Transcription
Hey everyone, and thanks for jumping back into the macroverse. Today, we're going to talk about the mechanism that typically ends business cycles. If you guys like the content, make sure you subscribe to the channel, give the video a thumbs up, and check out ITC Premium at thecryptoverse.com. Use the coupon code ITC50 to get 50% off your first month. Let's go ahead and jump in.
So, we've been putting out videos for a while talking about how business cycles end. We've also been discussing the idea that we are, in fact, in a late business cycle environment. Late business cycle environments are characterized where higher risk assets bleed to lower risk assets. I've called it sort of rolling down the risk curve. Altcoins bleed to Bitcoin. Bitcoin bleeds to stocks. Stocks bleed to gold, and we've been watching that play out for quite some time now.
In this video, I want to talk about the mechanism that typically ends the business cycle. Now, remember, there are two primary aspects of the macro side of things that we discuss and how the intersection of these two things affects the overall business cycle. And it's the intersection of the unemployment rate and inflation rate. Remember, the dual mandate of the Federal Reserve is maximum employment and price stability. Those are the two primary things that we talk about. But there's one more thing that I occasionally reference, and that is where this video comes in. And in this case, it's geopolitical conflict.
Now, geopolitical conflict is by no means my area of expertise, although I imagine a lot of people will become experts on geopolitics on Twitter over the next few days. But the point here is to say, geopolitical conflict is the third thing that can truly affect a business cycle, and I want to talk about that in this video.
So, what we're going to look at, this is the S&P 500. The green shaded regions are where business cycles end. Okay? These are where business cycles typically end, and that's what sort of gets the final phase of the business cycle to play out. That's when you have a contraction in the United States.
Now, what we're going to do is we're going to bring up that business cycle indicator that we created. It is, again, the S&P 500 divided by the unemployment rate squared, multiplied by interest rates, multiplied by the inflation rate in the United States. And we're going to normalize all of that with respect to the money supply. When you do that, you get a chart that looks like this. And what you'll notice is that the business cycle will end. And what ends it is a recession in the United States.
Now, some people are under the illusion that we have business cycles every few years, right? They'll say, "Oh, well, we didn't have a recession in, you know, '96 or in 2014 or whatever, right?" But those are not representative of business cycles. This chart, I think, does a pretty good job of showing you where the business cycles actually are. When you look at it in this way and you see that each business cycle returns back down to these low levels, this metric does, anyways, you can see that saying that, "Hey, there wasn't a recession in 2014." Well, so what? Like, this metric was not elevated in 2014. This metric shows us where the business cycles actually are located, and it reminds us that business cycles take place over many, many, many years. You could argue that the current business cycle has been going on since the pandemic. If you want to ignore the pandemic and say that we can't, that was just sort of a black swan, you could argue that this business cycle has been going on since 2009. So the idea, you know, the quick rebuttal that many will make to say that this is not true, they don't end in recessions, is not true. You can see that that's exactly how they end, right? That's exactly how business cycles end are in recessions. They just take place over much longer periods of time than I think a lot of people give it credit for.
And so the thing that I want to draw your attention to, and one of the things I want to do, is I want to index this to 100 because that gives us some idea of where these things tend to bottom out. They tend to bottom out. This one was at like seven. Uh, this one here was at like seven as well. This one over here was at four. This one was like closer to zero, closer to zero. And right now, the index of this metric is at around 50, 58, 59.
What is the mechanism? What is the mechanism that tends to occur that leads to these things going back down? Well, remember the equation, the equation that we are that we've created is the S&P 500, right? So, SPX divided by the unemployment rate squared, and then we multiply that by the inflation rate, and that's multiplied by the Fed funds rate. Okay? That's the equation, and you can stop there if you want to. If you want to normalize it, which is what I like to do, you can divide all of it by the money supply M2. That is the equation. This is the metric you see on the chart.
Now, there's one thing that tends to spike just before the business cycle ends. Does anyone know what it is? Give you a minute. I'll give you a hint. It tends to occur when geopolitical conflicts arise. So, oil. That's the last piece. That's the last piece to talk about here. The price of oil.
If you look at the price of oil, what you'll notice is that these business cycles tend to occur, they tend to end. They start ending. They don't end immediately, but the beginning of the end of the business cycle occurs when oil spikes. You can see that it spiked in 1990, and then that led into the 1990 recession. The price of oil spiked into 2000, and that led to the recession in 2001. The price of oil spiked here into 2008. That was just before the financial crisis in 2009. Even, even back over here in 2016, the price of oil was spiking. Again, this is not as good of an example because we did, in fact, have more of a black swan event. Not really something that you can necessarily predict on a chart. But regardless, the price of oil was going up, and you could argue that it, it was that the economy wasn't necessarily the strongest back then either. We also had an inverted yield curve, so you could argue it played out all the same, regardless.
And so this cycle, the reason it's been premature to call for a recession, there are two reasons. Reason number one, when the stock market is at all-time highs, you usually don't call for recessions. It normally takes the stock market dropping to then lead us into the negative feedback loop in which recessions occur. So the stock market has to drop, and then you get layoffs by companies. Those layoffs then lead to less demand in the overall economy, which then leads to more layoffs. You have that negative feedback loop. We are not in that negative feedback loop right now. That is a negative feedback loop to be aware of over the next couple of years because if it plays out, it'll be imperative to be aware of why it's happening. Now, again, we're not in that negative feedback loop right now. Initial claims remain low. Layoffs remain, layoffs remain low relative to historical standards. Layoffs are common even in normal times. Okay? In order to have a negative feedback loop, you have to see companies laying off a lot more people than they have been.
