71 Bankruptcies In August, Economic 'Cracks Are Widening' Fast | Danielle DiMartino Booth

Economic Cracks and Labor Market Weakness [00:00]

• Morgan Stanley is reportedly allocating 20% of client assets to gold, which some see as a contrarian indicator.
• Individual stocks are falling, signaling potential margin calls.
• Cracks are widening in the economy, with a suggestion that declining gold prices could be a warning sign.
• Federal severance payments are ending for approximately 150,000 federal workers, adding to unemployment ranks.
• Home prices are expected to decline, drawing parallels to the 2007-2008 financial crisis.
• The Fed has begun a pivot, or is it? This is a key question for the macroeconomic landscape.
• Donald Trump is posting cartoons of firing Jerome Powell on Truth Social.
• Betting markets suggest Christopher Waller as a potential replacement for Powell, though there's also a chance Powell might stay, with approximately 40% foreseeing his continued position through January 31, 2028.
• The Federal Open Market Committee (FOMC) has the authority to elect its chair, distinct from the President's nomination power for the Federal Reserve Board.
• A dissent at the last FOMC meeting wanted 50 basis points, which did not happen.
• The preponderance of data suggests a rising unemployment rate, with higher expectations among upper-income earners.
• Surveys indicate that companies intend to continue layoffs into 2025 and 2026.
• There is a more rapid decline in the health of the US labor market.
• September 30th marks the last day of federal severance payments for about 150,000 federal workers.
• FHA mortgage modification programs are ending.
• Student loan garnishments begin the day after, with government shutdowns also a possibility.
• The confluence of these factors suggests a 50 basis point rate cut might have been warranted.
• The unity in voting for Fed independence was the reason no one joined the dissent.
• Jerome Powell noted that individuals at the margins, such as college graduates and younger people, are having a hard time finding jobs.
• The overall job finding rate is very low, but the layoff rate is also low, creating a low hiring and low firing environment.
• If layoffs increase, people laid off may not find new jobs quickly due to the low hiring rate.
• This situation could quickly lead to higher unemployment in a less healthy labor market.
• Powell expressed a shift in policy focus towards a more balanced one due to these concerns.
• A low firing and low hiring environment could sound like an equilibrium unless one is a college graduate or has been unemployed for over 6 months.
• Individuals unemployed for longer than 6 months constitute 25% of the unemployed pool.
• Crossing the threshold where 25% of the unemployed have been out of work for over 6 months leads to "labor market scarring."
• Even at a low pace of layoffs, the unemployment rate is expected to tick up if new individuals join the labor force and are not hired.
• The layoff pace is described as the highest since 2010.
• Gold prices have continuously hit all-time highs in 2025.
• Stellar Gold is presented as a gold developer with two large undeveloped gold projects in Canada.
• The Tower Gold Project is estimated to deliver a $2.5 billion after-tax net present value and produce 273,000 ounces annually over 19 years.
• The "Daily Feather" from QI Research shows a decline in people hearing good news about the job market (18-34%) and a rise in the unemployment rate.
• For Gen Z and millennials combined, 50% have heard zero good news about employment, a precedent only seen during the Great Recession.
• This perception of the job market is the worst since October 2008.
• This survey is considered a coincident indicator, reflecting the current state of the job market rather than being forward-looking.

The most important thing is that the people are starting to hear nothing good about the job market.

Signs of Economic Slowdown and Consumer Behavior [11:17]

