The Breakdown - The Macroeconomic Signals Have Rarely Been This Confusing

Episode Date: August 18, 2022

This episode is sponsored by Nexo.io, Chainalysis and FTX US.   Homebuilder sentiment is going through its worst stretch since the 2007-2008 housing and financial crisis. New York manufacturing data also surprised with some of the weakest numbers in a decade. On the other hand, U.S. industrial production rose to a new all-time high. So are we headed for a recession or not? NLW explores.  - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company safeguards your crypto by relying on five key fundamentals including real-time auditing and insurance on custodial assets. Learn more at nexo.io. - Chainalysis is the blockchain data platform. We provide data, software, services and research to government agencies, exchanges, financial institutions and insurance and cybersecurity companies. Our data powers investigation, compliance and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - I.D.E.A.S. 2022 by CoinDesk facilitates capital flow and market growth by connecting the digital economy with traditional finance through the presenter’s mainstage, capital allocation meeting rooms and sponsor expo floor. Use code BREAKDOWN20 for 20% off the General Pass. Learn more and register at coindesk.com/ideas. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “The Now” by Aaron Sprinkle. Image credit: Sadeugra/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, August 17th, and today we are looking at the macro outlook. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or If you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX.

Finally, I want to tell you guys about CoinDesk's new event, the investing in digital assets and enterprises summit or ideas. It's an event that facilitates capital flow and market growth by connecting the digital economy with traditional finance. Join CoinDesk October 18th and 19th in New York City for a 360-degree investment experience where you can source, invest, and secure the next big deal in digital assets in one place. If you're interested, use code breakdown 20 for 20% off a general pass. You can register right now at coindesk.com slash ideas. So today, as I mentioned, we're doing a bit of a macro review. Yesterday we caught up on crypto.

Today, we're looking at what's going on in the broader. economy. Last week, we had one of the first really positive macro weeks we've had in a long time. Inflation surprised to the downside for the first time in about a year. In other words, inflation was less than what economists predicted. Economist's average prediction had inflation for July coming in at 8.7% year over year, but in fact, the number was 8.5% year over year. 8.5% is, of course, extremely high by historical averages, but the thing that markets were excited about was the fact that it was actually going down. On top of that, month over month inflation between June and July came in at 0%. In fact, just under 0%. This created some open space

for political wrangling. The Democrats have been getting hammered on inflation, and so quickly seized on the fact that they could legitimately say that inflation was 0% without necessarily necessarily giving the context that that was month over month and year-over-year inflation was still 8.5%. Republicans, meanwhile, were very happy to call them out on this, and this is a type of tension and bickering and back and forth that I just expect to grow between now and the November midterms. Still, markets saw broad excitement around improved conditions. And indeed, this was actually the second piece of positive data in a row. The week before, we got the jobs report, which suggested that the U.S. had added over 500,000 jobs the month before, which was more than double

economist estimates. Many pundits seized on this number to suggest that all of this talk of recession was just a bunch of baloney, but listeners of this show will know that when you actually dug into the numbers, it was not nearly as clear a story as it first might have seemed. First of all, when it came to full-time jobs, those had actually decreased. The increase was entirely in part-time jobs and people taking on multiple jobs, which kind of suggests that people are either being moved from full-time to part-time and or having to take on additional jobs just to make ends meet. Still, from a popular financial media perspective, we had two good pieces of news in a row. One that said that the labor market remained strong and didn't seem to be flashing

warning signs of a recession, and one that suggested that while inflation remained a real problem, perhaps it has stopped its relentless assent. This week, however, a number of indicators have been less positive. On Monday, Joe Wisenthal from Bloomberg, some to do. up two really awful economic data points today, both Empire Fed and Home Builder sentiment dropping off a cliff. So let's take them in order. First, the New York State Index of Manufacturing activity plunged in recent data by the second largest amount since data began being collected in 2001. The index released by the New York Fed captures orders and shipments in New York. The one-month drop in the data was worse than the decline seen at any point in the global

financial crisis era and was only matched by the April 2020 decline. as the world shut down around COVID-19. The number of factories reporting weaker business conditions nearly doubled in one month to 43.6%. Steve Cortez, a political consultant, said the New York Fed Empire Manufacturing Index just fell off a cliff. Data out this morning a massive miss versus expectations and shows the largest drop ever outside of spring 2020 lockdowns. Jeff Snyder, the chief strategist at Atlas Financial said, only other time the Fed's Empire Manufacturing Index crashed by more than 40 points in a single month, it was April 2020. Yes, it took COVID lockdowns for something like that to happen.

