The Chart Trump Is Watching

Who's taking the deal?... The new treasury secretary speaks... The most important price in the world... The story he's telling... A recession signal from Starbucks... New Investor Hour podcast with Hendrik Bessembinder...

Tonight was supposed to be the deadline...

By midnight tonight, more than 2 million federal employees were supposed to have decided whether to accept a "deferred resignation" offer as the White House continues to shake up Washington.

Workers who accepted the offer would be paid through September if they agreed to leave their jobs. By today, as many as 60,000 workers had reportedly decided to do it and presumably avoid uncertainty about possibly losing their jobs anyway.

Here in Maryland, through friends and various sources, I (Corey McLaughlin) had heard directly of a handful who'd chosen this route. But the whole story is in limbo now. This afternoon, a judge hit the pause button on things. From global news service Reuters...

A federal judge on Thursday pushed back to Monday a deadline for U.S. government employees to opt into the Trump administration's "deferred resignation" program offering workers nearly eight months of pay and benefits to leave their jobs.

U.S. District Judge George O'Toole in Boston, at the urging of unions representing more than 800,000 federal employees, pausing a Thursday deadline for workers to decide whether to take the offer while the unions pursue a legal challenge to the program.

So, we'll see what happens here over the next few days. It doesn't change the fact that at the same time, President Donald Trump has ordered a federal hiring "freeze," for workers to return to the office, and for remote jobs to be eliminated in the name of "efficiency."

Here's the intention...

As new Treasury Secretary Scott Bessent told Fox News yesterday...

We're re-privatizing the economy. We're going to have private-sector jobs.

That's opposed to "an economy that's been supported by the government," Bessent added in the interview with host Larry Kudlow, a member of "Trump, Part I."

In yesterday's interview, Bessent pointed to the energy-sector growth, specifically... and the idea of having "smart, safe and sound bank regulation" leading to more lending to Main Street and small businesses... Tariffs, he said, are a "means to an end" with the end being to bring manufacturing back to the U.S...

In theory, tariffs would be a shrinking ice cube – that you would tariff a country and then as the production comes back to the U.S., the income tax (the corporate revenues and the paid income tax) goes up and the tariff income would go down.

He also vouched for an extension of the Trump tax cuts from 2017, too, whose scope is being debated in Republican circles as we speak today. Bessent argued that the country doesn't have a revenue problem, but a spending problem.

The chart Trump is interested in (for now)...

When he's scrolling on his phone or watching television, yes, Trump is interested in what the stock market is doing. He has made that clear over the years, saying that the state of the S&P 500 Index, for example, is a signal of American success or failure.

On that point, the market was "mixed" today, but the S&P 500 and tech-heavy Nasdaq Composite Index traded slightly higher back toward all-time highs again.

But right now, Trump is evidently more interested in another chart. As Bessent said in the same interview yesterday...

He and I are focused on the 10-year Treasury, and what is the yield of that.

The 10-year Treasury is the most popular bond-market benchmark in the world.

Depending on how you look at it, the 10-year yield can be an indicator of economic-growth expectations, inflation, and risk appetite, and is definitely a mix of them all. If investors expect growth and inflation, they'll demand a higher fixed return on bonds to keep up with a growing stock market and outpace inflation.

In the fall, two big factors sent the 10-year yield and others higher...

First was the Federal Reserve's decision in mid-September to cut its benchmark bank-lending rate by 50 basis points. That happened as the labor market appeared to weaken over the summer, but also as inflation numbers remained above the Fed's 2% goal.

As we wrote back then, the bond market was signaling that the move could overheat the economy again and lead to more inflation.

Around the same time and then following that decision, for other reasons, the market became increasingly convinced about what a Trump win meant in November. As our Dr. David "Doc" Eifrig wrote in an Income Intelligence update just after Election Day...

The market's reaction to Trump's victory shows what investors expect from here.

Stocks are up... because investors expect business-friendly policies under Trump that will boost economic growth. Inflation expectations are up, too... as Trump hasn't shown that he'll curb government spending. More spending risks reigniting inflation...

Despite the fact that the Fed is trying to loosen monetary conditions, interest rates had been rising prior to the election... likely because financial markets were anticipating Trump's win.

Since then, rates continued to rise into mid-January just before Trump was inaugurated. But they have fallen from their 4.8% peak on January 14. Here's the 10-year yield's path since Election Day...

The story he's telling...

To Bessent, the bond market loves all the proposed new policies that we're hearing come out of the Trump administration in the first few weeks, and what might come. Bessent said yesterday...

Despite the growth estimates going up, the 10-year is coming down because I believe the bond market is recognizing that energy prices will be lower, and we can have non-inflationary growth.

We cut the spending. We cut the size of government. We get more efficiency in government, and we're going to go into a good interest-rate cycle.

He didn't say it, but a "good interest-rate cycle" assuredly means steadily lower rates. Though the new treasury secretary said he's not going to demand anything from the Fed, and that Trump isn't currently, either (which is what we've said, too)...

[The president] wants lower rates. He's not calling for the Fed to lower rates. He believes that if... we deregulate the economy, if we get this tax bill done, if we get energy down, then rates will take care of themselves...

