Private Wealth

Weekly Research Briefing: Still No Clear Path

July 12, 2022

Major recession or mild slowdown? If we only knew the answer, the path would be so much easier. As Jon Hilsenrath notes below, if this is a recession, it will be one of the most unique that the U.S. has ever encountered. Friday's jobs data continued to suggest a healthy economy, not a deteriorating one. While most measures are showing slowing growth rates, it all still seems controlled. Inflation data and growing commentary point to lower prices ahead. And yes, I see gasoline prices now down for 25 consecutive days. The monthly CPI/PPI numbers are out on Wed/Thurs so the markets will have much to digest mid-week. Then on Thursday and Friday the earnings juggernaut will begin, led by the big financial stocks. The good news for this Q2 earnings period is that the S&P 500 has dropped 15% since stocks reported their Q1 results. So, expectations are lower, but will they be low enough for all the uncertainty around margins?

I hope that you know the answer and have placed your macro bets accordingly. While I might think that the U.S. will have a mild slowdown, I am not seeing a confirming signal from the credit or commodity markets. My equity “buy” button is gathering cobwebs as I patiently build my lists of great public companies that I want to own. For returns, I am currently relying on high-grade credit, preferred stocks and solid dividend names to provide some steady income. My private equity, private debt, and private real estate (non-office) holdings continue to act as ballast in my portfolio. One day the markets will give me a green light to get me to hit the “buy” button on my public equity wish list. But not now. Time to study, read, think and patiently wait for the green light.

Jon Hilsenrath names this economy the 'jobful downturn'...

The U.S. economy has experienced 12 recessions since World War II, and each one included two features: Economic output contracted and unemployment rose.

Today, something highly unusual is happening. Economic output fell in the first quarter and signs suggest it did so again in the second. Yet the job market showed little sign of faltering during the first half of the year. The jobless rate fell from 4% last December to 3.6% in May.

It is the latest strange twist in the odd trajectory of the pandemic economy, and a riddle for those contemplating a recession. If the U.S. is in or near one, it doesn’t yet look like any other on record.

Analysts sometimes talked about “jobless recoveries” after past recessions, in which economic output rose but employers kept shedding workers. The first half of 2022 was the mirror image—a “jobful” downturn, in which output fell and companies kept hiring. Whether it will spiral into a fuller and deeper recession isn’t known, though a growing number of economists believe it will...

“I would be surprised if there were a recession without much job loss,” said Gregory Mankiw, a Harvard University economics professor. He said if one is coming, it would likely be provoked by Federal Reserve interest rate increases. A “small downturn” could be needed to bring inflation under control, he said.


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If the U.S. does end up printing two negative GDP quarters, it will be one of the most unusual recessions on record...

While labor market data has historically lagged other economic indicators, we find that it would be historically unusual for the labor market to appear as strong as it is at present even at the very outset of a recession, even in real time. Nonfarm payrolls have grown at an annualized pace of 3.0% over the last three months and 3.7% over the last six, roughly double the typical pace at the start of past recessions.

US job vacancies rate

Goldman Sachs

It is difficult to foresee non-farm payrolls turning negative anytime soon...

Wide distribution of outcomes after historical yield curve inversions

The Daily Shot

Even the underemployment rate set a record low on Friday...

In other words, everyone who wants a job, gets a job. Or two. Or three, if they want.

Cumulative personal savings in the pandemic

The Daily Shot


“By the time a recession is officially called, we’ll be either well into it or almost exiting,” (Josh Bivens, the director of research at the Economic Policy Institute)


70% of Americans think that we are either in a recession or soon to enter one...

Just the psychological overhang of this is causing spending to reel in and major purchases to be delayed.

Wide distribution of outcomes after historical yield curve inversions

Civic Science

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Goldman Sachs' current activity indicator is showing a pullback in all areas of the economy...

Less encouragingly, after decelerating from last fall to last winter, our current activity indicator (CAI) stepped down further in May and turned slightly negative in June and is even lower if we correct for nominal bias in business activity surveys. Housing data and manufacturing surveys have been the largest contributors to the decline recently, but the weakness in our CAI has been relatively broad-based, with all subsets of data indicating a below-potential pace of growth (manufacturing +0.7%, consumer -1.7%, labor +0.2%, housing +0.9%, other +1.0%; hard data -0.3% and soft data -0.3%).

Best Year for Commodities

Goldman Sachs

Rising auto financing rates combined with higher auto prices will slow future car buying activity...

Best Year for Commodities


The slowdown in auto buying combined with the mending of supply chains has sent used auto prices tumbling...

