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Patrick Hill: The Twilight Zone Economy

19 days ago

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The Twilight Zone Economy

“It is a dimension as vast as space and as timeless as infinity. It is the middle ground between light and shadow, between science (reality) and superstition (bubbles), and it lies between the pit of man’s fears and the summit of his knowledge (fundamentals). This is the dimension of (economic) imagination. It is an area which we call The Twilight Zone.” Rod Serling, introduction to the TV series, 1959  [our comments in ( )]

Our economy has entered the twilight zone. Today, economic leaders base policies on a hoped-for utopia with bubbles called ‘growing markets’ and greed termed ‘good valuations’. The twilight zone economy is a place where fundamentals have disappeared. It is a utopian world of no moral hazard for business, financial or

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Will The Economy Replace Ten Million Jobs By 2022?

February 21, 2021

“Employment will bounce back to pre-pandemic levels by December 31st, 2021.” – Bank of America

Popular forecasts call for a return to pre-pandemic levels of employment and economic activity by yearend. Really? We are not so sure.  The economy lost over 22M jobs between February 2020 and today. The recovery has gained 12M jobs leaving a deficit of 10.7M jobs to replace. This post evaluates trends in employment, hiring, and worker job concerns to determine if this robust forecast to gain 10.7M jobs in 11 months is likely. We begin with a review of automation and job growth at the corporate level from an executive perspective. Next is a look at the worker perspective, a review of automation in various industries, an examination of small business hiring, and an outline of entrepreneur

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Five Forces Driving The 2021 Economy

January 10, 2021

Five Forces Driving the 2021 Economy

Social, cultural, and behavioral patterns create economic forces evident in the buying and selling of goods and services. The pandemic shocked demand and supply channels of the real economy causing social, relationship, geographic and financial dislocations.  These dislocations have changed social behavior, desires, relationships, and expectations temporarily and, in other cases, permanently.  The crisis created profitable opportunities for some businesses and jobs for workers. Yet, other companies experienced losses, debt, and threats to survival.  The pandemic is a once in one hundred year event. As such, there is limited experience and knowledge about the economic consequences of shelter in place lockdowns and health policy. However, we can see

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Work From Home Threatens Commercial Real Estate Valuations

December 10, 2020

“I don’t see any way of avoiding a great deal of pain in the commercial real estate market in 2021. It is almost inevitable. My friends at the Federal Reserve and FDIC are becoming increasingly uncomfortable with what’s going on in the commercial real estate world.”Cam Fine, Former President of Independent Community Bankers of America

WFH Threatens Commercial Real Estate Valuations

Investors hold $3.4T in commercial real estate debt via bonds, direct loans, and securitized loan bundles.  Core city commercial real estate valuations could decline if millions of employees work from home (WFH) permanently. Most analysts assume that once virus infections are contained or ended by vaccinations, workers will flock back to cities.  The question is: will tens of thousands of workers commute

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The Housing Debt Bubble Is Going To Burst

November 12, 2020

The $100B+ Housing Debt Bubble Is Going To Burst

“Being self-employed, I don’t like to add extra bills or burdens, and with a moratorium, there’s no guarantee that later I won’t be further into debt.” 

                                                Lucy, freelance photographer, Colorado – July 2020

Lucy’s concern about accumulating debt echoes across America. Millions of renters and homeowners are anxious about paying both their monthly housing bill and a ballooning debt balance.

Based on present missed payment rates, consumers will accumulate at least $100B in housing debt by January 2021. The following model describes a set of linked health, social and economic events. These events are likely to unfold in next 6 months.  An uncontrolled wave of virus infections drives the

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Executive – Employee Catch-22 Jeopardizes The Recovery

September 24, 2020

Executive – Employee Catch-22 Jeopardizes The Recovery

“A catch-22 is a paradoxical situation from which an individual cannot escape because of contradictory rules or limitations. The term was coined by Joseph Heller in his 1961 novel Catch – 22”   Wikipedia

The Catch-22 is this: executives will not hire until they see sustainable sales growth and employees will not spend until they feel confident about their job future.  

