We are Entering the Final Stage…

Key Concepts

• Unemployment Rate as a Recession Indicator: Historical data shows that increases in the unemployment rate often precede or coincide with economic recessions.
• Stock Market Performance vs. Economic Indicators: The current situation presents a divergence where the US stock market is reaching all-time highs despite signs of economic weakness, mirroring historical patterns before recessions.
• Catalysts for Recessions: Historically, economic recessions have been triggered by various catalysts, including pandemics, housing crashes, tech bubbles, oil shocks, and potentially tariffs.
• Oil Shocks: A significant historical catalyst for recessions, characterized by substantial price increases in oil, impacting transportation, manufacturing, and consumer spending.
• Tariffs as a Potential Catalyst: The impact of tariffs on the economy is being compared to oil shocks, with a focus on their effect on GDP and business uncertainty.
• Uncertainty: A key variable in economic downturns, with tariffs creating a higher degree of uncertainty for businesses and investors compared to typical oil price spikes.
• Corporate Profits: A crucial leading indicator for stock market investors, with declining profits historically preceding recessions.
• Business Cycle Stages: The economy is considered to be in the final stage of the business cycle, making it vulnerable to a strong catalyst that could trigger widespread layoffs.
• Technical Analysis in Trading: The importance of objective analysis of market charts and technical indicators (like moving averages) for making trading decisions.

Economic Indicators and Recessionary Signals

The transcript highlights a concerning trend in the US economy, drawing parallels to historical recessionary periods.

• Unemployment Rate: The unemployment rate has risen by 0.5% over the last year and a half. This specific increase is historically significant, as similar movements in 2007 (pre-financial crisis) and 2000 (pre-2001 recession) preceded economic downturns. The text notes that this pattern has only occurred before or during US recessions since the 1960s.
• Stock Market Divergence: Despite these unemployment signals, the US stock market has reached new all-time highs, exhibiting strong returns over the past decade. This divergence is compared to October 2007, when the market also peaked at an all-time high while unemployment was rising, ultimately leading to a 60% market drop.
• Federal Reserve Interest Rates: The Federal Reserve's interest rate has been maintained at its highest level since 2008, a factor that can slow economic growth.
• Index of Leading Economic Indicators (LEI): The LEI has been "moving quite violently lower" for the past three years, a trend that began when the Federal Reserve started raising interest rates in 2022. This pattern of decline in the LEI is consistent with the weakness observed before the 2001 and 2008 recessions.
• Job Growth: Job growth in the US has significantly stalled, as indicated by the non-farm payroll report. The transcript suggests that it would require little to push job growth into contraction territory (below zero).

Historical Recession Catalysts and the Role of Tariffs

The video explores historical catalysts that have triggered economic recessions and assesses the potential impact of current tariffs.

• Stock Market Peaks and Recessions: A 100-year chart of the S&P 500 shows that major stock market peaks have consistently occurred just before or at the onset of official NBER economic recessions.
• Types of Catalysts:
  • Pandemics: 2020, 1920.
  • Asset Bubbles Bursting: Housing crash (2008), tech bubble (2001).
  • Oil Shocks: 1970s, 1990s, and also potentially contributing to the 2001 and 2008 downturns.
• Oil Shocks as a Primary Catalyst:
  • A 75-year chart of oil prices, overlaid with NBER recession bars, demonstrates that oil prices have systematically jumped before every recession in the last 70 years, with the exception of COVID-19.
  • Oil shocks are widely accepted as responsible for downturns in the 1970s, early 1980s, and 1990.
  • Even for the 2001 and 2008 recessions, oil prices spiked beforehand, potentially acting as a catalyst to burst the existing bubbles.
  • On average, oil prices rise by approximately 150% leading up to recessions.
  • Economic Impact of Oil Shocks: Energy is fundamental to society, and rising oil prices increase costs for transportation, manufacturing, and supply chains, leading to higher living costs and increased business expenses. This is described as a "universal form of tax."
• Comparing Oil Shocks to Tariffs:
  • Average Oil Price Increase: ~150%.
  • Average US Tariff Rate: Currently around 18%. While specific tariffs (e.g., on China under Trump) reached 127%, the average is lower.
  • Surface-Level Comparison: Tariffs appear less impactful than oil shocks based on price increases alone.
  • Impact on GDP:
    • A 100% increase in oil prices translates to a ~5% hit to GDP (ECB and Federal Reserve studies).
    • An average oil shock (~150% increase) results in a ~7.5% drag on GDP.
    • Research from Yale and the World Bank suggests tariffs are expected to cause about a 2.6% hit to GDP.
  • Conclusion on GDP Impact: The effect of a classic oil spike is approximately three times larger than the projected impact of tariffs on GDP.