@charliebilello: Used Car prices are down 7% over the last 6 months. In 2020, this was one of the first areas to spike higher, in advance of broader inflationary measures. Hopefully, the current downturn is a leading indicator of lower inflation rates to come.

Best Year for Commodities

A similar effect is occurring in the housing market where the average cost of a mortgage is now nearing the cost of renting...

@LizAnnSonders: Monthly mortgage payment is more affordable (when taking 20% down payment into account) than average rent cost, but gap is closing swiftly ⁦@biancoresearch @Redfin @RentDotCom

Best Year for Commodities

Home buyers with cold feet are increasingly taking a page from the Elon Musk handbook...

The US housing market saw a rise in the percentage of deals cancelled in June as rising mortgage rates made homes more expensive, pushing some buyers to walk away from deals.

Across the country, nearly 60,000 home sales fell through, according to an analysis by Redfin Corp. That was equal to 15% of transactions that went into contract that month, the highest share of cancellations since April 2020, when early Covid lockdowns froze the housing market.

Best Year for Commodities


Some good builder tidbits from around the nation's hot markets confirm the slowdown and reduction in housing prices and labor/material building costs...

#Austin builder: “Sales have fallen off a cliff. We’re selling 1/3 of what we sold in March and April. Trades are more willing to negotiate pricing since market has adjusted significantly past 60 days.”

#Boise builder: “Sales have slowed tremendously. Builders are dropping prices and halting new starts. Seeing prices drop on labor due to slowing of home starts. Expecting 15% to 20% reduction in most costs.”

#Dallas builder: “Framing labor has become readily available, suggesting housing starts slowdown is finally showing its typical signs. Haven’t raised prices in 3 months.”

#GrandRapids builder: “Believe we’re on the edge of cost reductions. Making every effort to refuse further [cost] increases and pushing for decreases in all areas that have seen significant two year run up.”

#Harrisburg builder: “Sales decreased to 50% of what they were 3 months ago. Traffic is down and we’re only moving spec homes after dropping prices. No one is buying to-be-built homes at this time.”

#Nashville builder: “Scary times. Hoard cash and hang on for the ride! National builders are cutting staff and offering buyers incentives. Move-up buyers are now practically non-existent due to rising rates in comparison to their existing rate.”

#Phoenix builder: “Some builders are already cutting staff. Cancellations are extremely high. Dismal traffic and sales climate.”

Employers are also looking to exit commercial RE leases as their employee base becomes more remote...

Companies are taking steps to further reduce their U.S. office footprint as they look to cut costs amid what many expect will be an economic downturn.

During the coronavirus pandemic, executives gave office workers more flexibility to work from home, enabling businesses to sublet office space or hold off on renewing leases. These moves helped to bring down corporate expenses and improve efficiency. Many employees have continued to work remotely or under a hybrid model even as revenue has recovered—and in many cases grown...

Vacancies have increased across the U.S. over the past year. About 17.5% of office space across the country wasn’t leased or was leased but available for sublease at the end of the second quarter, up from 16.5% a year earlier and 13.2% five years earlier, commercial real-estate firm Cushman & Wakefield PLC said.

Occupancy rates also remain below prepandemic levels. During the week ended June 29, the average occupancy rate in 10 major U.S. metro areas was 44% down from over 95% before the pandemic began, according to Kastle Systems, which operates security systems in U.S. office buildings. Kastle tracks how many people are entering buildings based on anonymized data from its swipe-entry systems.

“When you’re coming into potential economic headwinds, that puts even more pressure on figuring out where you can cut expenses, so any resource that you’re not fully utilizing is a target for companies,” said Mark Ein, chairman of Kastle...

Leidos Holdings, which provides information-technology and engineering services, last month said it plans to “get rid” of 25% of its office space. The Reston, Va.-based firm occupied about 8.9 million square feet of office space at the end of last year, most of which is leased, a filing showed.

“Mondays are pretty empty. Fridays are pretty empty. And that means we have too much real estate,” Roger Krone, the company’s chairman and CEO, said at a conference last month.

S&P 500


So, if gasoline, auto, home, food, durable and soft good prices are all now receding...

@carlquintanilla: “Markets now imply that headline inflation peaked in June and will soften sharply over the next year.” - JPMorgan

S&P 500

Fed's Esther George is not a fan of raising rates too quickly...

I’m certainly sympathetic to the view that interest rates need to increase rapidly, recognizing that current rates are out of sync with today’s economic landscape. However, I am also mindful of how the rate of change in tightening policy can affect households, businesses, and financial markets particularly during a time of heightened uncertainty. Policy changes transmit to the economy with a lag, and significant and abrupt changes can be unsettling to households and small businesses as they make necessary adjustments. It also has implications for the yield curve and traditional bank lending models, such as those prevalent among community banks. For these reasons, several considerations influence my own thinking about the appropriate path for policy.

