Tighter Lending = Looser Labor… [Dirty Dozen]

You tend to think past financial crises resemble earthquakes. They are not one-shot events. They are like bad relationships: drama, gloom, resolution, bounce back, optimism, it’s all going to be fine, then another drama, another gloom, a huge bounce back, then…~ Nassim Taleb

In this week’s Dirty Dozen [CHART PACK], we look at tightening lending standards, cooling labor markets, falling Fed expectations, recessionary EPS leads, contrarian outflows, and a setup in gold and bitcoin, plus more…  

**Note: This continues to be a difficult market to navigate, as far as equities are concerned. And it’s likely to remain so for the rest of the year, and some. 

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  1. Flow Show summary… tighter bank lending standers = small business credit crunch = higher unemployment. 


  1. Balance sheet repair… via Apollo, “A financial accident has happened, and we are going from no landing to a hard landing driven by tighter credit conditions. ..”

“Small banks account for 30% of all loans in the US economy, and .. are likely to now spend several quarters repairing their balance sheets. This likely means much tighter lending standards for firms and households even if the Fed would start cutting rates later this year.” (h/t @carlquintanilla)


  1. Pricing cuts… The eurodollar market is now pricing in two rate cuts in the second half of this year, after one of its largest weekly repricings in history.


  1. Between a rock and a hot place… Supercore CPI (core services – housing) picked up again, coming in last month at 0.5% (h/t @CameronDawson). The sticky inflation environment makes it near impossible for Powell to ease up too much. We expect 25bps this week with lots of talk about growing “concerns” over spreading financial risks. Our second half recessionary hard landing scenario is looking more and more likely.


  1. Deep earnings recession… Morgan Stanley’s non-PMI leading earnings indicator (YoY%) is predicting a steep drop in EPS over the next 9-months. 


  1. Tightening Fincon, loosening labor… Temporary Help Payrolls (green line) are a dependable lead on unemployment and have been trending up for months. Job postings on Indeed paint a similar picture, showing a material slowdown in postings since the start of the year (h/t @GavinSBaker).



  1. Credit crunch = recession… via BofA “banking crises are followed by tighter lending standards and lower risk appetite… small businesses most negatively affected as most reliant on regional banking lending (tighter credit + lower small business optimism – chart 4); US small businesses create ⅔ jobs in America so lower availability of credit causes a surge in unemployment (chart 5); note banks with under $250bn of assets make up 80% of commercial real estate lending & with v high US office vacancy rates (18.7% in 4Q22)… commercial real estate widely seen as next shoe to drop.” 


  1. Short-term it’s a coin toss… Our base case since the start of 22’ is that we’re in a cyclical bear market. In October of last year, we called for an intermediate bottom and a multi-month counter-trend rally. This has since played out and going forward we have less conviction on the sustainability of this bullish counter-trend rally. 

With that said, there continues to be some short-term positives such as our aggregate fund flow indicator falling below its 3yr 20th %tile last week. This often marks intermediate bottoms (red dots), though its signal becomes less useful in a bear market. 


  1. Seasonably good… And we’re also kicking off on one of the strongest periods of seasonality for US equity markets. This is especially true when you account for additional Presidential cycle tailwinds. 


  1. Watch the Russell… The chart below is a monthly showing small caps. They’ve so far failed to regain the midline of their Bollinger Band, which is typical of cyclical bear markets. How this month closes will be a big tell. And it’ll largely be dependent on coming actions and signaling from our Game Masters (Fed). 


  1. Gold nearing a breakout… Gold is within a hair’s breadth of breaking out to new all-time highs. Positioning remains very light and the macro backdrop is extremely supportive. PMs are quite overbought over the short term, so they’re susceptible to some mean reversion. It’ll be interesting to see how they respond to this week’s FOMC.


  1. Bitcoin bottom… Bitcoin (chart below is a weekly) has completed a large inverted H&S bottom. This could be a signal of more rally left in risk-on assets or a last-ditch speculative response to the recent trouble in the financial sector. I don’t have an opinion there but will play this one purely by the chart. 

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Thanks for reading.

Stay frosty and keep y0ur head on a swivel.

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.