🗞 A Big Rally, Then What?

WHILE YOU POUR THE JOE… ☕️

The US AIM Act is going to change a lot of things, especially in cooling. ❄️ 

Not just air conditioning and refrigeration, but also in the new massive wave of data centers that is coming to the United States.

You see, as electricity prices spike due to the rollout of AI and the domestication of these data centers, there will have to be a long-term and short-term solution.

The long-term solution involves shifting energy sources completely, which will take some time for us to determine and implement (my guess is nuclear).

Which is why I’m focusing on the short-term solution.

Which is making things more efficient through less electricity requirements and power delivery.

After some research on industry dynamics and company positionings, I landed on a very interesting company that fits all of our criteria for this thesis. 👀 

That company is Chemours ($CC).

I will be posting about this trade in future newsletters, but I will also offer you a shortcut right now.

Instead of waiting for me to tell you which stocks are of interest, what if you could come up with these ideas yourself?

Well, you can, and it will only take you 5 days if you dedicate yourself.

Our entire idea-generation process has been boiled down into this FREE 5-day email crash course for you to take this week.

Sign up for your first lesson tomorrow ✅ 

Speaking of idea-generation, let’s get on with today’s email 📧…

MISSING LINKS
Actionable Conclusions

In our last newsletter, I posted what I think are some of the weak points in the US economy today.

But I realized something.

I didn’t do a good job at telling you what that might mean for the stock market and your portfolio for the coming months.

So in this newsletter, I am going to show you just that (so take notes).

Three Types of Rate Cuts

When you study most of the rate cut cycles that the Fed has implemented in the past, there are typically three kinds of cuts:

1. Emergency cuts (like 9/11 and COVID-19)

2. Normalization cuts (announced and part of monetary policy shift)

3. Recession cuts (made after the economy has fallen enough into recession)

Today’s cuts haven’t been announced, and neither has any sort of monetary policy shift, so it’s hard to put the September cut into the normalization category.

Then again, we also don’t have any emergency situations.

Which leaves us with recession cuts, and I think most of us here can agree that the US economy is in a recession, and has been since 2022. 📉 

In fact, the current economy looks a lot like 2019:

Starting with the credit cycle, the 10Y 2Y yield curve is now sitting close to where it was in late 2019.

It’s also steepening from inversion (which 100% precedes a recession). 🐻 

However, this steepening is driven by the short end of the curve, which is never good for credit and exemplifies today’s tightening cycle.

Then for the business cycle, we have the services PMI (red) and its business activity measure (blue).

Looks like we are on a “recovery,” right?

Similar levels to 2019 as well, except for one MAJOR difference.

Prices right now are not teh same as 2019, that’s becoming very clear.

Which means the Fed is going to cut into an economy which has above-average unemployment AND above-average inflation pressures.

Similar to 1974, this cut may create a sort of stagflation scenario (where real assets outperform financial assets).

On the other hand,

This is also a recession cut, so it’s very hard to tell where valuations are going to go from here. 🤷‍♂️ 

Though one thing I can tell you is this..

• Earnings have several headwinds working against them right now

These headwinds are driven by the weakening fundamentals in the US economy, which is also why you see the following behavior from equity risk premiums ⬇️ 

Charted in white, this instrument measures the widening between corporate bond yields and treasury bond yields.

Corporates are now seen as riskier, for good reason.

Now compare that upward move in the S&P 500 along with widening risk premiums to those of 2019 ⬇️ 

Pretty accurate precursor to the big COVID crash isn’t it?

So, what do I expect will happen during this recession / stagflation scenario you may ask.

Something that is already happening, real assets will continue to outperform.

Let’s take a look at the 2019 scene vs today when it comes to S&P 500 vs gold prices ⬇️ 

Sharp drop in teh S&P 500 vs Gold spread in 2019 followed by a long-term catch up driven by stocks.

Fast forward to today, and we can expect the same scenario to play out as markets finish blowing off the top on stocks under the rate cut narrative. 📈 

However, when this ratio gets back to normal channels, that’s when I would seriously consider shifting my money elsewhere, or at least to different strategies.

By different strategies I mean only two things in reality.

First, you can go into cash and have a war chest ready for when new deals start to come around.

Or

You can stay active in the market (with probably a higher VIX to squeeze out profits) in a neutral manner.

How?

With a little-known strategy called long/short equity. Up to $10 billion has been injected into hedge funds trading under this mandate this year alone, not seen since 2018 actually.

Which should tell you the “smart money” already knows what will outperform in the coming decade.

Question is, will you stay in denial or join them in the wealth-creation opportunity of this cycle?

Find out if this is even in your sphere of interest, take our free 5-day email crash course, which people are absolutely loving ⬇️ 

And if it turns out this is exactly what you need.

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Correlations are super important here for the S&P 500 and gold.

As you can see, they are now beginning to turn into a cyclical upswing, which means:

1. Gold will have to come down and meet stocks

2. Stocks will rally to meet gold

There is absolutely no way you can expect the former to take place, so I think a further rally in both gold and stocks is in place here. 📈 

I mean take a loot at inflation.

You really think Fed cuts are going to help this? Not one bit.

Watch for media headlines call for a “Shadow Recession” in the coming months, because at some point this inflation (outside of services) will eat away at margins and EPS.

Valuations will eventually have to reflect this.

To your success,

G 🫰 

GO AND MAKE IT HAPPEN
Together With Augur

We love visuals, who doesn’t?

Putting together financial data in a way that’s digestible and impactful can take an unnecessary amount of time if you do it the old way.

Which is Excel.

Why not cut out the middleman and use the thousands of charts and visualizations made by our friends at Augur Infinity?

Free, quick, useful. ⬇️ 

To your success,

G. 🥃