So, when you look at this chart, you can see that oil has not been spiking. In fact, if you just look here at the price of oil, you can see that it's, it's, it keeps trying to break out every few months, but it's not able to. I wonder, is the geopolitical conflict arising now in the Middle East? Could it lead to the price of oil spiking up here? Which also could correspond to it bouncing off of this double bottom? Right. So, you had a low in the price of oil in April, and then you had another low, sort of a double bottom in December. I wonder if this double bottom right here is sort of setting oil up to then rally, which then leads us into the final phase of the business cycle. And that's the ending process of it.
Now, I want to say a couple of things. First of all, this just, this stuff does not play out overnight, right? I've said before, the end of this business cycle, it likely will take a couple of years to play out. You know, and if you're over here panic selling Bitcoin, one of the things that Bitcoin normally does is it rallies in early March. And you could argue that in a lot of ways, the reason it rallies is because people get, they panic and they sell it when there's news of geopolitical conflict, and then usually a week later, it then rallies. Uh, conflict is sort of more obvious to everyone, and that's actually what happened in 2022 as well, right? Bitcoin sort of sold off into February with the geopolitical conflicts that were going on back in February of 2022, and then it actually started to rise and then led to a lower high, and then Bitcoin then went lower into April, May, and June. So, think about that, right? Like, this is not that these, these ideas, they don't mean they have to play out tomorrow. But if the price of oil starts to spike, right, if it starts going up, remember that's what typically leads into the end of the business cycle. That's where it typically ends. The start of it is when the oil, the price of oil starts to rise. So I just want people to be aware of that because, you know, we've talked about this for a while, and I think it's only going to become more relevant as the months go on.
The other thing to remember is that markets absolutely hate uncertainty, and when you are in an environment with a lot of uncertainty, they tend to stall out. And you'll actually notice that pretty clearly if you look at the S&P 500. I mean, like, it really hasn't gone anywhere in several months, right? Like, if you zoom in over here, it hasn't gone anywhere since like October. And I think one of the reasons for that is just all the uncertainty.
Now, again, when you look at the year-to-date ROI of the S&P and you look at 2026, and then you look at the average of prior midterm years, normally the weakness really starts to present itself like by the end of March, early April. Sometimes it'll start before then, but that is where you would really start to see that weakness come into play in the stock market as we go further into the year. Um, so just be aware, right? Just be aware.
And I, I want people to remember that this is a process that has played out for decades and decades and decades. The unemployment, the labor market weakens, hires drop, job openings drop, quits drop. That's what's been happening for years now. Again, you can see it pretty clearly. Look at job, if you look at job openings, right? So the first, the first thing that happens as things start to weaken, job openings drop. Hiring drops, and then quits also drop. Right? So all this stuff starts dropping. The unemployment rate is the last thing to move. Right? The unemployment rate, when it goes into its nonlinear phase where it starts to go up quickly, that's where you have your contraction in the United States. That's where you have your recession. When the unemployment rate goes up quickly. The reason it hasn't gone up quickly yet is because we don't have a lot of layoffs.
Now, I think a lot of people are going to blame AI, but I think that's a cover for other things. I think there's actually a lot of overhiring during the pandemic. Uh, I'm not saying nothing will be AI-related, but I do think a lot of companies will use that as a cover, um, to try to sort of save the image of the company because, I mean, whenever you have layoffs, it typically leads to pretty bad morale in the company. And so a lot of times companies will do it, especially if they have the cover to do it under some narrative that other companies are also using. So again, even in the '90s, the unemployment rate was trending higher. It wasn't until it really started to go up where it became nonlinear that the market really started to care. So the unemployment rate has been fine so far, slowly going up. Layoffs are still low. Inflation has been coming back down, even though tariffs took place, hasn't really affected inflation. But one of the bigger components of CPI is the price of oil. And so if oil starts to spike, it can lead into a process, and I've talked about this before, where the Federal Reserve gets checkmated.
If any of you guys play chess, we play chess on the stream all the time. If any of you play chess, and you are, if your opponent has a weakness, you want to exploit that weakness, right? So what do you do? You attack it. They can defend one weakness. They can defend it. But if you then make another weakness on the other side of the board, they can't defend that. And that's what leads to checkmate. Same thing happens in the macro. If the unemployment rate goes up, well, the Fed can defend that. They just cut rates. If inflation goes up, well, they can defend that. They raise rates. They have the tools to fight it. What do they do if the unemployment rate goes up and the inflation rate goes up due to geopolitical conflict leading to the price of oil going up? When that happens, there are then two weaknesses: the unemployment rate and the inflation rate. And that is when the Federal Reserve gets checkmated. We are not there yet, but I do think we will arrive at that moment here within the next year or two.
So, thank you guys for tuning in. If you guys want to check out ITC Premium, you can use the coupon code ITC ITC50 at checkout, and that'll get you 50% off your first month. Um, this is going to be a long process. Don't expect this to play out overnight. Business cycles take years to play out, and that's the hard thing, right? That's the hard thing communicating with people is this is not a five-minute chart. This is a chart that takes place over a very long period of time. And if you're curious why higher risk assets have been doing so poorly for so long, it's because we have been in a late business cycle environment for many years. And in order for things to change, the business cycle needs to reset. And that's what we are in the process of doing.
If you guys like the content, make sure you subscribe to the channel, give the video a thumbs up, and again, check out ITC Premium. I'll see you guys. Oh, by the way, if you also want to check out the new website, benjaminc.com, you can go check out the report we put out over there talking about a lot of these things over the last couple of months. I'll see you guys next time. Bye.