and the data suggests a greater downside risk than upside in the long term.
  • Busts in the economy are often followed by large rallies that give false hope and encourage people to invest, only for the bear market to return and cause further decline.
  • Hunt discusses the current economic situation, including the Federal Reserve’s rate hike, tightening lending standards by banks, and the worsening credit conditions, which are all contributing to a potential economic downturn.
• 55:14 Increasing interest rates and potential credit crunch are leading to a significant impact on corporate margins, increasing bankruptcies, declining retail sales, and indicating a perfect storm of economic deterioration.
  • Increasing interest rates have not yet affected corporate margins because companies took advantage of low rates to leverage up and store cash in treasuries, but as time goes on and they have to refinance, their interest rates will increase, leading to a significant impact on corporate margins.
  • There is an unfolding potential credit crunch due to re-ratings and the massive leveraging up by corporations at low interest rates, leading to an increase in corporate bankruptcies and the need to divert cash to paying down debt.
  • Healthcare bankruptcies are increasing, corporate earnings are dropping, and certain sectors are thriving, indicating a perfect storm of economic deterioration.
  • The semiconductor sector has seen a significant increase in stock prices, but there is a surplus of inventory that is not being sold, and despite the consumer discretionary sector being popular, retail sales have dropped, indicating a decline in the economy.
  • Retail sales on a unit basis have been in sharp decline, indicating that people are buying fewer things, and warnings from companies in the logistics space suggest a slowdown in the economy.
  • Yellow, a short haul trucking company, filed for bankruptcy due to issues with unions and the inability to meet pension payments, indicating a clear story of economic deterioration.
• 01:02:51 Seek advice from a professional financial advisor who understands the risks and can help manage portfolios during potential economic downturns.
• • Lacy Hunt advises viewers to have a plan for managing their portfolios and recommends working with a professional financial advisor who takes into account the economic issues discussed in the video.
  • Prepare for potential economic downturns and seek advice from professionals who prioritize genuine consultations over sales.
  • The speaker emphasizes the importance of discussing individual financial situations and making informed decisions, while also highlighting the need to be prepared for potential economic downturns.
  • Discussing portfolio positioning, retirement planning, college savings, caring for aging parents, and other financial needs is important during uncertain economic times, and viewers are encouraged to support the channel by liking, subscribing, and scheduling future updates.