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There's a lot of change in the air right now: in the economy, the markets, and of course with the fast-approaching US election.
There's so much change currently underway that today's guest titled his latest report: The Macro Winds Are Shifting.
How exactly? What will the likely repercussions be?
And how should investors consider positioning intelligently today for where the puck is headed?
For guidance, we're fortunate to speak today with Jesse Felder, founder & Editor of the respected market research firm: The Felder Report.
Follow Jesse at https://thefelderreport.com/ or on X/Twitter at @jessefelder
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Felder argues that despite surface-level economic strength (low unemployment, positive GDP growth, all-time highs in stocks), deteriorating labor market fundamentals, insider selling at decade highs, and historically bearish market technicals indicate an imminent earnings recession and potential hard landing, requiring maximum defensive positioning now.
- Labor market showing self-reinforcing deterioration: unemployment rising, job creation at 20-year lows, full-time employment falling while part-time rises, continuing claims 15-16% above pre-pandemic averages
- Insider sell-to-buy ratio at 25:1 (highest since 2021), which leads earnings troughs by 20 months, suggesting peak in earnings cycle has already passed
- Technical dispersion at extremes: Hindenburg Omens and Titanic syndromes triggered more in 2024 than at 2007, 2001, or 1987 peaks; defensives outperforming growth; bond market pricing recession while stocks lag
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Goldman Sachs research concluded that while AI could replace labor, the capital investment required is several multiples more expensive than maintaining current headcount, making labor displacement uneconomical in most applications.
“as the Goldman Sachs research report a few months ago suggested that yeah you can you can replace l labor but uh the investment required to do some is is is sign SE several multiples more expensive than just keeping the people that you hired to do the jobs in the first place”
Energy is historically the best-performing sector in the six months following a major stock market peak, based on investtech data analysis across recent cycles.
“the best performing sector six months after a major stock market Peak is energy um and so major stock market Peaks rolls over what's the number one sector you want to be in over at least over the last you know two three Cycles has been energy”
The Magnificent Seven stocks are massively concentrated in ETFs across the market, meaning many retail investors unknowingly hold exposure to these mega-caps through diversified index funds and broad ETFs.
“they are so overed across the the fleet of ETFs that are out there in the world that a lot of people have exposure to these companies that they don't even realize they have they're in some ETF that that doesn't sound like AI at all but because of of the the structure of how ETFs are created and whatnot um there's a lot of exposure to these stocks”
Stan Druckenmiller covered his shorts at the peak of the dotcom bubble in March 2000 due to frustration with the market's irrational behavior, forcing him to exit his position before the crash and then experiencing severe losses as the market reversed.
“Stan Miller famously uh you know got so frustrated trying to short the dotcom bubble that he he covered all of his shorts and went long right at the top in March 2000 right and then he got destroyed when the market reversed to the downside”
Soft landings are a recurring expectation in market cycles (2007, 2001, dotcom) where initial peaks in asset classes are followed by optimistic narratives that recession won't occur, until data becomes so bad recession is obvious.
“the notion of a softt landing is a very common theme right people were talking about a soft Landing in 2007 you know housing Markets started to Peak and roll over in 2005 and everybody thought for a couple years wow maybe there won't be any big problems”
The market can remain irrational longer than investors can remain solvent, creating psychological challenges for bearish investors who must endure extended periods of being wrong.
“the market can remain irrational longer than we can remain solvent there's that old adage there um”
The labor market is in the early stages of a self-reinforcing deterioration cycle: as unemployment rises, consumer confidence falls, spending declines, corporate profits compress, hiring contracts further, creating a vicious cycle historically associated with recessions.
“the deterioration in the labor market and historically this has been something that is self-reinforcing so um you know he talks about how right people start to fear for losing their jobs they start to spend less that puts pressure on corporate profits so hiring goes down and it just kind of becomes a vicious cycle”
Large tech companies (Microsoft, Amazon, Google, Meta) are spending massive amounts on AI infrastructure and data centers with no clear revenue models or customer demand, creating a bubble similar to the metaverse spending that forced Meta into cost restructuring.
“the companies are spending so big tech companies Microsoft Amazon Google are spending so much money on uh building out these uh data centers and on on AI and Nvidia chips and all these things that and the revenues are not materializing to support the investment”
Corporate executives' insider sell-to-buy ratio has reached 25:1, the highest level since late 2021, signaling that earnings growth has peaked and an earnings recession over the next 12-18 months is probable.
