When I sailed ocean races as a kid, I recall the feeling one would get when you noticed a distant calm approaching – the doldrums. You were making good time – of course in the middle of nowhere and many miles from any land on which to take a break – and you would see the calm sea ahead. Sure, we looked for a way around it – but more often than not – our choice was to simply go through it instead. It was a letdown no matter how hard you fought it.

That is the sort of feeling one gets as we approach another summer. The calm awaits – the pause in activity – the shifting waters and dull currents will conjure up ghosts where they do not exist. It is our job to remain focused and take advantage of those errors as the summer unfolds.

Our view stands : pray for a summer swoon – and build when/if it arrives. Our data suggest this 18 month pause has a bit longer to go but once complete, once all are assured the end is near – the upside will be set as the surprise.

“Out of Left Field”

Usually when you hear that term used, it is describing a negative surprise of some sort. Something no one saw coming. I suggest we think in terms of what no one sees coming as we approach the summer doldrums.

If we had 1000 people in a room and suggested to them the “recession” so many fear has pretty much already been going on for the last year, we’d be thought of as detached I am sure. I don’t mean the normal way we historically read a recession but I suggest to you these are no longer “historical” economic times.

New businesses today are planning/building drones, apps, self-driving cars, robotics, cloud operations, medical technologies, defense and space technologies and even AI tools which go far beyond what the boomers created. Let’s face it, our perception needs to change with the times.

The “out of left field thought” may need to be twisted around a bit this time.

It may need to be seen more like we saw in the mid-80’s or in ’94 and ’95. In both periods we saw a significant pause in growth. It was termed a stall in earnings. Each was marked by internal sector shifts. Each came close to “recessionary readings” but neither actually became a recession. In retrospect what they were both building toward was not a recession but instead, a new period of extended growth.

I would argue that we need to see our current situation in the same manner.

An important sector of our economy has seen a tectonic shift in its structure and viability. The media has covered it in a way where one would think only of Apocalypse Now. This, of course, was wrong and only inflamed fears again – causing the soft activity we have seen in recent quarters. As stated on many occasions – you tell enough people bad new for long enough and they will act in a self-fulfilling manner.

The oil sector will emerge better, stronger and more productive than before – and it won’t need $110 oil to be profitable.

These are not perilous times. They are just changing times.

The Barbell Economy exists and it is flowing through the system underneath all the chaotic headline events which capture so much attention. Make sure you are aware of it – we update those portfolios for members each week and post them above. Members can see all positions in their Private Member Area.

Fresh Data Snapshots

Services data beat this morning and orders came in better than expected. Both areas suggesting that generational shifts are at work and being overlooked by most:

Fear Over LEI’s?

Like the other periods of “stall” in past decades referenced above, LEI’s also caused concern at the time. Today they are doing the same.

In summary though, as the Bespoke chart below will show, the averages are right in the middle of expansion territory – not great – but not recession zones either.

It’s our fears working against us when we just sub-consciously assume that all items “out of left field” will be bad news.

Be ready for the surprise instead – good news.

In the schematic above the top left shows a chart of a diffusion index which measures the number of states with leading indicators above 0.

Currently, 44 states are positive on a year over year basis. Indiana, Iowa, Louisiana, North Dakota, Oklahoma, Pennsylvania and Wyoming are down YOY currently. That compares with four states (Alaska, Louisiana, North Dakota, and Wyoming) down or flat YOY in the DEC data.

It may be helpful to note that most of states showing weakness (Louisiana, North Dakota, Oklahoma, and Wyoming) are highly dependent on the energy sector, a sign of the impact that the shift in oil prices has had on those local economies.

The current status is not unique. As I noted above, we witnessed similar mid-cycle pauses take place in both the mid-80’s and 90’s (’94-’95), of course for different reasons.

The red line on each chart indicates the level which historically indicated the start of a recession in the past. Also included is the average YOY change in leading indicators and the median YOY change. As I noted at the start, both are right in the middle of expansion territory with neither showing a huge recession risk.

Closing Thought for the Day

Our big picture data and view suggests it is not a coincidence that this same “launch-pad” structure is forming in the market today. This period of the last 18 months (with maybe another quarter or two ahead) is masking the underlying strength building in the economy as new industry, new tools, new processes are being build as the next generation prepares to take the reins in earnest.

Once again:

Think demographics – not economics
Count people first..money follows.

Patience and discipline – pray for a dip – and a summer swoon.

More inside.