4 Tenets

”I’m serious man, you gotta read some books.”

????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????------Born on the 4th of July

?

Going into the second half of the year, I wanted to state my views as clearly as possible with four points on the fourth.

?

Recession Clock Just Started Ticking Dept: The 2-year yield has been above the 10-year yield for 12 months (if you smooth the series over one month, it inverted on July 5, 2022, although it feels longer than that). That yield curve inversion tends to lead recessions by a year to 18 months, so we are now entering the right period for a recession to begin, just as everyone is ready to dismiss the perfect recession indicator as flawed. The 3-month yield vs. the 10-year note yield has been inverted for seven months, and the typical lead time for that yield curve inversion before recessions occur is six months to 18 months, so we are right on time.

?

Dodged a Bullet Dept: Fiscal policy is the market embodiment of the live-by-the-sword die-by-the-sword dynamic. While investors enjoyed the relief of yet another government shutdown avoidance, the odds are rising for real problems in September. Perhaps two to three months ahead is too far in Zero Days Till Expiration Land, but the market has not stopped being a discounting mechanism.

?

Levity versus Gravity Dept: Wages are not coming down fast enough and core services prices will stay high due to labor negotiations. The Federal Reserve is focused, rightfully, on wages as the driver of services inflation. While 3-month annualized core services PCE ex-shelter has fallen from 5.0% in January to 3.8% in May, and the NFIB survey’s leading indicators of Plans to Reduce Compensation and Prices is trending in the right direction, core services inflation remains sticky. The upcoming UPS and UAW contract negotiations will capture the attention of the Fed, and the market will have to deal with the fact the there is a long way to go before 2% inflation looks likely.

?

Enthusiasm Gap Dept: If everyone is so convinced that generative AI is going to create a regime shift in the earnings prospects of the mega cap tech companies, why aren’t their insiders buying? No one knows order books and strategic plans and margin and revenue forecasts better than the chief financial, accounting, and technology officers at the top seven tech companies. The fact that there is a vacuum of insider buying orders should be a wake-up call. Corporate officers are not buying into the re-rating of their companies’ prospects: when there is a divergence between unbridled optimism from investors and clear-headed indifference from insiders, be wary.

?

?

One Line Regarding the Markets

The daily chart below is the Dow Jones Industrial Average from the January 2022 high:

I like the fact that the Dow has tested and failed the 34,300 area no less than nine times. There is a similar dynamic for the S&P 500 at the 4325 August high. Because we are expecting a sobering reality check in risk markets, any move below 34,300 in the Dow and 4325 in the S&P is significant, and actionable. It does not pay to anticipate a market turn, however, so we are relying on our models to signal a turn. Keeping it simple for now is best, so respect the markets above those two levels.

?

?Peter Corey

PavePro

? Copyright 2023 Pave Finance, Inc. All Rights Reserved Pave is an SEC registered investment adviser. Such registration does not imply any level of expertise by the registrant. Pave provides services on a non-discretionary basis. Clients are responsible for opening a brokerage account and placing any trades in their own account. Clients will also need to input their investments positions and trading activity in our application. The enclosed material is for educational purposes only, any client subscribing to Pave’s advisory services will need to accept the Term of Service and execute, by accepting, the Investment Advisory Agreement in the Pave application. Investing is speculative and involves risk, including the possible loss of principal. The information contained herein is provided for discussion purposes only, is only a summary of key information, is not complete, and does not contain certain material information about Pave or any of Pave’s affiliates and is subject to change without notice. The distribution of the information contained herein in certain jurisdictions may be restricted, and Pave may not be available in all jurisdictions.?

Unless otherwise indicated, the information contained herein is believed to be accurate as of the date it was produced. No representation or warranty is made as to its continued accuracy after such date. This material is not intended to be, nor should it be construed or used as an offer to sell, or a solicitation of any offer to buy, any securities or investment advice. No offer or solicitation may be made prior to the delivery of an Investment Management Agreement, which will contain additional information about Pave, including disclosures relating to risk factors and conflicts of interest. Clients will also receive ADV Part 2A, 2B and Part III (Form CRS). You should review all the material provided about the advisor. In the event of any discrepancies between the information contained herein and the Investment Management Agreement, the Investment Management Agreement will control. You should make an independent investigation of the investment described herein, including consulting your tax, legal, accounting or other advisors about the matters discussed herein. Pave’s non-discretionary investment methodology may not be suitable for all investors. There can be no assurance that any investment objectives will be achieved. Investment losses may occur, and investors could lose some or all of their investment. No guarantee or representation is made that Pave’s investment methodology will be successful. Nothing herein is intended to imply that Pave’s investment methodology may be considered "conservative", "safe", "risk free" or "risk averse”. Economic, market and other conditions could also cause Pave to alter the investment methodology. Certain information contained in this material may constitute "forward-looking statements," which can be identified by the use of forward-looking terminology such as "may", "will", "should", "expect", "anticipate", "target", "project", "estimate", "intend", "continue" or "believe" or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of Pave’s methodology may differ materially from those reflected or contemplated in such forward-looking statements. Pave believes that the information contained in this material to be reliable but does not warrant its accuracy or completeness.?

?