The challenge for executives and employees is sustainable employment. They both look for the other to take the first step to achieve sustainable employment.  The recovery will not gain momentum until executives gain confidence in future sales. Employees will not buy as much as the executives prefer until the threat of layoffs abates and hiring resumes.

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Two Economies: One Growing, the Other Declining

August 29, 2020

A Tale of Two Economies: One Growing, the Other Declining

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epic of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us…”

                                                 Opening Sentence – A Tale of Two Cities, Charles Dickens

In his iconic opening to A Tale of Two Cities, Dickens compares the peace, wisdom, and hope of London to the peril, uncertainty, and desperation of Paris at the time of the French Revolution. 

The Professional Economy

Today in a similar way, we have two economies interlocked

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Will Consumers Bailout The Economy?

July 30, 2020

Will Consumers Bailout the Economy?

“Absent any policy and behavioral changes…most likely (will lead) to an overall GDP contraction for 2020 in the 8% to 12% range, assuming no second round of infections in improving states such as New York. Moreover, the recovery of lost output would not be completed in 2021. And the uncertainty surrounding these predictions would notably increase, with the balance of risk tilted to the downside.”

                                                Mohammed El-Erian, Allianz, Chief Economic Advisor, 6/30/20

The nation faces the worst economy since the Great Depression. The National Bureau of Economic Research – NBER has declared that a recession started last February.  Uncertainty is increasing as there are signals that the recovery is stagnating

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The Survival of Millions of Small Businesses Is Threatened

July 9, 2020

The Survival of Millions of Small Businesses Is Threatened: Let’s Support Them!

“I can’t throw everything I worked for under the bridge. I’m sitting in my retirement.”Dennis Dreibelbis – owner of the G Bridge Lodge, in a restaurant he purchased in 1984 investing long term to support his retirement –  6/10/20

Mr. Dreibelbis is 69 years old. In mid–March he shut down his Pennsylvania restaurant. He quickly fell behind in payments to vendors, rent, utilities, and payroll. He hopes to see a return of customers when he reopens this summer.  He received a Payroll Protection Program loan which goes mostly to pay his staff. He still has insurance, maintenance, and other unpaid bills pilling up. Dreibelbis does not want to close the business and lose his investment or be forced to sell in a

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COVID-19 Triggers Transformation into a New Economy – Part 2

June 4, 2020

Note: This is Part 2 of a two-part article including sections 4 – and 5 – please read Part 1 for sections 1) COVID-19 Unique Event, 2) Virus Drives the Economy, and 3) Outlook for the U.S. Economy


“The economy was a very nice photo, than the pandemic turned it into a jigsaws puzzle that’s all messed up, now we’re trying to put it together and figure out if all the pieces are still here or not.”

Mohammed A. El-Arian, Chief Economist, Allianz

The novel COVID-19 virus has driven the world economy into the deepest recession since the Great Depression while shattering the linkages that previously held it together. Two months into the crisis and economists are still trying to figure out what has happened to supply chains and demand channels. As El-Arian, notes key

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COVID-19 Triggers Transformation into a New Economy – Part 1

May 21, 2020

The COVID-19 pandemic has triggered a transformation into a “new economy.”

“The economy was a very nice photo, than the pandemic turned it into a jigsaws puzzle that’s all messed up, now we’re trying to put it together and figure out if all the pieces are still here or not.”Mohammed A. El-Arian, Chief Economist, Allianz

The novel COVID-19 virus has driven the world economy into the deepest recession since the Great Depression and shattered the linkages that held it together. Economists are still trying to make sense of what has happened to the supply chain and demand channels. As El-Arian, notes key economic components may be missing. As such, some new components will need to be created. All these components will then need to realign into a “New Economy.”