This jibes with Trump's comment the other day that Powell did the "right" thing last week by keeping short-term interest rates where they are. It makes more sense to hear it now, understanding that Trump doesn't want the 10-year yield to go higher too fast...

Of course, you don't want yields going too low too fast, either... because that means other things, like deteriorating expectations for growth and even deflation.

There's a line somewhere between implementing austerity policies and cutting so much spending that it drags the entire economy into a recession. I don't sense anyone in the White House intends to do that, but as we wrote in our November 27 edition...

In the third quarter of this year, U.S. federal government spending rose by nearly 10%, which made for 0.6 of a percentage point in the headline estimated GDP growth of around 2.8% annualized.

Any meaningful level of cuts would assuredly lead to a decrease in U.S. GDP, and at least a form of the "shock therapy" Argentine President Javier Milei has prescribed over the past year or so.

We just learned last week that federal spending rose 3.2% in the fourth quarter of 2024, according to Uncle Sam's first estimate of quarterly GDP. That added 0.21 percentage points to a headline GDP rate for the quarter that dropped to 2.3% annualized, suggesting an economy that's already slowing.

Here's another signal...

Investors have more than a few recession indicators to keep an eye on. There are Treasury yields and the yield curve, which "un-inverted" in September (something that has typically happened prior to recessions).

Meanwhile, the unemployment rate (which we'll get an update on tomorrow morning from Uncle Sam), manufacturing activity, and even consumer sentiment can show signs of a coming recession.

It can be tough for folks to keep up with all the different signals. But some recession indicators don't need to look at wide-ranging economic data.

Our colleague and Stansberry's Credit Opportunities editor Mike DiBiase has a simpler recession indicator. And it has to do with just one company in the American economy. That's Starbucks (SBUX), as he shared in his December issue. From Mike...

When sales at the coffee giant's stores that have been open for more than one year fall from the previous year, it signals consumers are tightening their belts and eliminating expensive, discretionary treats.

It makes perfect sense. Consumer spending is the largest component of GDP – accounting for 68% of all economic activity.

If folks start getting a cheaper morning coffee, that won't doom the economy on its own. But it signals something about what else people might not be buying.

Mike's Starbucks indicator has been spot-on for the past two recessions. In both 2008 and 2020, Starbucks saw at least one quarter of declining same-store sales (and six straight quarters of declines during the great financial crisis).

Right now, this indicator is flashing again. Look at this chart that Mike shared...

And the most recent data shows no turnaround for the coffee chain. In its quarterly earnings report last week, Starbucks reported a 4% drop in same-store sales. That marked the fourth-straight quarter of declines.

Mike's latest message...

This isn't the only warning sign Mike sees in the economy. In fact, he says five other powerful recession indicators are also flashing red. And he believes bad news for the economy is on the way as a result.

Rather than the rosy circumstances that people like Bessent might be painting, Mike says another inflation spike and a dramatic decline in stocks are on the way. The better news is that Mike's investing strategy can help folks avoid that downturn and even double their money, he says, completely outside of stocks.

Longtime Digest readers and Stansberry Alliance members are aware of the work Mike does in Credit Opportunities. Not only did this strategy protect investors from losses during the 2020 COVID-19 recession, but it also produced average gains of 18% in an average holding period of only 112 days.

Now, Mike and his team are sharing a message from one of their own subscribers about how this investing approach helped him retire early without ever having to worry about the next market crash. To learn more, click here.

In today's mailbag, some more thoughts about a "trade war" with Canada, which was part of our mailbag yesterday... and a question about gold's price action lately... Do you have a comment or question? As always, e-mail us at [email protected].

"Bill M. is spot on. He neglected to mention, however, the booing of the US national anthem at Canadian sports events [happening now]..." – Subscriber Sherwin R.

"Wow, Canada as a 51st state sounds awesome!! At least for the U.S." – Subscriber Kevin B.

"I am a long-term gold investor, and I am at a loss at this point. I understand that gold is a hedge for global instability but, the two major drivers (or least I thought) were FALLING interest rates and inversely to the strength of the dollar. Well, it seems with sticky inflation that rates are not dropping and there is even talk of a mild hike. The dollar is as strong as ever. But gold is making new highs, why? The current administration is also committed to end the conflicts in the Middle East and Ukraine." – Subscriber Wally K.

Corey McLaughlin comment: Wally, it sounds like you're not lost at all. As I mentioned yesterday, while gold is considered a "chaos" hedge, prices also reflect a growing expectation for slower economic growth and lower interest rates ahead.

While inflation has been sticky, several central banks are now amid rate-cutting cycles right now... And if the path of inflation in the U.S. continues to drift lower like it has over the past few months, we could see the Fed take its finger off the "pause" button and do another rate cut by the middle of this year, bringing down the relative value of the dollar in the process.

As we shared nearly a year ago last March about all the reasons we were bullish on gold for 2024, the best time to buy gold (and gold stocks) is right before the Fed shifts to a "loose" monetary policy and lowers interest rates to avoid a looming recession. I wouldn't be surprised to see a "restart" in this shift later this year, though it's not a guarantee.

All the best,

Corey McLaughlin with Nick Koziol
Baltimore, Maryland
February 6, 2025

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