The Case for Skirting a Recession


The importance of challenging your narratives … will 2023 be a repeat of 1966? … why the inverted yield curve could result in a “non-recession” … where Eric Fry is investing today

What if we avoid a recession?Or what if we experience a “technical” recession, but the impact on the broader economy and stock market is mild?If so, then investors should be sifting through today’s market for the quality stocks that will soar when it’s widely realized that we’ve dodged a worst-case recession.Stepping back a moment, of all the ways that investors lose money, one of the most common reduces to “tunnel vision.”We analyze a market and/or investment, arrive at our conclusion about what is likely to happen, and then cling to that narrative come hell or high water.This isn’t how the most successful investors operate.Rather than look for data that support their market conclusions, the most successful investors spend their days searching for new information that challenges their beliefs.It’s “how am I wrong?” instead of “how can I confirm that I’m right?”Regular Digest readers know that I’ve skewed bearish for many months now. And while there’s plenty of data to support this perspective, many highly intelligent analysts don’t share that perspective.One of them is our macro expert Eric Fry. If you’re new to the Digest, Eric is probably the most successful investor you’ve never heard of.In 2016, some of the world’s best money managers and stock pickers, including Eric, participated in an annual investing contest. Leon Cooperman, David Einhorn, Bill Ackman…Eric beat them all. He won the contest, posting a one-year gain of 150%.Beyond that, over his career, Eric has dug up 40 different 1,000%+ returning investments. Most investors never get one.Returning to a recession, on Friday, Eric published his latest issue of Investment Report and warned “beware the non-recession.”Today, let’s jump into his analysis and learn why one of the most intelligent investors in our industry isn’t sitting on the sidelines right now, and why he thinks you shouldn’t be either.

Are we about to repeat 1966?

One of the biggest reasons why some analysts believe we’re on a collision course with a recession is today’s yield curve inversion.Regular Digest readers recognize this dynamic. It’s when shorter-term interest rates rise above longer-term rates.As Eric points out in his issue, according to research from the Federal Reserve Bank of San Francisco, an inverted yield curve has preceded every recession in the U.S. since 1950, with 1966 being the only false positive (a yield curve inversion that did not lead to a recession).Clearly, an inverted yield curve is to be taken very seriously.But what was it about 1966 that staved off a recession? And to what degree might that variable have a similar result here in 2023?Here’s Eric:

A few notable economic trends from that era provide some insight: Government spending, consumer spending, business investment, and foreign investment were all robust.Typically, during a recession all or most of these investment activities decline. But in 1966, they did not.

In making his point, Eric highlights heavy government spending due to the Vietnam War… low unemployment rates, a relatively strong economy, and strong consumer spending… robust business investment funded by plenty of corporate profits… and a steady stream of foreign direct investments.Eric concludes that, together, these factors not only helped the U.S. sidestep a recession despite an inverted yield curve, but the U.S. economy grew at a whopping 6.6% that year. It also tacked on another 2.7% the following year.Is history about to rhyme?

The case for a “false positive” recession from today’s inverted yield curve

Eric writes that the 2023 economy features these identical phenomena from 1966: big government spending… strong job growth … robust consumer spending… ample business investment… and plenty of foreign direct investment.Today, all of these variables are trending higher – not lower.From Eric’s issue:

Here’s what has happened since the end of 2020…

  • U.S. government consumption spending has climbed 13%…
  • Business formations (52-week average) have jumped 16%…
  • Foreign direct investment has increased by more than half a trillion dollars – or 11%…
  • Private domestic investment has doubled…
  • And the U.S. economy has added 13 million jobs, net – a 9% increase.

The American manufacturing “renaissance” is one of the newest factors contributing to the U.S. economy’s overall resiliency.As a recent Wall Street Journal headline declared, “America Is Back in the Factory Business.”