The challenge of

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A Pandemic Iceberg Hits the ‘Unsinkable’ U.S. Economy– A Map Ahead

April 16, 2020

The ‘unsinkable’ Titanic was designed to withstand a breach of four compartments, ensuring the ship would stay afloat.  On the evening of April 14, 1912, the ship hit an iceberg, breaching five compartments, and within two and half hours, the vessel sank.  Many investors think the U.S. economy, like the Titanic, is unsinkable as well. Yet, we have discovered the economy can sink when the most vulnerable sector of our economy is hit – the consumer. The country has been severely damaged by a pandemic iceberg aimed right at the consumer.  Never in the history of our country have we shut down 25% of economic output in a few weeks. In just three short weeks, millions of people are out of work or furloughed with millions more to come.  Goldman Sachs expects an unemployment rate of 16% or

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How COVID-19 May Move Markets

March 25, 2020

As the pandemic drives markets to the 2018 lows, certain
relationships in trends between the markets and the COVID-19 virus are evident.  As social distancing increases, markets
continue to fall. So, by looking at the expected breakout levels of the
virus, we can assess possible market reactions. The chart below shows the
inverse correlation between the expected peaks of the virus and potential lows
in the markets: 

Source: FIPhysician – & Patrick Hill  – 3/18/20

In the COVID-19 – SPX model above, the steep red line is a
forecast of new cases if social distancing were not in place.  The green line shows how social distancing
will flatten the curve of new cases. The blue curve shows how growth in the
pandemic may unfold doubling every 4 – 7 days. 
The lower chart shows how

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Will The Corona Virus Trigger A Recession?

February 14, 2020

As if waking up to an economic nightmare, investors see
headlines like these and many others flashing across their Bloomberg terminals:

Facebook says Oculus headphone production will be delayed due to virusApple extends country wide store closing for another weekFoxconn delays iPhone productionQualcomm cuts production forecast due to virus uncertaintyStarbucks announces China store closures through Lunar New Year, uncertain when they may reopenUS Steel flashes a warning of a cut in demandNike shoe production haltedUnder Armour missed on sales, and their outlook is weak. They partially blamed the Corona Virus outbreak.IEA forecasts drop in oil demand this quarter- first time in a decadeThe seemingly
never ending list of delays, disruptions, and cuts rolls on from retail to high

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Can Six Myths Keep The Market Going?

January 8, 2020

Piper Jaffray forecasts by year end 2020, the S&P 500 (SPX) will hit 3600, a 12.8 % increase. Of eighteen analysts interviewed by Marketwatch only three forecasters expect a decline for the SPX. Will the SPX reach 3600?  The SPX has soared over 400 % from a low of 666 in 2009 to over 3200 at the close of 2019. Mapping the SPX ten year history onto a psychology market cycle map of growth and decline phases poses interesting questions. As the market has zoomed over 400% upwards over ten years, it is clearly in the Mania Phase. Yet, the US economy is growing at the slowest rate of any economic recovery since WWII at 2.2 % GDP per year, why the disconnect?

Patrick Hill – 12-31-19

reason for the disconnect is investment analysts and the media lead investors
to believe

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Is Inflation Really Under Control

December 6, 2019

analysts have been discussing the pros and cons of using negative interest
rates to keep the U.S. economy growing.  Despite
this, Fed Chairman Jerome Powell has said that he does not anticipate the
Federal Reserve will implement a policy of negative interest rates as it may be
detrimental to the economy.  One argument
against negative interest rates is that they would squeeze bank margins and
create more financial uncertainty. However, upon examining the actual rate of
inflation we are likely already in a ‘de facto’ negative ­­interest
rate environment. Multiple inflation data sources show that actual inflation maybe
5%. With the ten year Treasury bond at 1.75%, there is an interest rate gap of – 3.25%. Let’s look at multiple inflation data
points to understand why there is such

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Will Consumers Bail Out The Economy

November 15, 2019

Consumers are viewed by many economic analysts as the last hope to
keep the economy humming as the manufacturing sector seems to be in a
recession. To wit, in the newly released third-quarter GDP report, personal
consumption accounted for 100% of GDP growth.  However, weakness in the business sector may
trigger a decline in consumer confidence. The October ISM manufacturing sector
report showed a contraction, while the ISM services report indicated continued
expansion. Yet, the less followed PMI Services report for October came in above
50 but with a note of caution.  Chris
Williamson, Markit Chief Business Economist noted:

“With inflows of new work drying up, firms are relying on previously-placed orders to sustain current output growth, meaning the rate of expansion could weaken

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The Market Soars As Corporate Profits Slump!

