2/ In Feb 2007, the Federal Reserve Chair, Ben Bernanke, predicted a "soft landing" for US Even the International Monetary Fund shared this optimistic outlook at the time Both predictions came just before the Great Financial Crisis
3/ This chart shows the number of news stories mentioning "soft landing" recently We’ve reached levels of excitement similar to those before the 2008 and 2001 recessions
4/ So, are we seeing history repeat itself? Wall Street seems excited about a soft landing again But before jumping to conclusions, let's clarify: What exactly is a "soft landing"?
5/ A soft landing happens when the Fed raises rates without pushing the economy into a recession Typically, rate hikes slow down the economy But in a soft landing, rates are lowered just in time to prevent a downturn
7/ The "recession bars" mark official periods of economic contraction, as determined by the National Bureau of Economic Research (NBER) They consider various data, but one of the key indicators they track is the unemployment rate
8/ When unemployment rises and people lose jobs, it’s typically classified as a recession The pattern is clear: when the Fed raises interest rates, the unemployment rate usually follows, triggering a recession Yet, this hasn't happened in 2024... so far
9/ A soft landing would mean the Fed lowers interest rates without unemployment spiking This is the outcome many are hoping for today
10/ Believe it or not, a soft landing has happened before In 1995, 1984, and 1967, the Fed raised interest rates, but unemployment stayed low In all 3 instances, the economy avoided a recession
12/ Last week’s government data sparked optimism The unemployment rate came in at 4.1%, below August’s 4.2% And the economy added 254,000 jobs in September These numbers suggest a resilient job market, not one typical of a recession
13/ Right now, 159 million Americans are employed—a record high Recessions usually come with declining employment, but we’re not seeing that The last 4 recessions showed much weaker job markets
15/ A robust job market and stock market were also present in previous soft landings: - 1995 - 1984 - 1967 Today’s strength in jobs + stocks explains why people believe we could be in a similar position
16/ But let's rewind to October 2007 The jobs report then showed record employment, and the stock market hit new highs Yet, just months later, the 2008 recession began History shows a strong market today doesn’t guarantee one tomorrow
17/ Predicting the future economy based on today’s strong job market is like assuming sunny weather today means sunshine tomorrow It could be true, but it could also be very wrong
18/ So, how do we forecast the economy’s next move? One key factor is credit When credit tightens, money becomes less available, slowing the economy Loose credit, on the other hand, fuels economic growth
19/ This chart illustrates the tightness of US credit conditions High readings = tighter credit Lower readings = easier access to money Historically, tight credit preceded recessions
20/ You’ll notice credit became significantly tight in the 2nd half of 2023 Yet no recession has materialized Now, credit is starting to loosen again Could this be the sign of a soft landing? https://x.com/bravosresearch/status/1846239815052022134
21/ Not quite In 1995’s soft landing, credit never tightened The Fed raised rates, but money remained freely available Which prevented an economic slowdown Today’s credit conditions paint a different picture, lowering the odds of a soft landing https://x.com/bravosresearch/status/1846239817652490260
22/ Overlaying the US unemployment rate with credit conditions reveals a lagging relationship When credit tightens, unemployment typically rises a year later This explains why unemployment has edged up in 2024 and why it may continue rising into 2025 https://x.com/bravosresearch/status/1846239820873716138
23/ This trend is something we’ve used to make multiple successful trades at Bravos Research We believe unemployment could keep rising until mid-2025, based on credit conditions And we’ve put the necessary hedges accordingly https://x.com/bravosresearch/status/1846239824862498966
24/ If by mid-2025, unemployment hasn’t spiked and credit conditions have loosened Then that would signal the US has avoided a recession In such an outcome, Wall Street’s long-hoped-for soft landing might just become reality