“corporate Executives right now are saying over the next 12 to 24 months economy is going to slow and earnings growth is probably peaked and we're heading for another earnings recession over the next uh 12 to 18 months”
The fed was 'behind the curve' in both the hiking cycle (kept rates low too long when inflation was rising) and will be in the cutting cycle (kept rates high too long, forcing panic cuts into recession).
“and that's why everybody always says the FED is behind the curve so where I'm going with all this Jesse is it sounds kind of like this is business as usual right”
Job creation in the latest month was 142,000 with 527,000 new part-time jobs created while full-time employment fell by 438,000, meaning the headline unemployment decline is entirely driven by a shift toward precarious part-time work.
“you know lizanne Saunders points out that um you know 142,000 jobs were created last month 527 ,000 new jobs were created for part-time workers and full-time employment fell by 438,000 jobs so the whole rise was in um you know part-time employment while you see uh you know people getting uh losing their jobs uh full-time jobs uh in a big way”
Job announcements and new hiring plans hit their lowest level year-to-date in August 2024 and are the lowest recorded by the Challenger Gray & Christmas report since 2005, spanning nearly two decades.
“more importantly I think job hes and new announcements of job of of hiring were the lowest level year-to dat that the firm has ever recorded So the labor market and that's back to 2005 so firms are hiring less than they have done in in two decades”
Restaurant performance indices have plunged to levels not seen outside of recessions, and auto lenders like Ally Financial are reporting rising defaults and delinquencies in July and August, with consumers citing rising unemployment rather than cost-of-living pressures.
“Fran Tran has pointed out that the restaurant performance index has plunged in a way that we haven't seen outside of recession um we've seen Ally Financial recently um you know big used car lender talk about how they've seen Rising defaults and delinquencies um over the last couple of months these are like real time indicators July and August higher than they expected and people are not just blaming cost of living now they're blaming Rising unemployment”
Continuing jobless claims are running 15-16% higher than the average of non-pandemic years (excluding 2020), indicating labor market stress well above historical norms despite headline unemployment appearing stable.
“continuing claims are running about 15 16% higher than the average of these non-pandemic years um you know 15% higher uh than than you would expect uh giving you know backing out that 2020 year relative to the other pre-pandemic or non-pandemic years”
The insurance and financial conditions that were tight during the pandemic have eased due to fiscal and monetary stimulus, but this stimulus is finite and will eventually be removed, forcing economic adjustment.
“fiscal spending that's been going on and again you can't do that forever too that has a price”
Consumption has been outpacing income for the last three to four years by a significant margin, a dynamic that can only persist for a limited time before consumption must revert to income levels—a historically typical onset point for recession.
“consumption uh you know versus income and consumption has been outpacing income for the for the last three four four years in in a significant way that can only go on for so long before those have to come back together right you can only outspend your income at least us as as consumers right the government can do it seemingly forever but we can only do it for so long before we have to to bring those back in line and looks like uh you know incomes are not going to catch up to consumption and so consumption right now looks like it's starting to come come back down towards incomes”
Commodities typically decline in the lead-up to recession but bottom and begin rising once recession starts, as markets anticipate the stimulus spending that will drive commodity demand recovery.
“so many people think that Commodities do poorly during recession Commodities do poorly in the leadup to recession once recession begins what do Commodities markets do they start discounting what's an 18 months going to look like what's what's going to look like 18 months from now well all the stimulus that comes during the recession is going to create a boom in demand for all those Commodities and so Comm the oil price historically declines in the lead up to recession once recession begins oil price price bottoms and starts to take off”
From 2005-2008 housing prices were clearly rolling over in a bubble, yet the market continued rising for years and only crashed after the problem became undeniable, illustrating how bubbles can drive investors mad before deflating.
“from 2005 to 2008 you know was a three-year period where it looked like housing prices were rolling over from a clear bubble and I mean go back and watch um you know uh the uh The Big Short right Michael bur you literally lose like going crazy because he knows things are going to go happen to go a certain way but they just don't materialize that way”
The marginal consumer—those on the edge of being able to afford purchases—determines overall consumption trends, and when marginal consumers shift from spending to saving, it creates a cascading effect that reshapes the entire consumption trajectory.
“when the marginal consumer gets tons of money you know put in their bank account from the federal government during the pandemic right and they go spend all that and you get the huge you know economic boom that we had and and followed by uh you know a turn higher in inflation it was that marginal consumer that made the biggest difference now that marginal consumer has shifted in the opposite direction”
The pattern shown historically is that the unemployment rate trends down during an economic expansion, plateaus at a low level, then when it starts rising, it rises sharply and explosively before each recession, suggesting this time will follow the same pattern without a compelling reason for it to be different.
