We appear to be in the late stage of the business cycle. Positive indicators include the S&P 500 reaching all-time highs, low stock market volatility, narrow credit spreads (indicating a low risk of default), and record-low Unemployment rates. Additionally, CPI Inflation has stabilized at 3.5%, though this remains significantly above the Federal Reserve's target of 2%.

However, while unemployment numbers are still low (see chart above), there is reason for concern when we look under the hood. The Bureau of Labor Statistics (BLS) publishes different reports on employment, including the CES (Current Employment Statistics) and the CPS (Current Population Survey). According to the CES, 2.93 million jobs were created in the US in the last 12 months; however, according to CPS, it was only 642k jobs. (Jeffrey Snider)

According to Neil Howe (at 21:30 in the video), one of the differences between the two reports is attributed to the business birth-death model used in the CES report, in which the BLS estimates job growth from newly created and dying businesses. Even the BLS itself acknowledges that this model tends to overestimate job growth towards the end of an economic expansion and underestimate it coming out of a recession.

Breaking down the CPS report reveals that the recent increase in employment is primarily attributed to a rise in part-time jobs, commonly seen towards the end of an economic expansion, and an increase in employment among foreign-born workers.
In fact, according to demographer Neil Howe (at 26:00 in the video), the share of foreign-born workers in the United States has jumped to 19.3%.

Continuing with our analysis of the late stage of the current economic expansion, two key recession indicators—the Yield Curve and the Consumer Confidence Spread—are signaling red. These indicators originate from distinct sectors of the economy. The Consumer Confidence Spread measures the disparity between current conditions and future expectations. Historically, both indicators follow a clear pattern, reaching their lowest points just before a recession begins. (Neil Howe at 14:00 and 59:50 in the video)

Let's examine the US CPI inflation in more detail. "Services less Rent of Shelter" (including medical care, transportation, and education) and "Commodities less Food and Energy" (18% weight in total CPI) have been rising on an annualized MoM basis. (Neil Howe, at 31:10)

Interestingly, the "Rent of Shelter" component, which accounts for 36% of the CPI, has been declining in recent months - a surprising trend given the rising Home Prices and mortgage rates. According to a paper by a team of Harvard economists, including former Treasury Secretary Larry Summers, the Bureau of Labor Statistics (BLS) removed interest cost (e.g. for mortgages, auto loans, and credit cards) from its consumer price inflation calculations in 1983. (Neil Howe at 34:30)

These researchers attempted to recalculate the official CPI numbers using a pre-1983-like formula that included interest costs. Their findings suggest a dramatically different inflation rate, which peaked at 18% in November 2022. (Forbes)

In a recent article on "The Five Big Forces" Ray Dalio makes the following points:

1. Persistent Inflation Concerns: Dalio highlights the ongoing issue of inflation remaining above target levels. 
2. 2024 Presidential Election and Fiscal Policy: Dalio discusses the political landscape in the lead-up to the 2024 US presidential election. He observes that neither presidential candidate seems motivated to reduce government spending, particularly in areas like defense and climate change, which could lead to escalating fiscal deficits.
3. Rising Government Debt and Economic Consequences: Dalio expresses concern over increasing government debt levels and the accompanying burden of interest costs. He notes that the decreasing attractiveness of US bonds to foreign investors exacerbates this issue. Dalio foresees a scenario where debt service costs could start to crowd out other essential government spending.
   
4. Market Expectations and Monetary Policy: Despite the environment of high inflation, according to Dalio there is a somewhat misplaced market expectation for the Federal Reserve to ease monetary policy. He points out that bond markets are pricing in a significant rate cut, which may not align with the longer-term needs for stability in interest and inflation rates.
5. Risks of Further Monetary Easing: He expresses concern about the risks associated with further monetary easing, such as reducing interest rates or other stimulative measures, particularly when inflation is already above the target. Dalio warns that such actions might worsen inflation without addressing fundamental economic issues, including high debt levels and essential spending in defense and climate change.

In his discussion, Ray Dalio emphasizes the importance of maintaining a balanced portfolio, particularly in the context of ongoing economic uncertainty and persistent high inflation.

Having focused on the business cycle for a while, let's now turn our attention to Real Yields and Gold. Since, early 2022, as real yields began to rise, gold decoupled and broke the typically negative correlation between these two assets.

Let's take a look at valuations for the US stock market. It doesn't really matter whether you look at the Price Earnings Ratio, the Dividend Yield, or Market Cap to GDP, today's valuation metrics all look pricey.

However, perspective is key. In his analysis, 'Are We in a Stock Market Bubble?', Ray Dalio employs six distinct criteria. He writes: "When I look at the US stock market using these criteria (see the chart below), it—and even some of the parts that have rallied the most and gotten media attention—doesn’t look very bubbly. The market as a whole is in mid-range (52nd percentile). As shown in the charts, these levels are not consistent with past bubbles."

In aggregate, Cyclical Sectors (including Consumer Discretionary, Communication Services, Financials, Industrials, Information Technology, Materials & Real Estate) have outperformed Defensive Sectors (Consumer Staples, Energy, Healthcare and Utilities) and the ratio is close to its 2000 and 2021 peak.

As Richard Bowman writes "Over the next few months, inflation data and central bank policy is likely to have a profound effect on consumer behavior around the world. If consumers believe prices have stopped rising and interest rates are peaking, sentiment could improve quickly. But, if inflation persists, or rebounds, they are likely to ‘batten down the hatches’ and they have little to fall back on."
Bowman suggests investing in companies that are less sensitive to consumer spending, including Defensive Sectors, Energy and Materials companies, and Technology Growth stocks.

Further segmenting the US stock market, Market-cap Weight outperformed Equal Weight, Growth Stocks outperformed Value Stocks, and Large-cap Stocks outperformed Small-cap Stocks.
Dancing out of line is the Nasdaq(-Composite)/S&P500 Ratio, which appears to be rolling over.

Internationally, the United States continued to outperform the rest of the World and it now makes up 63.82% of the MSCI ACWI Index. Similarly, Emerging Markets continued to underperform Developed Markets nearing the 2001 lows.

Looking at the MSCI World Factor Indices over the last 8 years, Quality, Momentum and Buy Back Yield stand out as the best performers; meanwhile Risk Weighed, Volatility and High Dividend Yield stand out as the worst performers.

Examining Country Indices, recent standouts include Italy, which has seen a 65% increase over the past eight years, driven by companies like Stellantis, Unicredit, and Ferrari; Kazakhstan, with a remarkable 361% gain; and Argentina, which has risen by 133%.

A brief note on Commodities: Cocoa made the news recently because of exploding prices. Poor weather in Ivory Coast and Ghana, which together produce around two-thirds of the world’s cocoa beans, has affected crop yields.

The average sales price of a house sold in the US fell less than the median, while the Case-Shiller Index kept rising. On average, a house in the US costs 8.18 times the average annual income, which is slightly below the peak of the housing bubble in 2005.

In February, we finally saw a small uptick in Total Existing Homes Sold.

On a positive note, while Mortgage Rates remained relatively high at 6.88%, the spread to the Treasury Yield finally narrowed after reaching record highs.

To close things off, let's look at the state of the crypto market. Since the launch of Bitcoin Spot ETFs in January, the cryptocurrency has increased by 43%. We are now at the midpoint of the 4-year cycle, just before the supply halving event.

Bitcoin continued to outperform other cryptocurrencies and Bitcoin Dominance stands at 55%.

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