Inverted Yield Curves, Recession and Still a Long Way to Go...

Recession talk is everywhere. The yield curve remains inverted. The worst it's been since November of 2000. I wonder if anyone remembers what happens after that. Home sales are slowing. Earnings growth is slowing. The S&P remains down 20% for the year. Gold is weak. The dollar is strong. Not a single sector of the 11 sectors of the S&P are positive over the past three months. And we've still got a long way to go to get out of this market and leadership malaise that we are in.

1:35 Stock Market Update: Inverted Yield Curve, Slowing Hiring & Earnings, Negative GDP Growth
9:05 Lack of Leadership: Federal Reserve & Politicians
14:15 Gold & The Dollar
19:36 Bullish Case for Nuclear in the Energy Transition
23:20 Subway’s Lack of Tuna is a Microcosm of How Companies Screw Over Consumers
25:35 Policing in America Is a Failed Institution
31:58 Homelessness On the Rise
 Being Fiercely Independent

I am Nick Hodge. I'm by myself this week, and this is episode 177 of Bizarro World. I'm going to recap a little bit of the letters I've written over the past couple of weeks, because I had an issue of Foundational Profits for July that was out the second Friday of the month as they always come out. And I was writing recently that inflation is sort of old news at this point, right? Everyone knows that prices are high. We just printed a 9.1% on the CPI, which is the highest since 1981. That's longer than I've been alive. And everyone feels the inflation, and now the market is turning its eye to recession and toward earnings.

Stock Market Update: Inverted Yield Curve, Slowing Hiring & Earnings, Negative GDP Growth

So I guess first, let's start with the inverted yield curve. 


That's when you take the US 10-year yield and subtract away the US two-year yield, which should be less than the 10-year yield because it's a shorter duration, but when it's higher than the 10-year yield, we say the curve is inverted. And every time the yield curve has inverted, going back something like a century, then a recession follows. And not only did the yield curve invert once this year, not only did it invert twice this year, but it's inverted now three times this year. And what's interesting to notice is that it's significantly inverted.

So at a point last week, the yield curve was inverted some 22 basis points, right? Nearly a quarter of a percent. And the last time it was that inverted was in the fall of the year 2000, which of course predicated the recession that was coming then and the dot-com bust that followed, which saw 40% decline in stocks over the next two years or so.

And so a recession is firmly in the cards, and you'll hear a lot of pushback against it. People pointing to certain things like the most recent jobs report was decent, not great, or they’ll point to things like retail sales being up for the month of June. But really if you drill down into it, you can see through some of those arguments from the mainstream or from entrenched politicians who of course want you to believe that everything is okay. We had the White House press secretary last week saying that the American economy is strong, which, if you participate in the economy at all, you know is frankly bullshit.

So hiring is slowing. If it's not reflected in the numbers yet, you can see it in the headlines. Google (NASDAQ: GOOG) has said that it's going to slow hiring. Apple (NASDAQ: AAPL) has said that it's going to slow hiring and cut costs. Many other tech companies have said that they're doing the same. And so hiring, from at least an anecdotal perspective, is certainly slowing down and making headlines the opposite of what you would see if the economy was strong and hiring was robust. There was an article out just this week in CNN I'm looking at that says Google becomes the latest tech giant to slow hiring. It's just the latest in the list of companies that are slowing hiring.

And then if you take a look at the GDP, which is a true measure of economic growth, but when you have two consecutive negative quarters of economic growth, that's what marks a recession. And so you had -1.5% growth in the first quarter.  And now, the Atlanta, the Federal Reserve Bank of Atlanta, which puts out a GDP nowcast, an estimate of what the numbers are going to be, is saying that as of July 15th, they're looking at a -1.5% print on the GDP for Q2.

Evolution of Atlanta Fed GDP

We'll get the official number later this month, that comes out on July 28th, and I think it's going to give the market significant headwinds and solidify for a lot of people that we truly are in a recession.