“this chart which is just a chart of the unemployment rate right and it shows for for every recession uh e even the 2020 but let's let's exclude that because that's you know it was for different reasons um you basically have coming out of the the previous recession you have the um unemployment rate Trend down down down it gets very quiescent it bottoms it kind of plateaus and then when it starts Rising it explodes right and we see that again and again and again in just about every recession in this data Series right”
Commodities are historically at all-time lows relative to stocks, and the valuation spread creates an opportunity if rotation occurs, similar to 2001-2011 when value and small-caps dramatically outperformed after the tech peak.
“and it's honestly very reminiscent to me of this 2001 2201 time frame where you had blowoff in the tech stocks and they reversed lower and small caps uh and value stocks were just starting to take off and they would outperform for the next decade dramatically”
Microsoft cannot sell Copilot and Adobe cannot monetize AI features despite massive investment and hype, indicating no killer app or revenue model has emerged despite hundreds of billions of AI spending over two years.
“Microsoft can't sell co-pilot and that's really one of the only only products out there that they're trying to sell Adobe cannot sell uh clearly sell their uh you know any kind of AI upgrades um it's just there's there not revenues um there”
When earnings downgrades occur (likely due to AI revenue miss or margins under pressure), 50x FCF valuations leave little room to absorb the impact, risking sharp declines in mega-cap AI stocks that dominate major indices.
“if those have to be uh you know cut due to things like this you know Apple um you know uh iPhone sales disappointing then not only are we seeing a peak in the you know the earning cycle but the the downside of this cycle is going to going and accelerate and so that doesn't leave a lot of room for for stocks trading 50 times free cash flow to to uh absorb those kinds of um down downgrades”
Bill Dudley has warned of a potential 'bond vigilante' or 'Liz Truss moment' in the US fiscal market, where investors lose confidence in debt sustainability and force sharp rate increases.
“bill Dudley's been talking about we're going to have a uh a showdown with the B Vig Vigilantes at some point we're going to have a list Liz trust moment here in the United States”
Chinese equities are the most hated asset class on the planet today, with every major Wall Street bank calling them uninvestable, which historically signals a contrarian buy opportunity.
“every every Wall Street bank has called them uninvestable and to me that's that's usually a really good good Buy Signal um they trade at ridiculously cheap valuations”
Chinese technology stocks trade at a fraction of the valuation of US peers while having superior growth potential, making them attractive if the Chinese economy stabilizes.
“I'm uh interested in those you know big big tech stocks in China because you look at them compared to the US their you know comparisons and uh they trade at a fraction of the price and have you know much better potential growth ahead of them”
Warren Buffett is holding cash at historically elevated levels relative to his equity portfolio, and both Buffett and Stan Druckenmiller are positioned defensively rather than aggressively buying long-duration bonds, indicating macro concern at the highest levels of investing skill.
“look at Warren Buffett right he's never had more cash at Brookshire hathway relative to the equity portfolio than he does today this the greater in greatest investor in the history of capitalism and he's never been more defensive than he is today”
Because people are so worried about cyclical commodity weakness near-term, the secular bullish case for commodities is largely ignored, creating the opportunity that exists today.
“the the fact that people are so worried about the cyclical impact on Commodities right now today creates a huge opportunity for those of us looking through that to the secular uh the secular Trend which is about as bullish as anything we've seen in our lifetimes”
Michael Burry faced extreme psychological stress and anxiety during the 2005-2008 period, knowing the housing market would collapse but watching prices rise for years before vindication.
“Michael bur you literally lose like going crazy because he knows things are going to go happen to go a certain way but they just don't materialize that way”
Hindenburg Omens and Titanic syndromes (technical indicators of market breadth deterioration) have been triggered more in 2024 than at any previous market peak including 2007, 2001, and 1987, signaling extreme dispersion and extended trends.
“we've had so many um Hindenburg Omens and Titanic syndromes triggered in the stock market this year it's higher than anything we've ever seen before so more than at the 2007 top more than at the 2001 stock market top and these are the only times you really see these types of things”
De-globalization, green energy transition infrastructure, national security-driven re-industrialization, and AI-driven energy demand for data centers are all secular bullish forces for commodities that create a decades-long tailwind.
“the combination of um you know de globalization of uh you know uh The Greening uh you know trying to the Green Revolution um industrializing uh you know uh the our nation you know for for purposes of uh National Security um redoing infrastructure I mean all these things are so bullish for Commodities”
GDP growth of 2.8% in Q2 2024 provides a headline argument for continued economic strength, but real growth may be overstated due to inflation measurement issues and composition (including government spending).