First, communicating the path for interest rates is likely far more consequential than the speed with which we get there. Moving interest rates too fast raises the prospect of oversteering. It is notable that even before the March increase in the target range for the federal funds rate, Treasury yields had already moved up significantly and financial conditions were tightening, as expectations were building for significant adjustments in monetary policy. And indeed, the adjustment has been significant. This is already a historically swift pace of rate increases for households and businesses to adapt to, and more abrupt changes in interest rates could create strains, either in the economy or financial markets, that would undermine the Fed’s ability to deliver on the higher path of rates communicated. Along these lines, I find it remarkable that just four months after beginning to raise rates, there is growing discussion of recession risk, and some forecasts are predicting interest rate cuts as soon as next year. Such projections suggest to me that a rapid pace of rate increases brings about the risk of tightening policy more quickly than the economy and markets can adjust.

Kansas City Fed

The Fed's Waller is fine with 75 bps this month and then pivoting down...

@NickTimiraos: Fed governor Christopher Waller: "I’m definitely in support of doing another 75-basis-point hike in July." The Fed could pivot to 50 basis points in Sept and then debate moving to 25 basis points in Nov. "If inflation just doesn't seem to be coming down, we have to do more."

The Fed's Bostic is also fine with a 0.75% hike at the next meeting...

“The tremendous momentum in the economy to me suggests that we can move at 75 basis points at the next meeting and not see a lot of protracted damage to the broader economy." - Atlanta Fed President Raphael Bostic

The Transcript

The Goldman Sachs CEO warns about future volatility...

"One of the pieces of advice that certainly I would give right now is that people need to expect that the world is going to be more volatile, it's going to be more difficult to make returns on assets than what we've experienced when money was very, very easy. We're tightening monetary policy. That's going to have an impact on asset prices. It's going to have an impact on demand. So, I think you have to be prepared for that volatility and the impact of that volatility. I'm not going to predict any outcome, but certainly we're going to operate with tighter economic conditions and tighter economic conditions have some very direct and predictable consequences." - Goldman Sachs (GS) CEO David Solomon

The Transcript

Levi Strauss would not recommend investing into the dry cleaning industry...

"We've got some recent consumer research. More consumers are now wearing jeans more often in professional settings. I would say maybe even at your bank, the CEO is probably just happy that people are coming into work and wearing a pair of jeans is perfectly acceptable today, and that's very different than a pre-pandemic world. More than half of the people that were surveyed in the survey, and this was done globally, said that they can now wear jeans to work. That's a huge change from pre-pandemic. So the trend towards casualization is definitely helping." - Levi Strauss (LEVI) CEO Charles Victor Bergh

The Transcript

Past underinvestment into energy materials and services will continue to impact future production...

"I think the other challenge we have going forward just as an industry is, I think there's a lot of bottlenecks in industry being able to leverage and grow more than they currently are. We're all seeing it today in the lack of services, the lack of tubulars to get the wells drilled, the lack of frac sand to get things done, the service providers to be able to provide the services they need. So there's a lot of bottlenecks in the industry and trying to grow any more than they currently are." - EOG Resources (EOG) Lloyd W. Helms

The Transcript

The commodity markets have been recently wrecked by the selling of financial players...

But this should be a short-term effect for many commodities that have seen past underinvestment into new production. The obvious example is oil and natural gas. But another big shortage should occur in the copper markets as EVs, solar and the grid see continued significant investment. Could Freeport-McMoRan someday join Occidental Petroleum in Berkshire Hathaway's raw earth holdings?

As we have argued persistently, irrespective of near-dated fundamental trends, copper does possess a clear structural bull story, which we continue to see defined by peak mine supply in 2024, and sequential record-sized copper deficits starting from 2025, all from a starting point of near record low inventories. With no increment in supply investment to start to provide support at the mine level, the ongoing sell-off will have only reinforced that restraint. Whilst that does not matter to spot conditions today, from mid-2023 onwards this will clearly have far greater weight, as the market starts to discount a much tighter and open-ended phase in supply ahead.

S&P 500

Goldman Sachs

If it is the first month of the quarter, then get ready to open the fire hydrant of earnings data...

@bespokeinvest: We'll have two weeks of calm before the earnings storm later this month. Here's a look at the # of earnings reports by day over the next month.

S&P 500

The Financials will start us off with a bang on Thursday and Friday...

@eWhispers: #earnings season begins on Friday

S&P 500

The good news is that valuations are significantly reduced going into the Q2 results...

