Business Cycle Slowdown Will Intensify Into Recession | Mike Singleton

Episode Summary

Executive Summary: Mike Singleton of Invictus Research argued that markets are being driven primarily by the business cycle, especially real growth, inflation, and Fed policy. He sees broad U.S. economic slowdown hidden by strong services spending, with recession risks rising as tighter rates, manufacturing weakness, and tighter credit eventually spread to labor markets. His base case is higher unemployment in 2024, more Fed hikes in 2023, and preference for T-bills over duration.

Main Topics: Macro framework: business cycle over bottom-up investing (Priority: 5/5): Singleton explained his shift from bottom-up stock analysis to top-down macro work, arguing that a few variables—real growth, inflation, and monetary policy—dominate major asset-class price action. Why rates matter for every asset class (Priority: 5/5): He emphasized that Fed policy transmits through the whole interest-rate complex, affecting mortgages, housing, manufacturing, consumption, and eventually employment and equities. Economic slowdown and recession timing (Priority: 5/5): The discussion focused on why the economy can look resilient on headline GDP while still weakening underneath, with leading indicators suggesting recession risk into Q1/Q2 2024. Credit markets, spreads, and contradictions (Priority: 4/5): The hosts debated why credit spreads remain tight and long bonds are selling off even as growth slows, with Singleton arguing the market still reflects strong income growth and no recession yet. Inflation outlook and policy risks (Priority: 4/5): Singleton argued disinflation is slowing, with services inflation still supported by wage growth and oil potentially pushing inflation back up near 4%, increasing odds of more Fed hikes. Asset allocation and sector views (Priority: 4/5): He preferred short-term Treasury bills now, thought duration is premature, and saw selective opportunities in homebuilders and some semis, while remaining cautious on the broad market. Labor market transmission and earnings risk (Priority: 5/5): A major theme was that manufacturing layoffs are the canary in the coal mine; once they spread, unemployment, profits, and spending could deteriorate quickly.

Key Arguments: The market is ultimately driven by the business cycle, and the most important macro inputs are real growth, inflation, and monetary policy. Interest rates are the starting point of the cycle because Fed hikes propagate through short rates, long rates, and mortgage rates, affecting housing and goods demand. Housing weakness has already transmitted into manufacturing and related cyclicals, with mortgage applications, home sales, PMI, and sector layoffs all soft. The U.S. economy is slowing in aggregate even if services spending and headline GDP look strong; the strongest parts are being propped up by wage income and fiscal support. Excess savings are nearly exhausted, so they are unlikely to support consumption much longer. Credit spreads are not yet signaling recession, which supports the view that the downturn has not fully hit the broader economy. Singleton expects the unemployment rate to rise sharply in 2024, potentially above 7% by August, based on leading indicators like homebuilder sentiment and bank lending standards. He expects inflation to reaccelerate modestly in the near term because services inflation remains wage-driven and oil has risen sharply. The best bond-buying signal, in his framework, is when the Fed is actively cutting rates, not merely when the yield curve inverts. Homebuilders remain a favored long-term thematic exposure because housing supply is structurally tight, though they would still suffer in a recession. Broad equity exposure looks less attractive than cash/T-bills because tighter financial conditions, QT, and Treasury issuance are headwinds. Corporate profits and margins are already rolling over enough to justify concern about layoffs and weaker earnings ahead.

Data Points: NASDAQ decline in 2022: -35% - Used as an example of rate hikes compressing valuations and hurting growth stocks. ARK Innovation decline in 2022: about -60% - Cited alongside other risk assets to show macro dominance over bottom-up fundamentals. S&P 500 decline in 2022: about -25% - Attributed largely to rising real rates and multiple compression. Real interest-rate increase in 2022: 300-400 bps - Used to explain why stocks sold off sharply as the Fed tightened. MBA purchase mortgage applications: down about 57% from January 2021 peak - Evidence that higher mortgage rates have crushed housing demand. Total home sales: down about 37% from cycle peak - Shows housing activity weakening after rate hikes. Total active listings: down 75% from 2007 high - Used to support the long-term bull case for homebuilders due to tight supply. U.S. population growth since 2007: about 15% larger - Paired with low listings to show housing supply remains structurally insufficient. PMI level: mid-40s / around 46 - Interpreted as recessionary or near-recessionary manufacturing conditions. Wages and salary disbursements: up 6% YoY; 6.5% annualized over 3 months - Evidence that income growth is still supporting spending. Unemployment rate: 3.5%-3.6% - Highlighted as the reason the labor market remains tight and spending resilient. Excess savings peak: about $2 trillion - Invictus estimate of pandemic-era excess savings at its high. Current excess savings: below $150 billion - Shows the buffer supporting consumer spending is nearly gone. Credit card delinquencies: up 118 bps over 2 years - Used as a warning sign for lower-income consumers. Federal outlays as % of GDP: above 6% - Described as recession-like fiscal support still stimulating demand. Atlanta Fed GDPNow Q3 real GDP: 5.8% - Cited to explain why headline growth can look strong despite underlying weakness. Real GDP growth Q1: 2.0% - Example of solid but not recessionary growth. Real GDP growth Q2: 2.4% - Same point: growth positive but not uniformly broad-based. Homebuilder sentiment lead time: about 18 months - Used as a leading indicator for the unemployment rate. Manufacturing PMI lead time to labor market: about 16 months - Supports the forecast of later labor-market deterioration. Treasury QT pace: $85 billion per month - Cited as a continuing headwind to financial conditions. Treasury issuance in H2 2023: about $2 trillion - Expected to pressure rates and bond prices higher in yield. Triple-C spreads vs. ISM manufacturing PMI correlation: about -75% - Shows inverse relationship between credit spreads and manufacturing conditions. Credit card delinquencies vs 2019: above 2019 levels - Used to argue the median consumer is not as healthy as aggregate deposit data suggests. Corporate profits: about 12% off cycle peak - Seen as consistent with early recession dynamics and margin pressure. Corporate margins: 300-310 bps off peak - Historically enough contraction to induce layoffs. Historical recession profit drawdown: 25%-30% from peak - Benchmark used to project further downside in earnings. Potential severe recession profit drawdown: 35% from peak - Upper-end scenario if downturn proves deeper than average. Long-term mortgage rate: around 7%+ - High financing costs reducing housing and durable goods demand. Oil move: +13% month over month - Used to warn inflation may reaccelerate in the near term. Rate of excess savings run-off: from about $2 trillion to under $150 billion - Illustrates the fading consumer cushion from pandemic stimulus.

Pivotal Quotes: "Macro economic style investing and analysis has a reputation for being kind of esoteric. And I think that intimidates a lot of people from including it in their process, which I think is a big mistake." — Mike Singleton: Explaining why macro deserves a central role in investing despite its reputation. "The long and short of the story is if you want to get bonds right, you have to really watch the Fed." — Mike Singleton: Summarizing why policy is more important than growth alone for duration trades. "I think the answer is yes. And that's what the Fed wants." — Mike Singleton: Answering whether the current slowdown will become a recession, framed as the Fed intentionally maintaining tight conditions.

Implications: Listeners should expect continued pressure on rates, bonds, and broad equities until the labor market weakens decisively. T-bills look attractive now, while duration and risk assets may need to wait for clearer recession and Fed-cut signals.