“economy grew at 2.8% or maybe even more I think in Q2 and uh you know inflation's now coming down”
Stock prices are at all-time highs, leading observers to conclude the economy is strong, but this ignores the disconnect between headline indices and deteriorating market internals that signal a top is forming.
“stocks are at all-time highs right now right as this this recording right so it doesn't seem like there's a lot of worry uh going on”
The stock market has fully priced in a soft landing for months, but recent volatility and rotation into defensive stocks (utilities, Costco, Walmart) indicate the market is now repricing toward a harder landing scenario.
“we have come to the point where we fully priced in a soft Landing in the stock market and now what we've seen over the last couple of months with the heighten volatility and things is the market may be going wait a second maybe a soft Landing isn't you know pricing 100% probability of soft Landing was not such a smart idea”
Consumer savings rates have been artificially depressed as households have drawn down their pandemic-era savings, and credit card balances are at record highs at record-high APRs, both forms of unsustainable stimulus that have finite duration.
“American consumers have brought their savings rates down right which has been an artificial stimulus to spending which is just hey normally people save x% they're just not this time for whatever reason and so they've basically kind of been raiding their piggy banks...we've also seen people shifting and increasing amount of their consumption to plastic to credit cards right...and not for nothing they're also charging record high aprs right now”
Apple is trading at 35x earnings because analysts expect a new iPhone super cycle driven by AI capabilities, but early indications are that iPhone sales may be down 10% year-over-year rather than up 10%, representing a massive valuation disconnect.
“Apple trades 35 times earnings and a lot of that is because analysts have suggested they're headed for an new iPhone super cycle driven by you know AI capabilities”
Felder recommends staying on the short duration end of the bond curve and avoiding long-duration bonds due to fiscal deficit concerns and the risk of higher interest rates if stimulus becomes necessary.
“I'm I'm staying on the the short duration end I would just point out that you know I mentioned Warren Buffett and Stan Dr Miller Buffett has famously bought zero coupon bonds um when he's built a cash position today he's completely in treasury bills”
Stan Druckenmiller's primary career profits have come from trading the bond market, not equities, indicating the profit opportunity lies in macro and fixed income rather than stocks during certain cycles.
“Stan ducken Miller says he attributes the vast majority of the profits made during his career to trading the bond market”
AI technology is most effective at making knowledge workers more productive (especially coding) rather than replacing jobs, and applications like Perplexity AI improve search but don't eliminate demand for human intelligence.
“the the best application that I've seen for large language models and and generative AI is encoding and even you know professional coders will tell you that uh it does it really makes them more efficient and that's probably one its most effective uses it's also very helpful at uh you know improving search results and things”
Warren Buffett and other major investors are buying energy stocks (Occidental Petroleum) and energy infrastructure (PBF Energy, Talis Energy) hand-over-fist, indicating conviction in energy's asymmetric risk-reward.
“you see Warren Buffett you see Carlos Slim uh Mexican billionaire buying PBF energy and Talis energy and literally buying Handover fist every day day in Day Out”
The US fiscal deficit is already so massive that if another recession triggers stimulus spending, the stimulus package will have to be larger than the last (which was 'unbelievably massive'), risking runaway inflation that destroys long-bond value.
“the deficit is already so massive and and I think this is something that uh you know keeps me out of the bond market at least is that if we do go in recession and the deficit blows out even more and the and the impetus is going to be to add you know massive stimulus and and what we've seen over the last 15 years is every stimulus package has to be bigger than the last”
The top three stocks (Nvidia, Microsoft, Apple) have already seen their year-over-year earnings growth peak last quarter and are trending down even under very bullish estimates for the next 12 months, and peaks in earnings growth typically align with peaks in multiples.
“I just look at the top three stocks Nvidia Microsoft and Apple and if you take their earnings estimates over the next 12 months they've already peaked their year-over-year earnings growth has already peaked last quarter and is trending down even on you know very bullish estimates for the next 12 months typically when you see that peak in earnings growth it also lines up with a peak in multiples”
AI and data center buildout requires massive energy demand but solar and wind cannot reliably provide intermittent power; therefore natural gas is the solution and abundant cheap U.S. natural gas is poised for massive demand.
“just take AI right even if you think AI the spending is going to continue...data centers...creating such massive amand you know exactly demand for energy right now literally it's it's beyond anything we've seen for decades and decades so how do you generate all that power okay we're not going to go do it through solar and wind um because that it's just intermittent it's not consistent enough but what the country what we have is uh abundant cheap natural gas right and so you're seeing uh you know the amount of new natural gas power plants um you know be announced to be in the works is just growing so rapidly”
The relative performance of Walmart versus S&P luxury retail index has reached the highest level in the past 20 years, a historically accurate recession indicator.
