The Lynchpin for it all?

A few years ago, I saw an interview with Michael Kantrowitz, CFA regarding his "H.O.P.E." framework. Basically, it's a model that outlines the road signs to recession.

H- Housing peaks -> O- Orders peak -> P-Profits peak -> E-Employment peaks

When employment finally peaks and starts heading lower, dominoes start to fall as it's pretty hard to pay your bills without a job. Demand falls and a negative feedback loop ensues until we get a bottom. 📉 A reset happens and balance is restored in the system, then cue the start of the next expansion. 📈

The time frame around such happenings obviously varies as every time IS different and yet the same in outcome. Covid has distorted many things obviously, including the H.O.P.E. framework. Kantrowitz expected (myself included) a recession to begin last year which ultimately didn't happen. 😑

You could argue, and I'm sure someone will in the comments, that the model is doesn't work or clearly we are in a new paradigm, etc. etc. And yes, we should ask these questions in order to learn. What was different? Why did this not happen? That's working, but why? This is crazy, can it continue??

It's like a scene out of mad financial scientist movie. That is, if there was an actual mad financial scientist movie. 🤓

Anyway, employment is clearly a lynchpin. It's held up while the other indicators have faltered. And yes, earnings have bounced back some, and sure, earnings "expectations" are strong. (of course they are in a bubble) So maybe we are in the clear... but is employment really that strong?

Markets trade on the headline jobs number and the "revisions" are typically ignored. It's "new" data that matters, not silly 'ole revisions that are more accurate, right? Pffft 😏 That discrepancy might not be a big deal most of the time, but it's at least notable now.

The preliminary jobs data was drastically higher than the final numbers turned out to be. 🤔 Anecdotally, I'm also not seeing nearly as many "help wanted" signs these days, whereas they were everywhere a couple years ago. Probably a coincidence.

If the demand for labor is receding, that's the first step in layoffs. Another is lowering of hours worked, which we've also seen. The spending better pick back up if we want to keep kicking the reset can down the road. 🛣️