You could also look at earnings growth. So I've been saying in my letters for a while that the earnings that were going to come out in Q1 and Q2 and Q3 of this year were going to be compared against, obviously, the year ago numbers in Q1, two, three of 2021. And those numbers were very robust. If you haven't heard me say it on this podcast or in my letters, the earnings growth in Q2 2021 was something like 85%-88%, and this year, you're looking at 4% growth. So a significant slowdown in earnings growth. And as I record this, we're just now entering earnings season. We just got through the first week of earning something like 7% of the S&P 500 companies have reported. That's 35 companies.

And you've seen some significant downward revisions, some significant misses. I'd point specifically to JP Morgan (NYSE: JPM), who's the first to report coming in at $0.13 cents under what analysts were expecting. They reported $2.76 per share earnings versus the expected $2.89 cents. And they were saying that there's significant headwinds. They were saying that there's not a lot of comps to compare the current situation to. They said that year over year, their revenue grew $200 million, but their costs expanded by over $1 billion dollars.

You're going to see more of that as the rest of the S&P continues to report earnings over the next couple of weeks. Wells Fargo (NYSE: WFC) was another big miss. Morgan Stanley (NYSE: MS) was a big miss. And those are all just in the financial sector. You also had in the industrial sector, Lockheed Martin (NYSE: LMT), with a significant guide down downward provisions to earnings per share from $6.35 per share all the way down to $1.88 per share. And these numbers, again, are being compared to last year at this time, which were very robust earnings, because they themselves were being compared to 2020 when everyone was locked down in their house.

The market discounts or sells those downward rates of change when earnings growth is going the opposite direction that it was. And when you're staring at a recession then, the market gets extremely spooked, and the market is extremely spooked right now. As I said, not a single S&P sector is up over the past three months, and the only one that's up for the year, for the entire year now, as we head into the third quarter, is energy, but energy itself was the worst-performing sector over the past month. 

Not a single S&P sector is up over the past three months.

So the wind is coming out of energy sales as well. You've got crude now down below $100 per barrel, and gas prices thankfully coming down off their all-time highs.

You've got home sales slowing. So if you just Google ‘home sales slowing’ and look at a bunch of news stories, you can see from city to city. Even in some of the fastest-growing markets of the past year or two in Texas and here in Washington State, in Seattle, housing sales are slowing. I think they were the worst in two years as far as canceled deals, even sales that are getting close to the finish line being abandoned. And that's a function of higher rates, people not being able to afford as much house, right? You've got mortgage rates up over 5%, approaching 6%. 

Lack of Leadership: Federal Reserve & Politicians

And I should mention, you've got a Federal Reserve who is intent on continuing to raise rates. If you look at what the market is pricing in — they meet the day before GDP comes out, they meet on July 27th — and the market is indicating that they could raise rates by 100 basis points. That's a full percent. It would be larger than the 75 basis point hikes that they hiked the last time they met. And so it's a wrongheaded move to be raising rates into a slowdown.

And what would you expect otherwise from the Federal Reserve? They're the same group who was telling you for the past year that inflation was transitory. And of course, it wasn't. Me and Gerardo had been telling you that from the onset as far back as early as 2021, and there's no reason to expect the Fed to do the right thing. They've got to try to get the inflation down that they themselves caused along with the government who was mailing out stimulus checks. And I continued to equate the fox guarding the henhouse, right? Why would you expect the entity or the institution who caused the inflation to be able to reign it in?

And I guess I'll pick on politicians for a second because across the spectrum, you're approaching midterms, and I was poking around some websites of some candidates here in the past couple of days. And one of the largest issues, of course, is inflation, high prices, and they're all promising to bring it down, which is not anywhere in the realm of reality. Of course, politicians don't control prices. Once the money supply has been increased, like it has been over the past couple of years, I mean, to believe that a politician can lower prices for you at the pump or otherwise is wrongheaded. And if you believe that, like they say, I've got a bridge to sell you.
And so you'll hear politicians say, even the president, you've got to reduce costs at the pump, and that's not really in the realm of control of politicians. And so I guess, let me continue down the politicians avenue for a second, because we were telling you that it was going to be a hot summer, and we were telling you that there's going to be political upheaval. And you can see that really across the globe. If you look at the protests going on in the Netherlands with Dutch farmers continuing to block streets and move their equipment into public squares in defiance of ,or in protest of, climate change laws that the country wants to enact that would raise their already high input costs for production.