“it's basically just the relative performance of Walmart versus the S&P luxury uh retail index and so when when Walmart is is performing dramatically better than the luxury stocks it's always been a sign of recession and right now that ratio between Walmart to the S&P luxury index is literally as high as it's been at any point in the past 20 years”
True cost-of-living increases reported by consumers on social media range from 6-7% to 20-25% year-over-year, significantly exceeding the 2.5% headline CPI and outpacing wage growth, creating a purchasing power squeeze.
“I put out the question you know CP headline CPI is now 2 and a half percent year-over-year what would you say has been the growth in cost of living for your household over the past 12 months and as you can imagine you know people are coming back with much higher numbers I'd say anything from you know 67% to 20 25%”
Conference call data from major retailers (e.g., Albertsons) shows a recent shift from only low-end consumers seeking discounts to middle-market consumers now focusing on savings, indicating broad-based consumer weakness spreading upmarket.
“Just listens to tons of conference calls and when you start doing that and you listen I think it was the the latest Albertson's call and they they were talking about how for a long time now the the low-end consumer has been really going towards like uh you know store brands and things and looking for ways to save money but they're saying now they're seeing that you know Middle Market consumers and things starting to focus more on on savings”
Stan Druckenmiller said the best economist he knows is the inside of the stock market, meaning the message is not what the S&P 500 price is doing but what's happening under the surface in relative performance of different sectors.
“stand Dr Miller said the best Economist I know is the inside of the stock market right and so it's not necessarily what the S&P 500 is doing it's what's going on under the surface”
A Wylie Coyote moment describes when gravity hasn't yet kicked in but surface indicators clearly show downward direction is inevitable—the economy looks strong but underneath it's already falling.
“is this sort of like a Wy coyote moment I guess is where everything the status quo is still hovering in midair gravity hasn't kicked in yet but looking at the indicators it's pretty clear that that downward is going to be the next direction”
Being defensive does not mean short selling or other aggressive strategies; it means constructing a portfolio positioning comfortable for the investor given expected economic deterioration.
“think about what uh what defensive means to you right I mean Short Selling is not for everybody I actually don't recommend anybody try it but uh I think to think about what is my most comfortable defensive posture in this type of environment is just a worthwhile exercise”
The bond market has been pointing toward recession for a while with two-year yields and Fed rate cut expectations signaling recession, and there has been a disconnect between stocks and bonds but the stock market is coming around to agree with the bond market.
“the bond market has been pointing this direction for a while right bond market is uh you know with the two-year yield and and expectations for Fed rate cuts over the next 12 months bond market is screaming recession right now and so um you know there's been a disconnect between stocks and bonds but I think stock market is coming around to the idea that the bond market uh is is is right on the money here”
August retail sales data showing a 0.1% increase when a decrease was expected is being spun as positive evidence of consumer strength, but on a real (inflation-adjusted) basis retail sales are likely negative.
“the August retail sales numbers...they're being touted as a a big beat and you the consumer is is still hanging in there and it's basically because retail sales increased by 0.1% when they were expected to have decreased so it's like anything that's not complete disaster now is being sort of you know louded as a win right”
Stan Druckenmiller says the stock market discounts what will happen 18 months in the future, not the present, so insiders selling heavily is telling the market that in 18 months earnings will be down double digits, which is why the market is rolling over now.
“Stan says you know if you invest in the present you're going to get run over right the Market you have to know what's going to happen over the next 18 months what is the future what is 18 months in the future going to look like because that's what the stock market is trying to Discount today what will the future look like in 18 months and that's why insiders are telling you right now well in 18 months we're going to be down double digits and earnings um and so that's why I I I say it's it's fascinating to me to see the stock market start to wrestle with the idea of a hard Landing”
Michael Cantor-Witt's Hope framework identifies the E (employment) as the bullwark that stands between the economy and recession, and if employment domino falls, recession becomes almost inevitable.
“we worry about the um the increase in unemployment because of the the self-reinforcing elements that you mentioned um and I'm sure you're familiar with you Michael Canter wit's hope framework and the the E is the bullwark that that stands between the economy and recession and so if that does that Domino does fall over it's kind of game on for recession right”
The Felder Report provides market research and analysis through free weekly blog posts and active Twitter commentary, highlighting underappreciated trends in markets and the economy.
“the Felder report.com is my website um I try and put up a free blog post there once a week just kind of highlighting some of a lot of the stuff we're talking about”