Summary
Highlights
The speaker clarifies that the economy and the stock market are distinct. Companies can lay off workers to cut costs and increase profits, which might negatively affect the economy and employment but can lead to higher stock prices due to increased profitability. Stock valuations are based on company profits, and stock prices can rise even during layoffs, while the economy suffers. Stocks typically bottom out before unemployment peaks, as stocks are forward-looking.
The August jobs report shows only 22,000 new jobs, significantly below the needed 80,000 per month to maintain a stable unemployment rate. Revisions for previous months also show declines, with June revised down to negative 27,000 jobs and May down to 19,000. Over the past three months, the average has been about 27,000 jobs per month, which is insufficient. The unemployment rate has risen to 4.3% from 4.0-4.2% since May 2024.
There are 7.4 million unemployed people seeking jobs, while the JOLTS report indicates 7.2 million job openings, meaning less than one job per unemployed person. While there aren't massive layoffs, 34% of CEOs plan to reduce their workforce, a 6% increase from the prior quarter. The increase in 27-week unemployment claims, typically seen during recessions, and declining leading economic indicators, including consumer expectations, manufacturing orders, and housing permits, signal trouble ahead.
New homes now cost less than existing homes for the first time, with 9.2 months of inventory for new homes compared to 4.6 for existing homes. Homeowners are reluctant to sell due to not wanting to lose money or take on higher interest rates. One in seven buyers are canceling sales. Prices are declining in the South and West but are stable or slightly increasing in the Northeast and Midwest. For new homes, this is a buyer's market, with builders offering incentives and dropping prices to sell inventory, which explains the decline in housing permits.
90-day-plus delinquencies across all credit tiers are increasing by 10-20% year-over-year, particularly for car and home loans. However, this is not expected to cause a housing market crash like 2008, as current homeowners are in better financial positions and most have fixed-rate mortgages. Inflation indicators remain above the 2% target: PCE at 2.6% (core 2.9%), Producer Price Index at 3.3% (core 2.8%), and CPI at 2.7% (core 3.1%). Tariffs, which contribute to inflation, might be removed for most goods by October 12th, but those on China, aluminum, steel, and cars will remain.
US GDP contracted by 0.5% in Q1 2025 but expanded by 3.3% in Q2, with an estimated 3% expansion for Q3. While a technical recession (two consecutive quarters of negative GDP) was avoided, economic slowdowns persist, particularly in tech and manufacturing. The speaker predicts the Fed will reduce the federal interest rate by 0.25% to 0.5% at the September 17th FOMC meeting due to declining job data and potential tariff removals, which relieve inflationary pressure. A recession is anticipated in Q4 2025, but it won't be officially declared until 6-9 months after it begins.
The speaker advises against panic, noting that over 90% of people retain jobs even during recessions. Recessions typically last about 10 months. The speaker's strategy includes maintaining a 6+ month emergency fund, primarily in high-yield savings (CDs) and 0-3 month treasury bonds. For money not needed for at least five years, the speaker uses dollar-cost averaging to invest, primarily in S&P 500 (70-80%) and international funds (10-20%), with a small percentage in bonds/CDs/high-yield savings.
The speaker's long-term investments are mostly in international funds and S&P 500. They also mention specific smaller investments: a call option for TLT (bonds) expiring in 2027 and a put option for SPY (S&P 500). The SPY put was based on an expectation of tariff-induced market upset that did not fully materialize due to tariff delays. The speaker also discusses UVXY, which tracks the VIX (fear gauge), used for short-term gains during market panic, cautioning about its time decay.