This Is What An Economic Collapse Actually Looks Like

It's not one big thing right now. It's all the little things that keep adding up. And I don't mean to inflation Swiss consumer prices, for example, they turn negative in May for the first time, since 2021 European consumer prices were the second lowest they've been also since 2021. And both the Swiss national bank and European central bank are going to be cutting rates. China's manufacturing sector just put up its worst numbers in years, as well as us factory orders, which declined for the second straight month. And so did non-residential construction expenditures. All of these are really just the same thing. Tariffs are not going to be inflationary. In fact, they already aren't. We've seen this in us consumer and especially producer prices far more important than any short-term increase in some prices. The distortions to beat tariffs have created a payback period, which is now showing up in more and more places and in more and more ways. China's Shaixin, which I just mentioned, for example, that one absolutely plunged in May, even after tariff delays to the worst since September, 2022. And that's just where it begins. All of these are why the swap market has barely moved from its April deflation lows. Think about that. There's been a lot of optimism and re-risking pouring back into stocks, yet nothing in the swap market. And guess which one actually predicts the economy. Swaps continue to price lower interest rates for a lot longer. And everything that we're getting from the global economy is aligning with that. Hell, even the OECD slashed its growth rate expectations for the U S and China and basically the entire world today to rates prices, the entire global economy, they all keep coming down and they show no signs of stopping. That's what the swap market has been telling us along with some other things like the Swiss franc deflationary signals that have been blaring since the deflationary outbreak in April. While the stock market has dismissed it under trade trade deals and tariff delays, the real markets, the deeper markets, the monetary system itself keeps saying the same warning over and over again, deflationary signals. Now we're getting more and more deflationary results in terms of actual activity, as well as prices themselves. So when you look at swap spreads, you have to ask, why are they still so deeply negative? They have not really budged from their April record lows. There's been some little volatility, a little bit back and forth, but really not that much considering everything that's happened since then they've remained fixed deep in these negative spreads, which are deeply deflationary signals, both the 30 year and the 10 year maturities. They're really close to the record lows that were set during last month's outbreak of liquidations and deflation. So again, you have to ask yourself, why is that? How can this possibly be? The stock market thinks that trade deals and tariff delays are going to fix the problem. The swap market says they aren't the problem to begin with. So remember what swap spreads really tell us is that short-term rates are going to go down, go down a lot and stay there a lot longer. And this started way before we got to trade wars. So it's not really a tariff thing. And throughout the last couple of years, through all the mini reflations and all the inflation freak outs along the way, like now the swap market didn't really budge. Even last year after the carry trade swaps kept turning more and more negative, even if bonds steepened in the last fall, which showed that the swap market was more and more concerned about the long run viability of a global economy that keeps going in the wrong direction. Month after month after month, no matter what happens in all of the, all of these different places, the stimulus, the rate cutting, all of the promises for strong and resilient, the swap market has maintained its posture and through time, as I keep saying, more and more aligns with it than not. We've got a whole bunch of it today, which is aligning with the swap market. By the way, if you want more on interest rate swaps, what they are, what swap spreads are, what it all really means. I've got four basics videos in the URODELL University member section that explains everything. Why swaps are so important. Why swap spreads are a key signal, how we validated and even how the mainstream views incorrectly the swap spread signal. So all of that stuff, check it out at URODELL University in our members section. But right next to swaps, we've got something like the Swiss franc. While everybody's shouting about ditching the dollar, the Swiss franc has been going higher against the dollar. Not because everybody's fleeing the US dollar, but because the Swiss franc going higher is a flight to safety, deflationary signal. And like the swap market, we haven't seen all that much movement in the Swiss franc either. It had plunged to a more than year high, more than a decade high in the middle of April before finally backing off in the first half of May. It got as low as 0.8455 to the US dollar on May 12th. But ever since then, over the past three weeks, like a lot of signals that we're seeing, including interest rate markets where rates are starting to creep lower again, swap spreads, as I mentioned, the Swiss franc has been strengthening all over suggesting stronger deflationary signal, more intense to flight to safety, more risk aversion building back in the marketplace because nothing really much has changed. Nothing meaningful has