Greetings everyone and happy new year. Well, it was an eventful turn of the year. the government uh shutdown did end.And uh here we are. We're catching up with uh economic statistics. Uh I'm going to be doing something a little different this time instead of the normal drill.uh because uh I'd like to give you a preview of a letter that we're going to be putting out uh uh at least show you some of the charts uh and um really go through the line of thinking um that we have been processing over the last year a ...

Economic Outlook - The employment report is weaker than expected due to downward revisions, raising recession fears, but the analysis suggests a "rolling recession" [2] - The expectation is for a strong recovery, possibly starting as a "rolling recovery", with upside surprises in real growth and productivity, and downside surprises on inflation by the midterm elections next year [5][6] - Geopolitical risks remain, particularly concerning Russia-Ukraine, China, and Mexico, but the biggest uncertainty is the Federal Reserve's (Fed) policy [7][8] Fiscal Policy - Year-to-date deficit as a percentage of GDP has shrunk from approximately 73% to 62% [10] - Tariffs are annualizing at an estimated $450 billion per year, potentially leading to a deficit of roughly 47% of GDP [10] - The analysis suggests that the deficit as a percentage of GDP could reach 3% by the end of 2026, two years ahead of the Treasury Secretary's objective [11][12] - Approximately 75% of capital spending will benefit from permanent expensing, which is expected to attract manufacturing back to the United States and boost productivity [18] - Factoring in expensing, the US corporate tax rate could effectively drop to the 12-14% range [19] Monetary Policy - Despite Chairman Powell's hawkish tone, the data suggests the Fed may ease, with odds for a rate cut in September up to 88% and a 50 basis point rate cut at approximately 25% [4] - Real private domestic final sales are growing at approximately 1%, indicating cautious consumer behavior and a rising savings rate, potentially crossing 5% this year [21][22] - The 2-year Treasury yield less the 3-month Treasury yield is below zero, indicating restrictive monetary policy, which historically precedes recessions [26] - Truflation, which measures thousands of items in real time, suggests that inflation may stabilize and then decline towards or below 2% [33][24] Market Indicators - Economic policy uncertainty reached unprecedented levels during tariff turmoil, even higher than during the 2008-2009 financial crisis and the COVID-19 pandemic [36] - Revisions to non-farm payrolls were extreme, typically seen only in recessions, confirming the "rolling recession" [47] - Federal government employees are down by 84000 year-to-date, with an expected additional 150000 layoffs by the end of September, potentially impacting consumer confidence [48][49] - The consumer confidence index shows a decline in jobs being easy to get, suggesting potential economic weakness [51][52]

Economic Outlook - The analysis suggests the economy has been experiencing a rolling recession for the past three years, with softening indicators particularly in the consumer and housing sectors [1] - The report anticipates a transition from a rolling recession to a rolling recovery, expected to gain momentum from the end of the current year into the next, driven by productivity gains and real GDP growth [1] - Productivity is expected to be a significant surprise and a potent anti-inflationary force, potentially leading to lower-than-expected inflation due to deflationary pressures from new technologies, especially AI [1] Fiscal Policy - The expectation is that tax rates will remain stable, which is considered a crucial factor [1] - While government spending and deficits are acknowledged as concerns, the analysis suggests that spurring growth through innovation is key to lowering the deficit [1] - The corporate tax rate could effectively decrease to the 14-15% range due to full expensing of capital equipment, potentially attracting increased foreign direct investment [2] Monetary Policy - Although M2 money supply growth has accelerated to approximately 45%, it is still considered low historically [1] - There are signs that monetary policy might be too tight, as indicated by the inverted yield curve, specifically the 90-day T-bill rate versus the 2-year yield [1][2] - Recent economic data, such as CPI, PPI, and PCE deflator, indicate that tariff increases have had minimal impact on the overall pricing structure of the economy [1] Employment and Labor Market - The employment report is viewed as weak upon deeper analysis, with government employment accounting for a significant portion of the non-farm payroll increase [2] - Average hourly earnings are up 37% year-over-year, but with expected productivity increases, underlying inflation related to labor could fall below 2% [2] - There are indications of stress in the labor market, with rising continuing unemployment claims and difficulties for college graduates in finding jobs, potentially due to AI impacting entry-level positions [3] Housing Market - The housing market is described as weak, with new and existing home sales at low levels by historical standards [3] - New home prices have been slipping for a couple of years, and existing home prices are also starting to decline [5] - A recent directive allows cryptocurrency to be considered in mortgage qualifications, potentially opening up the housing market to younger buyers [4]