Evidence of a resilient economy is all around us

While we acknowledge the inverted yield curve, let’s also acknowledge a great deal of anecdotal evidence of economic strength all around us.What does that look like?Regular Digest readers know that Eric has been bullish on a new American manufacturing renaissance for many months now.One of the biggest sectors driving this renaissance is electric vehicles.From Eric:

…Every major U.S. and foreign auto manufacturer is either operating or building a new EV factory here in the States. Most of these new facilities are popping up in the South, within a 300-mile radius of Chattanooga, Tennessee.

The Wall Street Journal recently echoed Eric’s point about U.S. manufacturing and EVs, putting numbers on it:

Construction spending related to manufacturing reached $108 billion in 2022, Census Bureau data show, the highest annual total on record — more than was spent to build schools, healthcare centers, or office buildings. New factories are rising in urban cores and rural fields, desert flats, and surf towns. Much of the growth is coming in the high-tech fields of electric-vehicle batteries and semiconductors, national priorities backed by billions of dollars in government incentives… 

Tying back to our broader “recession” conversation, this scope of investment makes a sustained economic slowdown less likely.

And it’s not just electric vehicles

Eric points toward resilience over in the housing market, where even the slightest drop in mortgage rates and/or home prices results in a swarm of buyers leaping into the market.Back to Eric:

Although the pace of annual home sales tumbled 35% from its January 2022 peak, it has bounced about 10% since the start of the year. Home prices are also bouncing and are sitting just 9% below the all-time high they hit one year ago.New home sales are leading the recovery, which prompted my colleague, Brian Hunt, to remark recently, “If there’s a recession coming, somebody forgot to tell the home builders! Many of them are hitting new all-time highs.”

Eric goes on to quote Brian, which we repeat below:

The economy is stronger than most people think it is…Sure… a mild “technically true, but not really” recession might arrive later this year. But the stock market has discounted that weakness. It’s baked into the cake.What follows is that people will start feeling better about the future… they will stick their toes back into the stock market, then feet, then legs… business investment will increase… sentiment and news flow will improve…

Eric agrees.He notes that while we might enter a statistical recession this year, it won’t significantly hobble the U.S. economy or corporate profits.And that means this “non-recession” is creating a buying opportunity in the stock market.

So, where is Eric investing today?

In last Wednesday’s Digest, we profiled how Eric likes a handful of energy plays today. He urged readers to look at TotalEnergies SE (TTE), which is a way to get exposure to both fossil fuel energy and cutting-edge, green energy technology.From Eric:

[TTE] is a fashion-forward, energy-transition company. The company’s management understands both what has been and what will be – and they intend to maximize profit from both. Specifically, management is pursuing a long-term strategy to reinvest the robust cash flows from Total’s legacy oil and gas operations into renewable energy projects and technologies. 

Eric also likes so-called “deep-cyclical” sectors like metals miners. We’ve profiled many in recent quarters. One example stems from the growing demand for copper. Eric has pointed readers toward Canadian metals mining firm, Teck Resources (TECK). Eric has also led his subscribers to profits with Freeport McMoRan (FCX) repeatedly over the years.Finally, in Eric’s latest issue, he brings up a new way to get ahead of the “non-recession” bull market. It’s an artificial-intelligence based health care company.I can’t reveal its name out of respect for Eric’s Investment Report subscribers, but he describes it as a “solid, steadily growing medical imaging company that also includes considerable fast-growth potential from its AI product line and investments.”To learn more as a subscriber, click here.

Returning to our broader “recession” talk

Yes, it’s important to look at the data suggestive of trouble to come. But as Eric pointed out today, indicators like the yield curve inversion aren’t infallible, and there’s plenty of data pointing toward U.S. economic strength – same is back in 1966.On this note, we’ll give Eric the final word:

2023, meet 1966.No one would confuse 2023 with 1966 any more than they might confuse Taylor Swift with Janis Joplin. Nevertheless, these two years bear an uncanny resemblance to one another, at least economically.The only time during the last 72 years that a yield curve inversion did not lead to a recession was in 1966… and 2023 could become the second notable exception.

Have a good evening,

Jeff Remsburg

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