changed. And then yesterday the franc got as high as 0.8171 to the dollar, which was its highest since April 21st and not really all that far off of the April 21st high point, which again, indicates to play stronger deflationary signals marketplace becoming more and more concerned after not really becoming all that optimistic, like stocks had been that the global economy really is not in a good place and it is really not moving in the right direction. That showed up in Swiss consumer prices as expected. The Swiss CPI was indeed negative in May in May for the first time since March of 2021, the year over year change for the CPI was minus 0.1%. And that, like I said, it was expected because the frank has been stronger, which has lowered the price of imports going into Switzerland. In fact, the foreign contribution to the CPI from the strong Frank Frank has been negative for months already. But here's the thing. Slowing prices domestically in Switzerland have not been able to offset these, these falling prices coming from the outside from the strong Frank. That's why the core CPI slowed to just half a percent year over year in May, which was its lowest since September, 2021, which means this isn't really just about the Frank. It's about the Frank is a signal for the, for the market's perception of the entire global system. And then the economic consequences starting with Switzerland. We've also seen some weak retail sales numbers in Switzerland, along with GDP that was positive in the first quarter, but on the strength of exports, that's not going to continue moving forward. That positive distortion leading to a payback that is beginning to emerge. In negative Swiss consumer prices, the high rate from Frank to the dollar. And then of course the Swiss national bank, which will be reflecting on all that weakness, lowering its rates almost certainly to zero this month, if not maybe negative. And if it doesn't do negative this month, there's a good chance that if they turn negative the next meeting afterward, all of these deflationary signals, global deflationary signals. And another one, Australia, I've talked about Australia repeatedly because Australia has been the one out there, the economy that never experiences a downturn, the economy where it seemed to make more sense to be concerned about consumer prices or what they call inflation. But increasingly over just the last couple of weeks, the reserve bank of Australia has turned from dove to complete and utter chicken. Not only did they cut rates for the second time at their last meeting, they even mentioned in public to the press, the assembled press at the press conference that they had talked about a 50 basis point rate cut. Now they're even going further. The latest news from Australia today, according to Bloomberg, Australia central bank expects global trade uncertainty will weigh on the domestic economy and employment. According to a senior official, helping explain policymakers surprise switch to a dovish stance last month, quote, the baseline forecast is for recent global developments to contribute to slower economic growth in Australia, Australia, and a slightly weaker labor market, at least according to reserve bank assistant governor, Sarah Hunter. That's what she said in the speech on Tuesday today. She added the RBA expects the price of tradable goods will be slightly dampened too. And now money markets are pricing three more rate cuts from the RBA this year. And that's not really the way to interpret money markets, but that's what the mainstream says. What the money markets are saying is that there's a growing probability that even the reserve bank of Australia gets into an entire series of rate cuts and they're getting into an entire series of rate cuts because tariffs are not inflationary. Even the formerly inflationary RBA can see that it's going to dampen prices and more importantly, dampen economic activity up to and including, and especially the labor market. The labor market is under threat everywhere from all of these deflationary signals leading to deflationary outcomes in the real economy. And that's what we're getting more and more of, not just in terms of tariffs and the impact of higher prices, but more importantly, the payback in a fragile and weak economy to begin with over in Europe. Same thing. Consumer price data comes out for the flash reading for the month of May and it's under expectations. Well, not as low certainly as in Switzerland. Europe is back to fretting over whether or not consumer prices are for policymakers going to undershoot their target right back where we were last summer and into the autumn before the artificial high disrupted temporarily, everything distorted, everything temporarily. Now we've got the payback period beginning and what's happening to economic activity along with consumer prices, they're both going lower. What Eurostat reported today were the flash CPI readings for the month of May 2025. Again, May tariff delays and all of that stuff. The year over year change for the CPI across the Eurozone was 1.9% which is the lowest since last September when we last talked about undershooting and it's the second lowest of the cycle so far, which means that consumer prices are in Europe like in the United States slowing down all over again and that while it sounds good, it's not a good sign. On the month consumer prices in May, despite tariffs being implemented, consumer prices were on average flat month over month. The core CPI for the Eurozone came in at 2.3% year over year in May, which was the lowest annual