Or if you look at the Sri Lanka where the president just had to flee, literally flee, the country as citizens overtook the presidential palace and the country's central bank building. And they've been rationing gasoline there. Or you look at the assassination of the former prime minister of Japan, Shinzo Abe. Or you look at the resignation almost in disgrace of Boris Johnson, whose own party turned against him, unwilling to support him any further as the leader there. Or just this week, Mario Draghi, the prime minister of Italy tendered his resignation, which was rejected by that country's president.

Or even on a local level here in Washington State, across the mountains from Spokane, where I live, in Seattle, you had US Representative Pramila Jayapal threatened with a guy out in her yard with a pistol strapped to his waste, which is legal here, threatening her saying — allegedly because he hasn't been charged yet — but the neighbor was saying that he was shouting for her to go back to India and that he was going to kill her, and it wasn't his first entanglement with her.

You can even look at the way people are getting vocal against the abortion ruling with people running Supreme Court justices out of their dinner, when they're out at restaurants or protesting in front of their houses. I mean, people are sort of fed up, and there's been an absolute lack of leadership, at least in my eyes, to really not combat the problems that we're facing, but to lay the foundation to avoid them in the first place. Right?

Like I was saying a couple of minutes ago, if you look to these politicians to solve your problems, then that's not the right way to be looking at things. I mean, you've had “experts” in office or “leaders” in office for the past several years who have allowed things to progress to the point they've gotten to now. If they weren't making the right decisions then, what makes you think they're going to make the right decisions now?

Gold & The Dollar

But anyway, getting back to the market a little bit, let's talk about gold, which I was telling you last week could fall even further. It was holding up relatively well at $1,800 for most of the year and has quickly broken down from that over the past three or four weeks. And you have people wringing their hands saying in this environment, in this inflationary environment, in this recessionary environment, that gold should be doing much better.

But what you really have to look at is the dollar.

United States Dollar index from 1974-2022.

I mean, the dollar is the strongest it's been in 20 years at this point, registering a 109 handle on the DXY index and looking like it could break out even higher. And when you've got a strong dollar like that, it signals a couple of things, one, that people are fleeing for safety, fleeing the market, fleeing speculative positions. And it really puts a lid on how high commodities and gold can go. So if you look at copper, which is a bellwether for the economy, it's often referred to as Dr. Copper, because it diagnoses what's going on out there. It's off some 30% from its highs after it screamed to $5 a pound earlier this year, now trading closer to $3 a pound. Same thing with several commodities across the board.

And then if you look at gold, it's pulled back to $1,700 and doesn't have a lot of support there. 

Gold Chart showing from 2018 through current time.

If I'm looking at a gold chart, I could easily make a case for it to go to the $1,680s, and if it doesn't hold a little bit of support that's there for it to have a flash crash as it were down to the $1,500 level, which would be the level it was in the total upheaval that we saw in March 2020, when COVID was just starting to be a thing. And here we are approaching 2023 and COVID-19 is still a thing. I was reading this week that Los Angeles is very close to, perhaps, reinstating their mask mandate. And so COVID-19 has fast become COVID-23, it seems like.

And all that said, it's the reason that my largest single position continues to be dollars. I was looking at the accounts I manage today, not the private placements that I do, but my retirement accounts and my brokerages that I buy in the open market with, and I'm still holding 35% cash. I was writing in the letter this week that I can't see strong reasoning to buy a lot of things. As I said, every sector of the S&P down over the past month. What I've been doing is continuing to raise more cash, so selling fringe positions, stocks I took a flier on that I wanted to just have a toe hold in or keep an eye on. I've shed those, if I don't want to hold them through what I see as more of a rough patch ahead.

