Long-term economic predictions are largely useless for trading because market dynamics are short-term. The real value lies in daily or weekly portfolio adjustments and risk management, which are uncorrelated with year-long forecasts.
The resilience of consumer spending, despite weak employment growth, is driven by affluent consumers liquidating assets or drawing down cash. This balance sheet-driven consumption explains why traditional income-based models (like savings rates) are failing to predict a slowdown.
While aggregate gross investment numbers look strong due to the AI boom, this hides weakness in classic cyclical sectors like residential investment, construction, and industrial equipment. This divergence creates opportunities for trades like long tech/short energy, which capitalizes on the two-speed economy.
According to the Kalecki-Levy equation, gross investment spending immediately becomes revenue for another company. Unlike consumption-driven revenue which has immediate wage costs, the cost of investment (depreciation) is recognized slowly over time, creating a powerful, immediate boost to aggregate corporate profits.
Traditional analysis links real GDP growth to corporate profits. However, in an inflationary period, strong nominal growth can flow directly to revenues and boost profits even if real output contracts, especially if wage growth lags. This makes nominal figures a better indicator for equity markets.
The massive increase in government debt held privately has broken the monetary policy transmission mechanism. When the Fed raises rates, the private sector's interest income from Treasury holdings now rises significantly, creating a stimulus that counteracts the tightening effect on borrowing costs.
Official liquidity measures like Fed balance sheet levels are too slow to be tradable. A better approach is to monitor the symptoms of liquidity conditions in real-time market data. Indicators like SOFR spreads, commercial paper spreads, and unusual yield curve shapes reveal the health of private credit creation.
When bond prices exhibit short-term mean reversion (up one day, down the next), it's a quantitative sign of deep uncertainty. This reflects the market and the Fed struggling to choose between fighting inflation and addressing weakening employment, leading to no clear trend until one indicator decisively breaks out.