Softlanding : Really ?

Amidst the prevailing narrative of a soft landing, numerous macro factors currently signal an imminent recession. The discrepancy between highly inflated financial asset valuations and the changed market environment defies logic. The US economy, perched on the edge of a downturn, faces the risk of a significant equity market sell-off and a drastic compression of fundamental multiples.

Crescat's macro model, comprising 17 macro, fundamental, and technical indicators, is presently at one of its most concerning levels in recorded data. This model has proven effective in identifying pivotal shifts in the US business cycle, which oscillates between expansion and contraction in conjunction with fluctuations in asset valuations and credit availability. Almost all indicators have hit historic extremes, affirming our viewpoint on the high risk of an impending hard landing.

We are at a critical juncture in financial markets and the global economy, supported by a compelling array of macro reasons:

Global Central Bank Assets: Contrary to overall stock trends, these assets are contracting significantly.

Yield Curve Inversions: Extensively inverted yield curves, a classic signal in credit markets, often coincide with an economic decline.
Unemployment Rate: Surpassing its 2-year moving average, historically foreshadowing recessions over the last 50 years.

ISM Manufacturing Index: Historically, a recession followed every 12-month period where this index stayed below the key 50 level.

Household Saving Rates: Approaching historic lows.

Conference Board Leading Indicator: Declining for 19 consecutive months, a trend only observed during specific economic recessions

Market Leadership: Narrowing market leadership, reminiscent of times before the 2001 Tech Bust.

Fixed-Income Assets: Recent significant value destruction in fixed-income assets worldwide.

Divergence Between Treasury Prices and Nasdaq 100 Index: Marked divergence between falling Treasury prices and a Nasdaq 100 Index defying gravity in a higher cost of capital environment.

Late-Cycle Valuations: Historically overblown valuations across various fundamental multiples in equity markets.

Monetary Policy: Lag effects of Fed rate hikes and quantitative tightening for extended periods.

Banking Credit: Contracting to levels akin to those during the Global Financial Crisis.

Cyclical Industries Index: Down 20% relative to the S&P 500.

Trucking Employment: Contracting faster than during the 2000 and 2008 cycles.

Consumer Sentiment: Near record levels, serving as a reliable contrarian indicator.

Federal Tax Receipts: Declining for seven consecutive months, a sequence observed only during recessions.

Corporate and Sovereign Debt Obligations: Maturing in the next 12 months, with effective interest rates poised for a drastic rise.

Corporate Margins: Yet to feel pressure from rising wage increases.

Small-Cap Stocks: Less than one-third have turned a profit in the last three years.

Aggregate Corporate Earnings: At the upper boundary of a 70-year channel, historically signaling a critical juncture.

Warren Buffett's Move: Accumulating the largest cash position in Berkshire Hathaway's history, comprising 52% of cash relative to total assets.

Tech Companies and Capital Intensity: US companies have engaged in one of the most extensive capital spending booms in history. However, while technology companies drive this investment expansion, their growth potential seems close to exhaustion. Despite investing heavily in artificial intelligence, this expenditure has yielded marginal revenue improvements.

The era where technology companies could sustain high earnings and free cash flow growth with minimal capital investment has passed. The current real growth in earnings is trailing only behind the prior decade's performance, setting the stage for a potential downturn in profits.

CAPEX Trends: Aggregate capital expenditure of S&P 500 index members often peaks, and we currently find ourselves at this upper limit. This typically precedes a contraction in capital expenditure.

Tech Capex vs. Resource Sectors: Remarkably, technological advancements demand more capital investment than traditional resource sectors. Tech companies' increased capital needs position them as more cyclical in nature.

Opportunities in Resource Sectors: Protracted periods of excessive spending by tech companies are typically followed by supply constraints and low capital expenditure in resource sectors. This creates investment opportunities in commodities, a trend seemingly in its early stages.

Rising Volatility: Monetary policy changes historically precede market volatility. Current signals from recession indicators suggest that volatility is unsustainably suppressed.

Liquidity Withdrawal: Declining global central bank assets are draining liquidity from financial markets, hinting at potential downside in equity markets.

Market Leadership Trends: Similarities with the Tech Bubble's peak indicate market weakness and potential overvaluation of technology companies.

Apple and Microsoft Dominance: These companies' weight in the S&P 500 dwarfs several sectors combined, yet their profits make up only a fraction of the economy's size.

Shift Towards Gold: With signs pointing to a new long-term cycle, precious metals and mining companies offer compelling investment opportunities, especially as central banks and traditional investment strategies historically neglect gold.

Silver's Potential: Silver remains historically undervalued compared to gold, indicating the potential for significant growth.

Seasonality for Precious Metals: December historically marks a strong period for precious metals, offering an opportune time for investment in the mining industry.

Miners as Investments: Mining companies could become attractive investments as precious metals gear up for a potential breakout into a new long-term cycle.