And the only thing I've been buying are companies that I'm intimately familiar with, the management and the asset, and comfortable holding them through a continued downturn, and know what my cost basis is originally and what levels I'm confident in buying more of. And that's not a lot of positions. I called out just two specifically in my Hodge Family Office letter this week, one in the copper space and one in the gold space. And other than that, I'm enjoying summer, man. I'm sitting by the pool. We were going to the lake this past week. The kids had a fantastic time at a friend's house out there who's got a lake house and a boat. We were doing some tubing. And I think that's what a lot of people are doing.

And so I think tax law season this fall is going to be brutal, and there's going to be a lot of quality positions to deploy some of that cash into, but I'm not rushing headlong into the market right now, given all the things I just laid out for you: inverted yield curve pointing to recession, GDP pointing to recession, home sales slowing, hiring slowing, earnings growth slowing. It's not an environment to really be deploying cash into.

And if you need to know a couple of the other things, sectors that I do hold and own, one is utilities, which has been a recommendation of mine in Foundational Profits. The sector is certainly down for the year, but every sector is down for the year except for energy. And so what you're looking for is a relative outperformance, which utilities have provided. And then consumer staples is really the only other S&P sector that I own outside of materials, which includes all the mining stocks, gold stocks, et cetera. So a lot of cash, a lot of gold and gold stocks, both in the form of physical and the form of paper gold via GLD and in the form of mining stocks with GDXJ, for example, and some other large producers, and then consumer staples, which I have been expressing via tobacco stocks.

Bullish Case for Nuclear in the Energy Transition

And so not a lot to do out there. You're in the dead heat of summer. There is a heat wave across the US. I was looking at the temperatures in Texas the other day, where Gerardo lives. It was 107 degrees in Austin, and their grid is being threatened again. And so let me just touch on that for a second, all right, because last winter, you had blackouts in Texas, which runs its own grid through ERCOT, the Electric Reliability Council of Texas, and they were saying the Texas grid isn't made for this freezing weather. Well, here we are in the summer, and they're forecasting rolling blackouts. They're telling people to set their thermostats high, and I'm scratching my head because I thought the grid was made for summer and not winter, but here we are, it's not performing well in the summer.

And that's really a global problem, and there's a lot of solutions that are going to come of that, whether it's implementing distributed power systems with energy storage systems in the form of whatever it is — pumped hydro or using the heat of power plants or batteries even — and certainly an increased adoption of nuclear, which I wanted to touch on. So winter is coming. We're already in the third quarter. We're halfway through summer.

Germany is really worried, it seems like, right, about their gas supply situation, given the Russian invasion of Ukraine. And then they're debating even turning their coal plants back on. You'll remember that Germany abandoned nuclear several years ago, which isn't looking like the best decision now. And then you've got Japan saying we need to prepare for winter as well. And then we're trying as fast as possible to get our nuclear plants back online because several of them are still offline over 10 years after Fukushima.

And so nuclear, I think, is something to keep an eye on the backside of these summer doldrums, the recession that's manifesting. And the long-term catalysts, the long-term fundamentals are still in place for the uranium stocks of the world, the copper stocks of the world, and the inputs that are necessary to implement these clean technologies and transition to electric vehicles and the grid that's needed to support them. Look, you think the grid in Texas can’t support 107 degrees. Wait till you have a significant portion, even 5% or 10% of people driving electric vehicles. Look, the amount of people that have electric vehicles right now in the US is 1%. So we’re going to have a lot more people plugging in.

I saw a meme this week of a train car carrying coal, which I see every day on my way to work here. I mean, coal is long from dead. We have a lot of railways here in Spokane, and the coal trains go by every single day, car after car, full of coal. But anyway, the meme had a picture of a coal carrier on a train, and it said another load of electric car fuel, right?Meme: Nothing to see here, just another trainload of clean electric car fuel. 

And that's because coal remains the dominant technology for producing electricity. And so over the years in the coming years, by 2025, 2030, we're going to have to make a significant change to that globally. And I would continue to point to nuclear and to uranium, obviously, which you need for nuclear. And then to the copper that's going to be necessary to build out those new power systems and new grid systems.