There were no lockdowns in August of this year, but the Empire PMI crashed by 40. So dot, dot, dot. Raul, the CEO of Real Vision, said this is the growth collapse I've been talking about. It's coming to a screen near you this summer and fall. The market dog wrote New York Empire State manufacturing collapsed, lowest since COVID. GDP, will take the big plunge in quarter three. Stephen Van Meadow, a fund manager at Atlas, said U.S. New York Empire State Manufacturing Index negative 31.3 for August. Stock bulls will be in massive denial.

This is a very recessionary print. So as you can tell, most of the analysis here was pointing towards recession, but Joe Wisenthal had a different take. He writes, for the first time in about two years, supplier delivery times are no longer worsening, according to respondents of the Empire Fed Manufacturing Survey. It's a bit of a tongue-in-cheek interpretation, but worth noting that even when things look clear, and when there is a general consensus forming on Twitter, there are always alternative takes. Speaking of alternative takes, the market didn't necessarily react how one might expect.

David Rosenberg, the founder at Rosenberg Research, wrote, Based on the market response to the New York Fed Empire and NHB indices, both at their lowest level since May 2020, it's safe to say that today's equity investor loves recessions. At Milwaukee Bonds, writes the last two times the Empire Manufacturing Survey printed below 30, February 2009, and April 2020, the S&P 500 returned nearly 70% over the next 12 months. So it's pretty clear what's happening here, and this is something we've seen throughout this inflation cycle. The market is looking for conditions that will force the Fed to loosen monetary conditions. So long as inflation is high, and the economy is, if not growing, at least not totally cratering, and the job market remains strong, the Fed has leave to keep their foot slammed down on the brakes.

The reason markets might be reacting positively to a recessionary signal is a belief that if a recession comes, the Fed has to reverse course and support the economy and generally make moves that are better for assets. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side. Nexo is a security-first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing, and insurance on custodial assets.

Learn more about Nexo's reliable business model and start your crypto journey at nexo.io. That's nexo.io. Eager to make more informed decisions around crypto, chainalysis is here to help. Demystifies cryptocurrency by providing industry-leading compliance, market intelligence, and investigations support for all crypto assets. For organizations like Gemini, Crypto.com, and BlockFi. Gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting us now at Chainalysis.com slash CoinDesk.

The breakdown is sponsored by FTXUS. FDXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today and use Referral Code Breakdown to support the show.

Now let's shift to housing data. According to figures released by the National Association of Home Builders in cooperation with Wells Fargo on Monday, the home builder confidence gauge fell for the eighth straight month. This marks the worst stretch of consecutive decline since 2007. It also fell into negative sentiment rather than merely less positive sentiment for the first time since May 2020 and June 2014, excluding the pandemic. All three key metrics in the survey, which include current sales, expected future sales, and prospective buyer traffic all hit two-year lows. And falling sentiment is continuing to accelerate in this month's data. This isn't exactly surprising. Homebuilders are

experiencing a confluence of problems ranging from high mortgage rates causing affordability issues for many buyers, as well as persistently elevated costs for materials and labor. On top of that, you also have general consumer discussion about the potential of a recession and the potential for a coming housing crisis, which is pushing more people to actually list their homes to try to get out in front of that. All of this together has led to a sharp rise in available housing inventory, but also a drop in new construction activity. There is now nine months' worth of housing supply available, the highest inventory level since 2010, and were it not for these still extremely elevated price of houses, plus higher mortgage rates that are causing the cost of financing to go

up, this would be a good thing. NAHB Associate Chief Economist Robert Dietz said, Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession. Despite higher costs, one in five builders reported lowering prices in the last month in an effort to increase sales or limit cancellations, with the average price drop being 5%. Eric Basmagian reminds us that housing tends to be something that shows where the market is going. He writes, Home Builder sentiment continues to crash in August, and this is with mortgage rates coming down. Remember, housing is a leading indicator. Now, the mortgage rates coming down that he mentioned is there's been a couple weeks of relief from the highs, but we're still at

rates that are significantly higher than they were six months ago. Wall Street Silver tweets, U.S. Housing Affordability Index is the lowest since 1989. Housing today is less affordable than at the housing bubble of 2006. Either interest rates will have to come down a lot, or real estate prices will have to come down substantially. Macro Alf writes housing activity is very important for the business cycle, as it is a leveraged sector that accounts for a good proportion of economic activity. Well, the U.S.N.HB Housing Index just recorded its eighth monthly straight decline. Last time it happened was in 2007. Soft landing my ass? Gordon Johnson from GLJ research writes, so is housing bubble 2.0 ready to pop? Well, looking at the data, it sure seems that way.

