Guest Haymaker - The MacroTourist
The Host & Mr. Muir
“We’ll look, I think the economy is doing well. We have a strong pace of job creation.” -Janet Yellen, 5/9/2024
“The most likely outcome is that the economy will move forward toward a soft-landing.” -Janet Yellen October, 2007 (The Great Recession began two months later)
“We have currency problems. We have a big currency problem.” -Former President Donald Trump
Hello, Readers and Subscribers:
For those of you new to the Haymaker newsletter (and welcome, by the way), our Friday content ranges from editorial pieces on politics, major news, and niche economic topics, to particularly strong guest pieces from fellow scribes. This is a very different format from our Making Hay Monday editions, which feature in-depth market analyses and regularly updated asset-class lists for the use and consideration of our savvy audience.
One of the aforementioned authors whose work we’ve been honored to host in our humble corner of the Substack ecosystem is Kevin “The MacroTourist” Muir. Kevin is a highly insightful economic and financial markets analyst, as well as a recent guest on the Haymaker Webinar series.
In this edition, Kevin argues that recession signs are underappreciated by those who should appreciate them. Further, although it’s easy to sideline bearish concerns at the moment, with the stocks still near all-time highs, that may be ill-advised given the interconnected factors he lays out.
Coincidentally (or, perhaps, not), since Kevin ran this piece on July 12th, the stock market has been under some downward pressure. At this point, it’s nothing serious though the tech-heavy NASDAQ has eased 4% versus the S&P 500’s negligible 2% blip of a dip.
However, on a relative basis the situation is much starker. Various Haymakers have suggested we might be near the point of a powerful rotation away from tera-cap tech stocks (i.e., trillion-dollar market valuations and, often, far larger) and toward the shares of much more affordably priced smaller and mid-sized companies. The Haymaker Team view was that either such a shift of preferences was due to occur or the overall market was likely to correct hard. Fortunately, from almost the day Kevin published his note, small cap stocks have been on a rousing tear while, as noted above, the NASDAQ has backed off a bit. As a result, the Russell 2000 small cap index has outlegged the “Naz” by 10%, a sizable amount in barely over a week. Yet, as you will read, Kevin is concerned that small caps—and, implicitly, most value stocks—are vulnerable to a weakening economy. Accordingly, this sudden rebound may not be sustainable. However, per the second visual, over time small caps are poised to do a ton of mean-reverting versus the NASDAQ. (Almost no one thought that could happen in early 2000 but the reversal of fortune lasted for nearly a decade.)
Last year, Kevin was among the perceptive few who realized that a U.S. recession was extremely improbable based on federal deficit spending run amok. As it turned out, the red ink roughly doubled in 2023 versus 2022. As prior Haymakers have repeatedly observed, that was a key factor — possibly, THE key factor — behind why the U.S. economy was able to withstand over two years of falling Leading Economic Indicators and a long-last yield curve inversion (short rates above long rates). Now, though, he believes those fiscal amphetamines are losing their potency.
On the positive side, the fact that the market has broadened out so dramatically over the last week or so ameliorates one of his (and our) greatest concerns: U.S. stocks’ breathtakingly bad breadth (i.e., a handful of companies doing all the heavy lifting). On the not-so-feel-good front, Kevin is being joined by others (such as billionaire venture capital tech investor, Roger McNamee) in voicing his concern that the promise of AI has been vastly overblown. The ultimate AI play, Nvidia, has more than doubled the NASDAQ’s decline; yet, at -8.75% since July 12th, it’s hardly been a bloodbath.
To the Haymaker way of looking at the world, Kevin’s missive is essential reading in at least two regards: one is the cocksure attitude a recession will be avoided; the other is the nearly universal addiction to tech stocks. Since he wrote this, of course, Donald Trump narrowly avoided assassination. His resulting popularity surge has investors pondering what that might mean for the tech sector, particularly if he wins in a landslide and both branches of Congress wind up in GOP hands.
As we wrote in this week’s Making Hay Monday, the implications of such an outcome are potentially adverse to almost every investor’s most favored sector. In fact, with his selection of J.D. Vance as his VP nominee, there is an elevated risk of a break-up of some of the great tech monopolies empires. Another point we made on Monday was that a second Trump administration is almost certain to try to push the U.S. dollar down “bigly”. If so, that could undermine support for U.S. tech stocks, as well, due to the degree to which foreign investors have piled into this sector.
Lately, we’ve been advising our readers to cash in some (not all) of their tech winnings. That looked like foolish advice until almost exactly the day Kevin published this note. Undoubtedly, millions of perma-bulls on tech are hoping, if not assuming, it’s another chance to buy the dip. Yet, after the stunning run stocks like Nvidia have had, it’s doubtful that this recent baby correction has flushed out enough of the speculative excesses. While a near-term bounce is entirely possible, be on guard for something much more painful for all those who have grown increasingly blind to a long and growing list of risks.
The Haymaker Team
WORRIED (Part 1 of 3)
The 'tourist walks through the first part of his new bearish view: the risk of recession is higher than anytime since COVID
Kevin Muir
(Originally published July 12th, 2024; this version abridged, with the author’s permission.)