Subway’s Lack of Tuna is a Microcosm of How Companies Screw Over Consumers

So with that, let me turn a little bit to the news and give you some of my Bizarro items or discussion items that we like to touch on every week. I saw this week that Subway was being sued for their tuna, which it turns out isn't tuna at all. And this is a longtime shtick or trope of mine, right, is how we let companies get away with things for so long, whether it's Fitbits that were not truly tracking what your heart rate and pulse was, being marketed as accurate. Or the amount of wood pulp that's allowed to go in grated cheese.

In this case, Subway, there was a group who was spot-checking the tuna fish that Subway was serving, and 19 of 20 tests contained zero tuna DNA. So they took 20 samples, and 19 of them came back without any tuna in them. There was chicken in the samples. There was beef in the samples, but there was no tuna in 19 of the samples. And Subway was trying to block this lawsuit from going forward. And this judge said, look, we're going to allow this group to sue you because basically we want to get to the bottom of why there's no tuna in 19 samples. Subway was saying that it was sampling error, or that you should expect a little bit of other meats to be in your tuna from cross-contamination, which of course, what else were they going to say? Right?

And that's just a microcosm of how companies are out to screw over consumers, right, not doing what they say. And there's just a general lack of oversight from a government that has no teeth and has no real leadership and has been bought and paid for through the mechanisms of campaign finance and through lobbying. And so good on that group for pointing out the fishiness as it were.

Policing in America Is a Failed Institution

And then let me turn to the police for one second, because they're one of the groups, one of the institutions that has truly failed here in the United States, is in desperate need of reforming. And there's a report or a story or a case every week that continues to highlight it. This week, we got the release of a tape of the footage of the Uvalde shooting, and we get to see the police show up five minutes after the shooter enters the building. And you've got cops standing in the hallway for 77 minutes while he fires hundreds of rounds and killed all those babies.

And they were there. I mean, your boys in blue, they were there in the hallway outside. They didn't try to go in, despite what the initial report said about them being met with a locked door. They never got themselves to the door. They ran away as soon as they heard shots when they were halfway down the hallway. You can see it plain as day in the video. You've got one officer checking his phone. You had another officer casually dispensing hand sanitizer from a wall-mounted hand sanitizer and rubbing his hands, all while the bullets are flying and children were being murdered. These are the folks who were sworn to protect you, right, and who in any other case are fast to pull the trigger, right?

It strikes me that a lot of these shootings that we see, these police shootings, is, "Oh, we thought he had a gun," right? "He was reaching for his belt to pull a gun," or, "Well, we feared for our lives." But in those cases, I guess I would point to one in Ohio recently, where the gentleman fired one shot from his car and then ran from his car, didn't have the gun with him, and the cops quickly put 46 bullets in his body. He had no gun in his hand. It seems like they're really confident to shoot when there's not an immediate threat to them, when there's not even a visible gun. And when there is an immediate threat, when you've got someone armed with an AR-15, they're pussies frankly. I mean, those guys in Uvalde stood in the hallway and listened to the screams of those children while they were being murdered.

And they have the equipment. I mean, you can see, again, clear as day, the police are there with riot shields, with protective gear all over, and they themselves have military-grade weapons. And they were content just to stand in the hallway, not to rush to the danger, to save you. And so again, that's just a microcosm of the entire American political leadership and police institution. They're not there to save you. They're there to look out for themselves. In the case of politicians, they're there to enrich themselves.

And in the case of police, I'm not sure what they're there for. I guess I would have to point to the clearance rates of crimes, which are approaching multi, multi-decade lows.

Up to date crime clearance rates.

They only solve 50% of murders. They solve 30% of rapes. They solve less than 30% of robberies. Despite the increased budgets they've got since 9/11, despite the amount of tools or toys, as I would refer to them, that we give them, all the protective equipment, the fancy rifles and pistols and cars and upgrades to the cars and the MRAPs and all that stuff, they continue to solve less and less crimes and continue to be there for you less and less.

And the last thing I would point to there is an article this week is showing that large cities like Chicago and New York are spending tens of millions of dollars on a technology called ShotSpotter, which is a network of microphones and cameras that are in installed in a city that are supposed to tell cops where shots are coming from, except this report pointed out that last year in Chicago, of 50,000 shots that were heard from this system, less than 10% resulted in an actual arrest or an actual event that police could do something about. And so another waste of money there and something that really doesn't serve the public.