As for expectations, will the reporting companies margin guidance live up to what the analysts are modeling into the future? Big question mark here.

S&P 500

J.P. Morgan

If future earnings estimates are correct, then the equity market could be set up for future gains...

Remember just six months ago when the outlook was for negative forward returns?

S&P 500

J.P. Morgan

At its June low, the S&P 500's price performance had baked in a median recessionary pullback...

S&P 500

Goldman Sachs

The current weakness in consumer confidence is begging you to buy equities right now...

Great chart that basically overlays consumer economic optimism with the market. Of course, it is always better to buy when things are darkest. But with a fully employed workforce, is the consumer in complete dire straits right now versus the last 50 years? Or are other factors at work?

S&P 500

J.P. Morgan

If past performance is any measurement, then future returns should likely improve...

Of course, potential buyers could do without those 1929-1930 datapoints. But yes, the market is ripe to be bought if we could just make it through this current bout of uncertainty.

S&P 500

A Wealth of Common Sense

What would make me (and few others) feel much better about broadly buying equities right now? Credit! It always comes down to credit.

@TimmerFidelity: From my perch, the biggest red flag seems to be the widening of credit spreads. The continued widening is a bearish divergence against the recent price low for the S&P 500.

S&P 500

An interesting chart that suggests that long term U.S. Treasury yields might be done for this cycle...

@mark_ungewitter: Flat 30y/10y spread suggests cyclical peak in long-term yields.

S&P 500

While the equity markets continue to wander, one group is on a determined hike driven by all of the M&A activity in its ranks...

S&P 500

The Daily Shot

Unprofitable technology stocks are attempting to act better. Watch to see if they break-up or fail here...

@WalterDeemer: If you believe in moving averages, this is a key juncture. $ARKK

S&P 500

Over in the private equity world, average and median-sized rounds raised by venture cap startups in the first half of this year are not down dramatically...

While the number total fundraises is lower this year, for those companies with good ideas, they are still able to raise capital for their business needs. It might be a completely different story if they had gone public in 2021 and now had a stock price suffering with an unprofitable company peer group.

Average fundings at Series A and B in the U.S. have fallen from the second half-year peak of 2021, but are still at or above averages a year out:

  • The average U.S. Series A for H1 2022 was $20.4 million, down 20% compared to H2 2021 at $25.6 million. Amounts are on par with H1 2021 and well above the $16 million 2020 average.
  • U.S. Series B fundings tracked at $50 million, down 8% from $54.4 million in the second half of 2021, but up from H1 2021 at $45.4 million. The average in 2020 was $35.8 million.
  • Series C fundings in the U.S. are on par for each fiscal half-year since 2021, averaging between $88 million and $89.5 million. These rounds are up from the average in 2020 at $62.8 million.
S&P 500


Is it too early to ask when England can Un-Brexit?

S&P 500


Cryptocurrencies have never been backed by the FDIC or SPIC. Sad to see so many get caught in the marketing lies...

Voyager Digital Ltd. marketed its deposit accounts for cryptocurrency purchases as safe, protected by the nation’s banking insurance system in the event of a failure.

This week, when the company tumbled into bankruptcy, customers learned they didn’t exactly have the protection they expected and a banking regulator began an inquiry, according to a person familiar with the matter...

Still, some customers online said they were only just learning their deposits weren’t insured by the Federal Deposit Insurance Corp. in the way they thought. Voyager had marketed the accounts as protected by that national safety net, an attractive pitch in the volatile world of cryptocurrency.

“In the rare event your USD funds are compromised due to the company or our banking partner’s failure, you are guaranteed a full reimbursement (up to $250,000),” Voyager wrote in 2019.

Thursday its website said “Your USD is held by our banking partner, Metropolitan Commercial Bank, which is FDIC insured, so the cash you hold with Voyager is protected.”

The individual customer accounts are eligible for insurance, but only in the case of a failure of the bank, not Voyager, Metropolitan Commercial Bank said this week. That is typical since the FDIC only backstops participating banks.

The confusion drew the attention of the FDIC, which is looking into Voyager’s marketing, according to a person familiar with the matter.


Josh, take the mic...

Wide distribution of outcomes after historical yield curve inversions

Many educators do not wish to return to work...

An opportunity for those looking to go into teaching. Maybe also an opportunity to find ways to improve the total educational system. Unfortunately, class sizes will continue to bulge until the rebalance is met.

Wide distribution of outcomes after historical yield curve inversions

The Daily Shot

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The author has current equity ownership in: J.P. Morgan Chase & Co.

The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, Hamilton Lane is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of Hamilton Lane.

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