It’s Time to Go Long on the US of A…

Vertigo is commonly defined as the fear of falling.

But Czech author Milan Kundera had a different take on the phenomena…

In the classic novel The Unbearable Lightness of Being, Kundera argues that:

“Vertigo is something other than the fear of falling. It is the voice of emptiness below us which tempts and lures us, it is the desire to fall, against which, terrified, we defend ourselves.”

And I think he’s right — at least when it comes to what I call “stock market vertigo.”

Because it seems like every time you crack open a newspaper or turn on CNBC, some pundit is eagerly predicting the next recession. They’re predicting a stock market collapse or the failure of some new government policy.

Maybe these folks are unhappy about where the market’s headed or who’s in charge. Maybe they’re just unhappy. Maybe, as Kundera suggests, they secretly want to see things fall apart.

Well, my apologies go out to those weirdos. Because that’s just not what the data is telling us about the (now strengthening) US economy. Here’s why I’m going long on the US of A:

Video Transcript:

Welcome to Moneyball Economics.

I’m Andrew Zatlin. And over the last week, we have been getting a lot of critical economic data being reported.

And guess what? It’s indicating that this economy in the US is poised for growth.

Well, that means that the consensus is absolutely wrong because consensus has been saying we are in an economic period of stagflation. Not a lot of economic growth. There’s inflation out there. “Woe is me, woe is me.”

The Zatlin view, the Moneyball view based on my finger on the pulse of the US economy is that no, no, no, we’re poised for a lot of growth this year. In fact, I’ve been calling it the Trump cycle because I think it’s going to extend for many years.

Well, it looks like I got it right. And so if I’m right about where we are in this economy, I want to talk about where we’re going to be, especially because of the Iran war throwing us for another loop. But that’s kind of been the theme of the last year, a lot of these loops coming at us. Let’s talk about what I think is going on. Let’s revisit the premise…

I believe that last year was the end of a COVID cycle where we ramped up and then had to ramp down because we overhired and overspent.

And then in addition to that slowing down that comes when you’re leaning up your operations, we had the Trump tariffs kickoff, which accelerated a lot of leaning up, especially in the manufacturing space.

And then we had a government shutdown and we had deportations.

So last year, massive economic shocks that really led to one place, a leaning up of companies. And in fact, they got too lean. And that’s why last year I started to say, looking at what’s going on, we’re going to start to see a move to growth. We have to. And it’s going to start with the manufacturing space.

But by and large, we’re going to see the data kind of contradictory because when you transition from one economic cycle to a different one, well, not all the data is cohesive. It takes a little bit for that data to kind of come together. And I said we would start to see that data coalescing and being positive the closer we got into late March and early April. And that’s exactly what’s happening.

So I want to review some of the data that’s come out that says, wow, things are starting to turn up. And folks, if I’m right, that means we’ve got a lot more room for growth coming down the pipeline.

Now, last week we got, well, we’ll start off with what are consumers doing? That’s retail spending. What are companies doing? Well, that would be payrolls.

And then third, what’s manufacturing doing? Because off on the side, manufacturing has its own little cycle going on and it’s cycling up. Like I said, it would. In fact, let’s start there. Let’s start with manufacturing.

So manufacturing had payroll growth for the first time in a long time. And in addition, we got these things called the ISM PMI report. So ISM is Institute of Supply Management, and they do surveys of a lot of companies out there in the manufacturing space. Guess what? The surveys turned incredibly positive last month and even more positive this month.

And the main heart of why we can expect more growth here is new orders.

New orders are accelerating. Basically, they are hitting levels we haven’t seen in a couple of years. What’s going on is exactly what I said would be going on. When we had these tariffs come out in conjunction with slight economic slowdown, manufacturers, basically they just stopped stockpiling inventory and they stopped buying machinery, but you can only do that for so long.

Machines and equipment break down. You have to replace them and you can only drag your feet for so long. And guess what? By this quarter, they have to start buying new equipment and new machinery, but they want to because inventories have gotten too lean.

See, for a while they played a game of, we’re going to front run the tariffs, we’re going to bring in lots and lots of inventory. And then that started to get depleted and they bled those inventories down. But guess what? Their customers didn’t want to have a lot of inventory either. And so they limped along another few months.

But right now, as the economy has stabilized and in fact perked up, suddenly the customers, they need orders. They need a little bit more stuff on the shelves. Well, it’s not there. And so you have a ramping up of production. You have a ramping up of employment.

Manufacturing is finally at the place where there’s going to be a positive feedback loop where we’re going to start seeing growth. That also points to what’s going on in Iran, and I’m going to come back to that. But when I look at company hiring, at the individual company level in particular, I’m seeing all these energy companies and commodity companies and manufactured companies ramping up their demand for workers. We are now in a new place. We are inflecting up. Okay, but that’s what’s going on with manufacturing.

Let’s talk about what’s going on with the consumer because, hey, that’s 70% of our economy. Retail sales, while they were down in January, they rebounded strongly in February. Wow. But they rebounded a lot more than just the run rate. And again, that’s because … And that’s despite bad weather, by the way. And I believe that that is largely because the consumer’s strong.

Yeah, you hear about this case shaped economy and all, but at the end of the day, inflation’s coming down. Wages continue to go up.

