The Email Beige Book

The Email Beige Book

I write a few newsletters, and I frequently get feedback from my subscribers. Sometimes, they’re just saying hello, and sometimes, they’re ripping on me, but sometimes, they’re telling me about things they see in the economy that are of interest. Oftentimes, they’re one-liners, like this one I got about five minutes ago:

Was talking to a buddy over the weekend who owns a pretty large recruiting firm that specializes in large-scale blue-collar projects, and he said that business has completely dried up.

Believe me when I tell you I have dozens of emails like this from people out in the real economy, telling me that the real economy is slowing down. Not just slowing down but hitting a wall. I call this my own personal email Beige Book, and it’s proven to be very accurate in predicting economic cycles over the years.

Contrary to what some people might believe, we still do have a business cycle in this country. We have periods of overinvestment and underinvestment. And even though it doesn’t seem that way, the economy is pretty sensitive to the level of interest rates.

The Fed is fond of saying that monetary policy works with a lag. That is absolutely true. In this particular cycle, it has worked with such a long lag that people were wondering if we’d ever get a recession at all. People thought we broke the business cycle. After all, it’s been, what, 14–15 months since the yield curve first inverted? The rule of thumb around yield curve inversions is that you will get a recession 0–18 months later. We’re still within that time frame.

As I write, S&P Global US Services PMI came in a touch lower, adding credence to the recession theory.

Bond Bulls and Bears

You have probably noticed that there are some people who are pretty bearish on bonds. I don’t want to put words in their mouths, but they kinda think that we ain’t had a recession yet, we ain’t going to in the future, the Fed will have to keep hiking, and we’ll all be trying to get 10% mortgages.

For sure, that would be the worst-case scenario, and my experience being a financial talking-head guy is that there is a class of financial talking-head guys who predict whatever would be the worst-case scenario at any given point. As I’ve said in other 10th Man newsletters, I don’t think we’re going to have a problem with inflation—I think we’re going to have a problem with deflation. At last, we will get the hangover from all the COVID spending. Took a while.

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Ten-year interest rates, as I write, are 4.25%. Some people think they will go to 6%. I think they will probably go below 3%. And I believe this because of the anecdotal information I am getting on the economy, which is more real-time than the actual data. I’m not suggesting that I have better data than the Fed, with their 250 PhD economists and thousands of data series, but I will suggest that, as one guy in an office, I can react to it more quickly.

But the data hasn’t been all that great, either. You probably saw the JOLTS job openings number from last week—a horror show. This is a leading indicator of the direction of the labor market. The 12-month average of nonfarm payrolls has been trending lower for a year. If it is the labor market that the Fed cares about, then it will soon get its wish. We will get our unemployment… in an election year, which should make things interesting.

Eyes Peeled

Part of this game is keeping your eyes and ears always peeled. Head on a swivel. Some of the best information you will get about the economy will come from the people around you: servers, Uber drivers, painters, roofers, and more. They have a nose for which direction the economy is heading. The irony is that we, the financial people, with our head in the data, really don’t.

One thing I did during the housing boom of the mid-2000s was drive around rural Maryland and Pennsylvania, taking pictures of housing developments in the middle of East Frogkick, developments that didn’t have a prayer of being occupied in the next 10 years. We were just building stuff for nobody in particular.

You probably saw the movie The Big Short when the Frontpoint guys went on fact-finding missions to talk to mortgage brokers and realtors. That is some shoe leather research right there, and that is how you win. They don’t teach you that in the CFA curriculum. Funny because most of the people I know who are bearish on bonds are the unhappy holders of that CFA designation.

Jared Dillian, MFA


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