Chief Investment Strategist, The Freeport Society
You can almost understand President Donald Trump’s decision to fire the head of the Bureau of Labor Statistics… and his insistence that the economy is far stronger than the employment numbers indicated.
After all, the stock market is hitting all-time highs, and the American tech sector is absolutely crushing it. With Nvidia and the rest of the Mag 7 leading the way, the U.S. is spearheading the AI revolution and leaving the rest of the world behind.
End of story… right?
Well, that depends on which economy you’re talking about.
It’s almost nonsensical to talk about “the economy,” because it’s wildly different depending on where you look.
The tech sector is booming, and most white-collar and creative jobs are still in good shape.
But outside of the tech bubble, it’s not looking so hot.
The middle class and blue-collar economy is hurting.
Inflation still stings…
The manufacturing renaissance has yet to materialize…
And wage growth is stalling.
Writing for The Telegraph, Melissa Lawford calls it the “redneck recession” because working-class workers are the worst affected.
But blue collar workers aren’t the only ones suffering. Younger workers and those with student loans are also in a real bind.
So today, let’s pick through the numbers to see what’s really happening in “the economy,” and how it could affect your investment strategies.
Manufacturing Is Dead
American manufacturing contracted for the fifth consecutive month in July.
It’s tempting to simply blame the tariffs, but that misses the full story. We had a brief blip of manufacturing growth in December and January, but before that manufacturing had been in decline for 26 consecutive months.
Some of this is the long hangover from the pandemic. The trend since late 2021 has been to spend less on “stuff” and more on experiences.
Some of it is due to inflation biting into budgets.
And more recently, some of it is due to tariff uncertainty causing executives to sit on their hands.
But whatever the cause, the takeaway is the same: The blue-collar economy is hurting. And there is no indication it’s turning around any time soon.
The Consumer Is Loaded With Debt
Credit card debt plummeted during the pandemic.
With most of the country getting stimulus checks, rent holidays, student loan moratoriums, and every other manner of free money, there was a debt reset of sorts.
It didn’t last.
By the end of 2021, most of the stimulus money had been burned though. By early 2022 credit card debt was back to pre-pandemic levels. It’s now a full 30% higher than its old 2020 peak.
By itself, that’s not necessarily a problem. Except that Americans are having a harder time paying the balances.
The delinquency rate on credit cards is now at the highest levels since 2012.
Student loans also look awful.
More than 10% of all student loans are reported at more than 90 days delinquent.
Debt pulls future buying into the present…nd a dollar needed to service existing debts is a dollar not available to spend.
That’s a problem… particularly when prices are rising on basic necessities.
And about that…
Today, the Bureau of Labor Statistics reported that core inflation – which filters out some of the month to month noise by removing energy and food prices – rose at 3.1% last month.
Inflation remains stubbornly sticky.
Forecasting a Recession
You’ve probably heard the old tongue-in-cheek joke that “economists have predicted nine out of the past five recessions.”
Yeah. Their track record isn’t great, and there are plenty of false alarms.
Unfortunately, the indicators that economists use to predict recessions have limitations… and they’ve become less useful than usual over the past five years.
Regardless, let’s take a look at the Conference Board’s Leading Economic Index (LEI), which has historically been one of the best forecasting tools for recessions.
Think of the LEI as a dashboard of gauges that try to predict where the economy’s headed.
It blends together ten different stats – things like new jobless claims, building permits, stock prices, and manufacturing orders – into one number.
If the LEI is rising, it means the economy is likely to grow in the next few months. If it’s falling, it’s a warning sign that things could slow down.
Right now, it doesn’t look great.
Nine of the index’s indicators were flat or negative in June.
The only one that was positive was the performance of the S&P 500.
And looking at the first half of the year, not a single one of the 10 indicators was robust. All were either flattish or significantly negative.
The LEI triggered a recession signal for the third consecutive month in June.
That doesn’t mean the economy falls apart tomorrow.
It means we should be paying attention here.
So here’s the million dollar question…
Why Aren’t Stock Earnings Cratering?
If the world is crumbling, why aren’t we seeing a reaction in the stock market?
Well… we actually are.
Hypergrowth expert Luke Lango, recently broke down the the numbers:
Take a look at the profit growth rates for the Magnificent 7 tech stocks (firmly in the AI Economy) and the S&P 493 (which comprises some AI Economy stocks, but also a lot of Everything Else Economy stocks)…
This quarter, the Mag 7 is expected to grow profits by 26%, versus just 2% growth for the S&P 493…
Inflation is currently running north of [3%], so the S&P 493 will essentially have NEGATIVE real profit growth for the rest of the year. Ouch!
So, how are we to navigate this?
To start, we should be invested in the strongest companies that are thriving in this environment. Stick with what’s working. For example, the Xtrackers Artificial Intelligence and Big Data ETF (XAIX,) a proxy for the AI economy. I recommended it in the Freeport Investor in December and it’s up 44% from its April lows. That’s a no brainer.
But don’t fall in love with the narrative.
Even strong stocks can get whacked in a real recession.
The best thing to do is keep a little extra cash on hand and hang on to your hedges in gold and Bitcoin.
In Freeport Investor, we’re sitting pretty in both assets. We hold three open gold positions, which are up 65%, almost 66%, and nearly 20%. And our two Bitcoin positions are in the green by 188% and 85%.
These will remain in our model portfolio for the foreseeable future.
To life, liberty, and the pursuit of wealth.
P.S. With “the economy” on the rocks and a “redneck recession” underway, caution is warranted. But it’s still important to invest. You just need to be more selective about. With the S&P 500 at nosebleed levels, and the Mag 7 pulling it higher, you’d be better served finding other investment opportunities. InvestorPlace Senior Investment Analyst and macro investing expert Eric Fry has some suggestions for you about which stocks to buy instead. He shares the details in this special broadcast.