• The notion of people feeling bad about the labor market is being explored.
• Las Vegas has experienced six straight months of declining traffic.
• Nevada is highly reliant on the tourism industry, which is struggling.
• The construction industry in Nevada is also in decline.
• The state of Nevada has one of the highest unemployment rates in the US and is in recession.
• Trade policy may have exacerbated the situation for international travelers.
• Net job losses began in the second quarter of 2024.
• Major US retailers are reporting that consumers, outside the top 10%, are not buying discretionary goods, including vacations.
• The trade war has worsened a bad situation, but the chief determinant is a lack of income growth.
• Nearly 1.5 million full-time jobs have been lost since January.
• A shift from full-time to part-time income impacts vacation spending.
• A weakening labor market impacts markets.
• Credit markets are showing signs of distress, with an example of a subprime lender to illegal immigrants going bankrupt.
• The fact that three banks were lending against the same collateral is compared to the 2007-2008 crisis.
• First Brands had between 10 and 50 billion in liabilities, with indications of off-balance sheet borrowing.
• When the real economy starts to break, credit markets show it the quickest.
• The bond market always leads the stock market, but credit spreads have not yet followed.
• Many stores, including Home Depot, plan to raise prices, but these hikes may not stick if demand weakens.
• Thor Industries, a large RV seller, reported increased sales of high-end motor-driven RVs to the wealthy, but collapsed sales of towable RVs, requiring discounts.
• Companies hope price hikes will stick, otherwise, sales will follow.
• Home price appreciation has peaked and is projected to decline.
• There have been five back-to-back months of home price declines according to S&P data, and four for the FHA.
• For many Americans, their net worth is tied to their home value.
• The idea that the Fed will cut rates is questioned, as home prices remain high even with some mortgage rate decreases.
• In cities like Austin, Texas, home prices remain 20-25% above 2020 levels, indicating no true correction.
• A Cleveland Fed president expressed concern about inflation, stating it's been stubbornly above the Fed's target for over 4.5 years and expects prices to fall back to 2% only by late 2027 or early 2028.
• Trueflation data shows a recent fall to 2.01% year-over-year, reflecting pressures in apartment rentals and discretionary spending.
• Seasonal upward pressure on inflation metrics is highest at the end of the year and the beginning of the next.
• Without seasonal adjustments, retail sales for August would have printed negatively instead of 0.6%.
• Seasonals can significantly swing data, and if Fed hawks seek an excuse to slow rate cuts, seasonals might be used, even if they don't reflect the real economy.

We've seen inflation come back down. But again, my mantra is trade the narrative, own the truth.

Market Dynamics and Investment Strategy [22:31]

• Most forecasts peg inflation as coming down in the long term (next year or so).
• The 10-year yield and the long end of the curve will likely follow inflation trends, potentially leading to a bond rally into 2026.
• The benchmark 10-year yield is around 4.13%, reflecting anxiety about credit markets and a potential government shutdown.
• There is significant uncertainty, reflected in longer maturity bond yields.
• The markets appear relatively insulated from the economic realities being discussed, with new all-time highs for the S&P and NASDAQ, and gold near $3,900.
• Market participants may not be feeling the stress discussed, as their wealth is dependent on assets.
• There is a disconnect between market highs and economic reality, explained by the top 10% of earners controlling 87% of the stock market and 50% of spending.
• As long as the stock market holds and inflows outweigh redemptions in passive investing, things might appear stable.
• A potential sign of widening cracks would be if gold prices decline even slightly, indicating margin calls.
• Silver is reportedly sold out at Costco, which is viewed as a market top signal.
• There are always signposts, such as Electronic Arts being bought out for $55 billion, the largest LBO.
• True inflation has been coming down.
• The vestiges of economic weakness will persist, especially if the Fed plans a slow pace of rate cuts.
• Falling mortgage rates may not offset weakness in the housing market if unemployment rates rise.
• A rising unemployment rate is a key factor that trumps falling mortgage rates.
• A decline in shelter prices will filter through, and car prices are also showing downside as delinquencies rise.
• The federal government can garnish entire tax refunds in February for unpaid student loans.
• Seasonal improvements expected around tax refund season may not materialize to the extent anticipated.
• Garnishments for student loans begin October 1st.
• FHA forbearance and mortgage modification programs end on the same day.
• Signs of further labor market weakening and corporate weakness on their books may lead to more layoffs.
• Companies may default on debt or go bankrupt, but it will likely be a gradual process, not an overnight Lehman collapse.
• Standard and Poor reported 71 record bankruptcies in August, the highest in the post-pandemic era.
• Some of these bankruptcies involve liabilities between $10 and $50 billion.
• Weakness will be most visible in credit markets.
• Profit growth peaked six quarters ago and has been declining for six quarters.
• CEOs and CFOs remain hyperfocused on cutting costs.
• Real GDP growth is still near 4% in the last quarter.
• Gross output, a measure of business investment, has turned negative.
• If not for the top 10% who represent 50% of spending, the US economy picture would be very different.
• The chief determinant of recession is not the consumer, but businesses and business investment, which are contracting.
• Consumer spending may contract next quarter if the labor market weakens.
• Government spending and net exports could drive growth.
• There could be a desperate move to do a "Dodge dividend" if the economy deteriorates, which would bring inflation back.
• For individuals under 18 getting into the market for the first time, it is appropriate to be very defensively postured.
• This includes dividend-generating stocks that can bolster cash income as savings rates are taken down.
• Anything defensive and income-producing is suggested.
• Individual stocks falling out of bed is a bad sign, as it will lead to margin calls even if the broad market holds.
• Be careful with margin calls and gold holdings.
• The markets may be pricing in lower interest rates and discount rates, leading to higher valuations.
• This situation could be compared to 1998, where valuations kept going higher.

"We're going to see it in credit. It's where we're going to see."