End of the Party: Why the Next Recession Will Be Brutal
Powell's Confession: The Economic Misstep Admitted on National TV
For nearly four years now, an unprecedented recession has been brewing, and we have been sharing this since then. There are a series of indicators that have been gradually unlocking; no crisis happens overnight, and one of the last indicators is close to being unlocked.
Let's do a brief recap.
First, we talked about how there were fewer crises historically, and these were much more pronounced. This is due to the incredible tampering within the markets. Obviously, if you have more control over something, in this case, the markets, you can substantially accelerate returns in the short term, but generally, the side effects will be worse.
This is exactly like people who take substances to last longer at parties. Obviously, in the short term, you achieve it, and you are also much more euphoric. But in the long term, it is worse.
Second, the Fed has multiple objectives such as boosting the welfare state, generating wealth, maintaining CPI at 2%, etc., but without a doubt, the most important is to have unemployment as low as possible. It has been meeting all these objectives by playing with interest rate hikes and cuts as well as with QT and QE.
Why is employment the most important? Because it is a macro indicator of the end of the cycle that indicates the party is about to end.
This is what we have been warning for a long time (since the beginning of 2023). We know you can do a lot of alchemy with rates and QE, but you can't do it with unemployment.
There are often correlations shown between indicators and recessions, and most of the time, correlation does not imply causality. However, there are indicators that have their reason for being, such as the yield curve and unemployment.
We are seeing how companies of the caliber of PayPal, Twitter, etc., are laying off large percentages of their workforce, and this is also very much linked to the end-of-cycle decline in productivity. Some examples of layoffs:
- Twitch: 35% of workforce
- Hasbro: 20% of workforce
- Spotify: 17% of workforce
- Levi’s: 15% of workforce
- Xerox: 15% of workforce
- Qualtrics: 14% of workforce
- Wayfair: 13% of workforce
- Duolingo: 10% of workforce
- Washington Post: 10% of workforce
- eBay: 9% of workforce
- PayPal: 9% of workforce
- Business Insider: 8% of workforce
- Charles Schwab: 6% of workforce
- Macy’s: 4% of workforce
- Blackrock: 3% of workforce
- Citigroup: 20,000 employees
- UPS: 12,000 employees
- Deutsche Bank: 3,500 employees
- Pixar: 1,300 employees
- American Airlines: 650 employees
- Google: 1,000 employees (0.5%)
- Salesforce: 1,000 employees (1%)
- Microsoft Gaming: 1,900 employees (9%)
In the following graph, you can see the strong correlation of end-of-cycle layoffs with crises.
Seems terrifying, doesn't it? It actually is, and a few weeks ago Powell spoke on 60 Minutes and acknowledged that the management had not been ideal.
It's somewhat the same with transitory inflation, isn't it? His speech came late, and it went from being a simple transitory recession to numbers not seen in the last 40 years.
This discourse that you have in the following video will get progressively worse, and then you'll say we didn't warn you.
Today, as every Sunday, we share our portfolio in detail. Our portfolio continues to reach historic highs, despite having a large allocation (40-60%) in risk-free assets. Likewise, we remain well protected against black swans.