November 1, 2019

The SPX recorded
new highs this week.  Investors appear to
be excited about the U.S. – China Phase 1 trade agreement, which only goes so
far in ending the trade war.  Plus, the
Fed is cutting interest rates, injecting $100 billion in repo financing over
the next month, and embarking on a new round of QE. So, is it clear sailing for
corporate America? Maybe companies are not as financially viable as record SPX
levels would indicate.

Let’s look
at the lifeblood of a company, cash flow. 
Goldman Sachs analysis of corporate cash flows shows that SPX companies
are actually running, in aggregate, negative cash flow at 103.8% while keeping
stock buybacks and dividends flowing to shareholders. Debt is up 8% squeezing
corporate cash flow to the point where aggregate cash flows are down 15%

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Will Monetary or Fiscal Stimulus Turnaround the Next Recession?

October 11, 2019

recession is emerging with interest rate curves inverted, the end of the
business cycle at hand, world trade falling, and consumers and businesses
beginning to pull back on spending.  The question is: will monetary or fiscal stimulus
turn around a recession? 

In this
post, we find both stimulus alternatives likely to be too weak to have the
necessary economic impact to lift the economy out of a recession. Finally, we
will identify the key characteristics of a coming recession and the
implications for investors.

economy is at the nexus of several major economic trends formed over decades
that are limiting monetary and fiscal options. The monetary policy of central
banks has caused world economies to be abundant in liquidity, yet producing limited
growth. Central bankers in

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Today’s Melt Up Triggers Tomorrow’s Melt Down

September 18, 2019

Since November of 2016, the NDX has soared by 72% and is poised to
break the recent all-time high of 8027. Today, it seems that sentiment is
shifting back to selling bonds and buying riskier equities with hyped
estimates. FAANG stocks have fueled an ongoing rally, via stock buybacks, non –
GAAP financial gimmicky, and promises of eventual profitability for many
unicorn startups.

Source: Stockcharts.com – 9/12/19

has moved prices up as the market has suspended its disbelief of key
fundamentals like future earnings, declining sales, job layoffs, contracting
world trade, and negative cash flow.

First, let’s look at downward revised earnings forecasts for the rest of the year indicating a decline almost to a contraction level in the U.S.:

Sources: Bloomberg,

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Navigating A Two Block Trade World

August 28, 2019

“Investors Need to Be Ready for a Two Block Trade World – U.S. and China”

On Bloomberg TV, VMware CEO, Pat Gelsinger, observed that with
escalation of the trade war he sees, “two
separate trading blocks forming the United States and China, we want to be a
player in both and will have to adjust, 
our strategy, investments, supply
chains and operations as a result.” 
He sees both countries digging in for the foreseeable future.

The evolution of a two trading block global economy has a major
impact on how businesses operate in the next five to ten years.  Those with major operations in China that ship
products to the U.S. will continue to be adversely affected by U.S. tariffs on
Chinese goods. Growing trade headwinds also face, U.S. companies shipping goods
to China. Besides tariffs,

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Stock Buybacks Imperil Corporate Viability

August 23, 2019

Goldman Sachs just completed an analysis of corporate balance
sheets and found that dividend and stock buybacks accounted for 103.8% of their
free cash flow. Meaning that they were paying more out in cash than they had on
hand!  Over the last year, free cash flow has dropped 15 %, while debt is
up 8 %.

This corporate
balance sheet squeeze is unprecedented; it is the worst cash flow crisis since
1980 and is unsustainable.  Corporate executives have turned to excessive
borrowing levels to keep this financial merry-go-round going. A good amount of
this debt is used for stock buybacks to hype share prices and keep earnings per
share higher than they would be without buybacks.  

If sales and
profits drop due to the trade war and/or consumer spending declines as it has
in the last

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