And as of January 1st, a bunch of states out there raised the minimum wage. So there’s more money in the system. And again, as I mentioned, companies are starting to hire again. So as a result, there’s more money in the system. The costs continue to go down because inflation’s slowing down. And so we’re at a good place. Consumers are also feeling more positive about things, so they’re more willing to spend.

There really aren’t any red flags out there. It was really remarkable though to see that they’re willing to spend a little bit more. I think that’s going to be the theme going forward, which brings us to payrolls. Payrolls is one place where I got it right and pretty much everybody else out there got it wrong.

I said we would see a massively strong March payroll. Payrolls came out adding 178,000 workers and I was at 151,000. The next closest, 100,000 at UBS. In fact, all the so- called experts out there were somewhere in and around a piddly 70,000, and even that 70,000 was up because of a one-time boost and blah, blah, blah.

See, this is the difference between my finger on the pulse and what I see based on my experience working on Main Street and the way experts are really just Wall Street.

They’re looking at regression tables and things like that. Let me explain where they’re getting it wrong and where I’m getting it right…

So again, these are folks who haven’t worked on Main Street. They really don’t know what companies are doing and they’re using a lot of data and a lot of trends and a lot of algorithms to derive things.

And they believe that this economy is stagnating. And so therefore they believe overall, we’re not really seeing any payroll growth. They’re also the victims of regression extrapolation. They go, “Hey, if I look back three months, this is what I’ve been seeing. So the fourth month will be the same.”

That’s not how I go about it.

I look at what companies are really doing. I look at the real data, what consumers are really doing. Are they spending money still on what they used to spend or are they spending more or less? Bottom line, I’ve got a figure on the pulse that’s different from everybody else on Wall Street, and it benefits me.

Now, having said that, I nailed this week. I nailed this week because I see all this growth out there. And I can explain also why I missed the previous month, because folks, I was way above consensus last month.

The difference though, last month, I understand why, and I share with my clients why it was because I did not fully take into account the massive storm impact of hurricane fern, excuse me, snowstorm, fern. I have to confess, I messed up. In February, I forgot that a massive snowstorm of that caliber doesn’t just reduce jobs. It delays the hiring even more in critical areas that are weather sensitive.

And February happens to be the month when, let’s face it, construction’s ramping up, outdoor activities like going out to restaurants, ramping up, and guess what? They don’t ramp up when the storm’s here.

So my thesis that I’ve been sharing with my clients has been, look, in general, this economy’s gearing up for growth. February, we had a storm that held things back. March, no. Disneyland needs to have 40,000 people. They have to staff up. They don’t have a choice now and the weather’s great.

And so my view, and it’s important that we could talk to this layer cake that’s built up that’s payrolls. It’s not just a big number. It’s a cake that has many different layers and each one’s kind of operating differently, except in March when pretty much it’s weather sensitive stuff going on because the weather’s nicer, people are going out.

And so prior to this, I shared with you and with my clients that I expected a sizable number and that’s what came out. And going forward, I don’t think it’s going to change that much. The US economy is doing well, which brings me to Iran. So all of a sudden as we go forward, we got to start taking into account what’s going on with Iran. And I’m going to share my two cents here. The Iranian attacks on the Gulf countries are the big problem. There’s a lot of oil supply out there.

Don’t worry about oil. There’s plenty of oil and the market’s overreacting. Oil prices will come down immediately once we stop bombing Iran.

However, it’s another part of the global supply chain that concerns me. A lot of the cheap energy that’s enjoyed by countries in and around the Gulf is used to produce a lot of different things that are energy intensive like aluminum. So a major aluminum manufacturing plant was taken out.

Iran itself, they made a lot of steel. They were the 10th largest steel producing company in the world, producing 2% of the world’s steel. Well, not anymore. There’s a lot of petrochemicals that have been taken offline.

For example, helium production, about 20% of the world’s helium is made in the Gulf countries, not anymore. And helium is critical to the semiconductor manufacturing process. There’s going to be some adjustments here. In general, you’ll see, for example, aluminum’s not being made in the Gulf.

Well, guess what? Alcoa can ramp up over here.

So the US has buffered in the sense of supply. Prices are set globally, but you can have that supply come online. You can have manufacturing capacity ramp up. And so any supply disruption at the commodity level can get dealt with, fertilizers, these kind of things. But we’re talking near term stuff and gyrations.

We’re talking about higher costs for a while. Let’s face it, gas prices went up a third this month. Consumers are not going to be able to withstand this for much longer.

So my projection is this. If the war ends in the next couple of weeks, then the consequences are minor disruptions in manufacturing a lot of commodities and raw materials, which will lead to higher prices for a couple of months while other global suppliers come online and meet the demand that’s out there.

If it goes past, say, into May, the risk of a recession is real because the consumer’s going to start pulling back. Interest rates will not go down. Inflation will go up. And you can just go down the checklist of headwinds that the US consumer’s going to face and there will be a retrenching.

If the 401ks, if the stock market does not sharply rebound like it did last year, people are going to go on vacation very unhappy and that sentiment matters.

But in the real world, people who are ready to buy a house or a car, well, their 401ks are hit and they’re going to be relying on that 401k to subsidize whatever buying they need to do, the big ticket items. 30% of our economy is tied to housing. And if basically the wallet’s shut and the home buying season starts to sputter, that’s real bad.

We have about a month, and we’re going to revisit this shortly.

In the meantime, we are in it to win it.

Zatlin out.