The Critical Role of Uncertainty

Beyond direct economic impact, uncertainty plays a crucial role in triggering economic downturns.

• Tariff-Induced Uncertainty:
  • Initial tariff announcements created significant uncertainty for businesses, leading to frozen hiring plans and postponed deals.
  • This uncertainty has been described as "much higher and more aggressive" than that from typical oil price spikes.
  • Earlier in the year, uncertainty following tariff announcements caused the US stock market to drop by 20%.
  • The transcript suggests this uncertainty was a "real threat" that could have triggered a recession if it had remained high.
• Oil Shock Uncertainty:
  • Large oil price increases can make companies question profitability, leading to slowed hiring and layoffs.
  • However, the uncertainty generated by tariffs is considered more pervasive and impactful.
• Resolution of Uncertainty:
  • Since the initial tariff announcements, there has been increased clarity due to finalized trade deals and ongoing negotiations.
  • This reduction in uncertainty has contributed to the market's recovery to new all-time highs.

Corporate Profits and the Business Cycle

The health of corporate profits is presented as a key determinant for stock market performance and a leading indicator of the business cycle.

• Corporate Profits as a Driver: Stock market investors primarily care about profits. When corporate profits are strong, the market tends to perform well.
• Historical Precedent: Heading into both the 2001 and 2008 recessions, declining corporate profits were observed. This is a critical indicator monitored by Braavos Research.
• Current Situation:
  • Despite a general feeling of economic struggle, corporate America is performing well, with profit margins at record highs.
  • The impact of tariffs has not been significant enough to substantially affect these profit margins.
  • Therefore, widespread layoffs directly resulting from tariffs are considered unlikely "for now."
• Final Stage of the Business Cycle: The economy is believed to be in the final stage of the business cycle, making it vulnerable. A sufficiently strong catalyst could trigger mass layoffs.
• Potential Future Catalysts: Future economic damage could arise from another oil shock or further interest rate hikes by the Federal Reserve.

Trading Strategy and Market Outlook

The transcript concludes with insights into trading strategies and a short-to-medium term market outlook.

• Objective Technical Analysis: Successful trading is emphasized as being about objective analysis of market charts.
• Example of a Trading Decision: In March 2025, when the market broke through key moving averages, Braavos Research shifted to a defensive position. Upon reclaiming these averages, they pivoted to buying technically strong stocks.
• Successful Trades: Examples of profitable trades mentioned include Spotify, NRG, EME, TME, Google, and Oracle, all delivering double-digit returns.
• Market Outlook: The current constructive environment for stocks is expected to continue for at least the next few months, despite the inherent risk of shallow pullbacks.

Braavos Research 5-Year Anniversary Offer

The transcript includes a promotional message for Braavos Research's 5-year anniversary.

• Mission: To provide investors with clear, data-driven research.
• Offer: A special discount on their service, providing full access to real-time trades and their complete trading strategy.
• Rarity: Such discounts are not offered frequently.
• Value Proposition: Guidance through macroeconomic environments, sharing setups and market strategies.