In fact, the report was saying that what ShotSpotter has turned into is a massive listening device, an eavesdropping device, right, because it has the microphones and can pick up things other than gunshots, like people talking, for example. And so another iteration of the police state that doesn't really serve to make you any safer and doesn't lead to any more arrests or solving of crimes, but certainly costs tens of millions of dollars. In the case of Chicago, I think it was over $30 million they had spent on this ShotSpotter.

And then I guess that takes me to Ring cameras, right? So we bought a house here in downtown Spokane a couple of months ago that I'm going to eventually use to work out of. It's being rehabbed now. And while it's been sitting empty, it's been broken into twice. Once, the back door was kicked in, and once, someone broke into the shed seemingly to spend the night. And I was looking into cameras to put up, and it just so happened that this week, there was a lot of articles about Ring cameras in the news, because police are being able to access this Ring camera data without warrants, without telling the homeowner. And so I'm not sure that I'm on board with that, right? Certainly not giving the footage to the police without it being formally requested from me.

Homelessness On the Rise

And so I'm coming up with a solution there, but the property crime in Spokane and elsewhere is going off the charts. And this comes full circle back to the housing and the recession, right? The homeless numbers are up significantly. There was 1,700 homeless people counted in Spokane in a report that came out last week. And homelessness was making headlines in the New York Times last week as well, and they were writing about the root causes of it. Of course, I don't have to tell you, homelessness is up. You see them on the street corners when you drive to work or take your kids places. And the tent cities are growing by the day. We have one tent city here in Spokane, they're estimating over 500 people are in it. It's the largest tent city in the state of Washington, even bigger than the ones that they have in Seattle.

And what are these reports pointing to as the cause?. It's something I've been saying for a while. When home prices are the way they are, people are literally priced out of the market. And if you can't afford a home, what are you? I mean, you're homeless. And so with inventories scant, with prices of houses remaining high, with rent prices increasing in cities across the country, and with people's wages not keeping up with those rates of inflation for housing prices and rent, and now with the Fed intent on continuing to raise rates, which has driven mortgage rates up on a 30-year to 5% or 6%, fewer and fewer people can afford homes.

It's obviously a more complex issue than that. You get into historic zoning laws and people in single-family neighborhoods not wanting multi-unit residential complexes near them. And it becomes a very complex issue, but fundamentally, it's a supply and demand issue, like so many things are. If there's not the supply of housing at a rate or a price that people can afford, then you're going to have more and more people on the street.

Being Fiercely Independent

And so, again, your leadership has been nonexistent, has failed to address that, at least as I see it. And it's why I continue to take all matters that concern me and my family into my own hands. I run my family, my house, and my investments like it's its own business without influence or input from politicians or anyone else. And I've taken that stance for over a decade now. I've been a strong proponent of individualism and individual sovereignty.

And over the next couple of weeks, a shameless plug here, I'll have a new report out that will be a blueprint for any market, and it'll offer a series of reports about how I do that, from how I manage speculative investments and safe investments to how I reduce tax bills, to how I keep myself and my family insulated from the system as the system continues to collapse — whatever institution that might be, Congress, the Supreme Court, police housing, whatever it is. And so keep an eye out for that. I hope to have it out by the end of the month. It's a blueprint for any market, but certainly a blueprint for the markets that we're seeing now, which again, S&P down 20% for the year, firmly in a bear market and, at least as I see it, not really going to improve for a couple of quarters until we get these comparisons to '21 behind us. So that means Q1 of 2023, Q2 of 2023.

So I guess apologies for being a doomer and a gloomer this week. I'm certainly not always that way, but the data is pointing to that needing to be the mantra here — staying defensive, staying in cash, so we can deploy it as tax law season comes and when stocks finally do turn the corner back to bullish after this bear stops growling, and I think that's a couple quarters away.

So an abbreviated issue here. Hope to have Gerardo back next week. Watch out for that Subway tuna. Stick with the meatballs or the spicy Italian. And that's all I got for this week, episode 177 of Bizarro World.