Accumulation of Red Flags in the Economy

The economic storm clouds are building and getting closer.

Nick Tomas

Jul 09, 2024

Bright and shiny on the surface. Getting rundown under the hood.
Stock Markets continue to kick ass.
Biggest threat to stocks at this moment.
What to watch for next in the economy.
Where my thesis becomes wrong.
What to do at this moment in time.

Bright and shiny on the surface. Getting rundown under the hood.

Things wear out over time. It’s normal and expected. The markets and economy are no different.

Cosmetically, things still look good.

Stock market indices continue hitting new highs.
More people passing through TSA than ever.
Packed bars and restaurants.
Filled arenas and stadiums for sporting and music events.

Under the hood there are increasing warning signs.

Lack of Market Breadth: Lack of new 52week Highs while S&P500 and NASDAQ continue making new highs.
Increasing Defaults
Increasing Unemployment
Home Building sector rolling over and construction jobs shrinking.
Bitcoin failing to break higher and back below resistance.

But the stock market, bro!

Yeah, the markets have really kicked ass lately if you know what you’re doing. They’re putting a nice shine on the surface and leading to confusion for those who haven’t taken the time to understand how the economic system works. Which I would say is the vast majority of people. But hey, lucky you that I’m so GD’d hard headed that I don’t know when to quit. (Ok. Truth is I always know when to quit. I just refuse to do so when the vision is clear and I see the path to success.)

Stock markets are typically about six months ahead of the economy. The exception is at the end of the cycle when markets are closer to a few weeks ahead of the economy. This is due in part to traders and active investors wanting to squeeze every last drop out of gains until it becomes more than obvious that the music is about to stop or has done so already.

And this is the situation we seem to be finding ourselves in at the moment as the aggregate of the economic data is weakening and continues to do so.

So while stock markets are great at knowing when the economy will recover from a recession well in advance, it is less predictive when it’s time for stock prices to fall and reset for the next cycle.

Biden dropping out is the biggest threat to stocks at this moment.

I touched on this in my 2024 Forecast. However, it bears repeating. It doesn’t matter what your thoughts are of the sitting president or the challenger. What does matter is that there are currently two guys running for President of the US which have been President before, and while there is a third candidate the odds are deeply against him now. This means the smart money knows what to expect out of the next four years more so than they would if one or both candidates had never held the Oval Office.

This gives a level of certainty around the November election which has only been experienced once since our country’s founding.* (Cleveland/Harrison 1892)

Taking that away by changing one of the contestants, and doing so at such a late stage, will increase uncertainty and there is nothing markets dislike more than uncertainty.

Should Biden drop out or get replaced, expect the smart money to take some chips off the table and wait to see how things shake out. This could last a week, or all the way until the election. We won’t know until it happens, if it does happen.

*Taft and Roosevelt were both on the Presidential ballot in 1912 after holding office, but there were also two other candidates who had not been president before. Eugene Debs and the winner, Woodrow Wilson.

What to watch for next.

Volatility spike to above 23.10 and hold.
Good earning reports getting sold.
Sales to fall while Inventories continue to grow for public companies.
More than likely continued new highs for the S&P and NASDAQ.
Bull Steepening in Yield Curves.
Rate cuts.
Bond Prices to begin outpacing Stock Market Indices.
Liquidity/Credit Crisis or lack thereof.

Where I become wrong.

As always, one of the biggest differences between amateurs and professionals is that a professional can tell you where their thesis becomes wrong.

Should market breadth once again begin putting in new highs along with markets, then this massive red flag is off the table. Should that happen, expect markets and the economy to continue trudging higher.

While it is not unusual for breadth to lag market moves, doing so on the backside of the credit cycle, as we are now, is when you absolutely want to be paying attention.

So, what is one to do here??

The truth is, the economic unwind could still take months to play out and turn into a full blown recession. The separation between the big winners and the big losers in society is going to come down to the same thing it always does… Preparation and operating with a level head rather than in the moment emotions.

This is the time to be raising cash and continuing to cut expenses. The goal is to get through the storm as close to financially intact as possible so that you can:

Protect your mental health when it’s all hitting the fan so that you can make the best decisions possible at the most difficult times.
Benefit the most in the next economic expansion.

Now is the time to be disciplined, not take chances. Especially if those chances are in fields which you are not an expert.

If you cannot clearly explain what you are doing, why you are doing it, know at what point you become wrong, have a plan in place to cut bait, and have been in a similar situation before, then you are not an expert.

For most of the economy, now is a terrible time to learn what you don’t know as it is the most expensive time of cycles to get educated.

Instead, now is the time to continue to batten down the hatches and prepare for the storm.

It is an Economic Slowdown, after all.

If you enjoyed this post or found it useful, do me a favor and hit the like (heart) button.

Click the Leave a comment button if you have any questions or comments, or need something clarified. Don’t be shy. The main point of “The Rhythm of the $ystem” is to improve constantly. Questions and comments help us both.