That is, there now seems to be a massive supply of new homes for sale in all stages of construction, given there's over nine months of supply, the highest since May 2010. Now, one weird dynamic of this is that per consumer affairs, something like 84% of Gen Z want a housing crash. Of course, the logic being that they think that that's the only way that they'll be able to afford houses. But as we've discussed before, part of the reason that housing got so expensive over the last 10 years was the lingering knock-on effects of too little construction

following the 2008 financial crisis. There are indications that we're setting ourselves up for more of that right now, as on Tuesday, U.S. home building fell to its lowest level in about a year and a half. So these are a few negative signals that, to listen to Twitter analysts at least, focus us back in again on the idea that we may be in for recession. But is there any counterpoint data? Indeed, there is. Also on Tuesday, the Fed reported that U.S. industrial production rose 0.6% in July, which was double Wall Street's expectation of a 0.3% increase. This put output in the U.S. industrial sector at an all-time high, its first all-time high since 2018.

Within these numbers, manufacturing rose after falling in the previous two months. Motor vehicles and parts rose 6.6% after a fall the previous month. In fact, excluding autos, total output increased the anticipated 0.3%. Utility output fell in July, mining output rose, which was its third straight gain, and oil and gas drilling is at a seven-year high. Scanda Amernath of Employ America writes, Recession risks still lurk, but hard to call the period in which industrial production

rose to record levels, a recession. So what to make of all this? Listen, if you are confused, you are not alone. Christopher Rubkey, the chief economist at Forward Bonds in New York, said, reading the tea leaves on the economy hasn't been this difficult in years. Industrial production has turned down in every economic recession in history,

so the record high this month is not consistent with a downturn. Then on top of all this, we're of course not alone in the world over here in the U.S. Another big thing spooking markets right now is Chinese economic data for July coming in soft. Retail sales were up only 2.7%, missing estimates of 4.9%. Industrial output was 3.8%, which was below expectations of 4.3%. Crude steel output was down 6.4%. And youth unemployment hit an all-time record of 19.9%. analysts at Goldman Sachs said that the recovery of growth in China had, quote, stalled and even reversed slightly in July, following lockdowns in April and May.

The Chinese housing sector also continued to disintegrate in July. Property investment was down 12.3%, which is the largest decline so far this year. New construction starts were down 45.4%, the largest drop since 2013. Home sales were down 28.6%. Construction loans from domestic banks fell by 36.8%. and capital raised from abroad went negative, falling by 200%. A senior official at a Shenzhen-based developer told Reuters, quote, everyone except state-owned enterprises is in survival mode.

We're all waiting for a recovery and trying to speed up sales and reduce costs and buy less land. But at the end of the day, sales depend on the end users. All of this led to the People's Bank of China performing a surprise rate cut of 10 basis points on the release of the data in an attempt to stimulate growth. So you have China over there cutting, even as the rest of the world is raising rates in an attempt to get down inflation. Richard Frost, the senior editor at Bloomberg, said the central bank surprised everyone by cutting key interest rates by 10 basis points, but with demand so weak, it's unlikely to have much impact. Data Friday showed new credit weakened sharply, despite banks being flush with cash. Now, one immediate effect of all of this stuff going on in China is that oil prices have fallen.

West Texas Intermediate, the U.S. benchmark fell below $87, its lowest point since early February, prior to the invasion of Ukraine. Lisa Abramowitz from Bloomberg said the ongoing drop in oil prices is a Roershack test for markets. Either this is emblematic of a global economy in decline in careening towards recession, or it's a normalization of crude values that takes much-needed inflationary pressure off companies. Jeff Snyder agrees. New York manufacturers weren't the only nasty recession reports. The whole trio of China's big three manufacturing indices thoroughly disappointed, more evidence for nasty global recession. They all thought once Shanghai reopened China's economy would surge than the rest of the world. Instead, May was a total wipeout. June was a tiny bit better and now July it's all falling again. No wonder PBOC panicked with rate cuts. So as we wrap up here, how is that for no one knows what's going on?

It feels kind of clear to me that we're just in some sort of secular shift, where the old models just have less and less power to actually tell us where the economy is headed and what's going to happen next. It may be the different phenomenon that shouldn't be able to happen together, like U.S. manufacturing output on the one hand and technical recession on the other, just coexist in ways that break our conventional wisdom. Whatever the case, I think it's going to get more rather than less weird from here. For now, though, I want to say thanks again to my sponsors, nexo.io, chain alysis and FTX for supporting the show. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.