rate since January of 2022, January 2022 and well below the two and a half percent year over year change that analysts were expecting. So again, we're back to undershooting in European consumer prices after the artificial high last year and according to the write up Euro area inflation eased more than expected, dipping below the European central bank's 2% target and of course supporting the case for interest rates to be lowered further as a response to the economic weakness that is showing up in falling consumer price rates, not in accelerating consumer prices like everybody says of tariffs being inflationary, especially at the Federal Reserve. Again, in the real world actual economic activity, actual economic results, it's the complete opposite. It's exactly what all of these deflationary signals have been saying from swap spreads to the Swiss franc to even just the yield curve. And even the mainstream economists at places like the OECD are beginning to recognize these dangers, not inflation. They keep talking about uncertainty. Of course they're going to, they're never going to give up on uncertainty, but more and more they can see the downside here is not in an inflation case or something like 2021 and supply shock. The downside is an economic activity. As I said, increasingly threatening labor markets around the world. So the OECD lowered its growth expectations yet again from just a couple of months ago. What the OECD said was the global outlook is becoming increasingly challenging, substantial increases in trade barriers. I love this one, tighter financial conditions, tighter financial conditions, despite falling interest rates, plus weakened business and consumer confidence and elevated policy. Uncertainty got to throw the uncertainty in there, all post significant risks to growth. If these trends continue, they could substantially dampen economic prospects and they already have. And that's the point. And the other point is, as they said, tighter financial conditions, lower rates go with tighter financial conditions, increased demand for safety and liquidity or what I talked about in yesterday's video, European banks, along with their American counterparts, loading up on government bonds, safety and liquidity, more deflationary signals that even the OECD is recognizing as it lowers global growth expectations. It also lowered expectations for the U S. Back in March, it was thinking the GDP growth of the United States might be 2.2%. It's now cut that down to 1.6%. And as I've mentioned before, an annual rate, that's one and a half percent and less. That's almost, almost certainly going to contain a recession in that calendar year. So the OECD isn't quite there yet, but they're already in the same territory that says traditional recession in the U S because of all of these factors, all these deflationary factors that keep showing up, not disappearing. And therefore less inflationary pressures, though the OECD believes that there'll be more of them, at least in the short run, which leads to the less economic activity that we're now seeing in various places, including China, not surprisingly the Chinese reported some pretty grim manufacturing statistics last night, the Shaixin manufacturing PMI for basically the private economy, smaller and medium sized businesses and producers over in China. The PMI just absolutely plunge well below expectations though expectations shouldn't have been so optimistic and well below what the official PMI had said from earlier this week, the official PMI actually increased a little bit to 49.5 off of the 49.0 low in April, 49.5 is still incredibly low, just not as bad as what Shaixin said. And according to Wang Ji, who's the senior economist at Shaixin, manufacturing supply and demand declined dragged by overseas demand. The downward pressure on the economy has significantly intensified compared to preceding periods. And that's no surprise either because the Chinese are going to experience a payback after an artificial high where they've been front running demand for months and months and months, trying to get stuff produced and shipped and sent before the tariffs hit. All of that demand that was pulled forward has to be paid back and we're now seeing the payback emerge and it's been increasingly ugly and consistent with these deflationary signals. And here's how Bloomberg wrote it. The surprise deterioration manufacturing highlights the need for more support from the government to strengthen consumption and offset shocks to external demand. At the height of tensions with the US last month, the central bank delivered cuts to its policy rate and the reserve requirement ratio, which determines the amount of cash lenders must set aside in reserves. And what good has all of this stimulus done for China or the rest of the world for the several years that the Chinese have been practicing it? Yet the knee jerk reflex from the financial media, from policy makers, from economists and even the stock market is always more stimulus, more stimulus, more stimulus, nevermind the fact that nothing ever gets stimulated. If you have to keep doing it, it doesn't actually work. Einstein's apocryphal definition of insanity. And China's a perfect example. There is no evidence that the gigantic stimulus push last September has produced anything. Yet there continue to be, there continue to be all these calls for more because it doesn't actually work. Another deflationary outbreak, another deflationary symptom of this overall environment. But that highlights the difference between markets like the swap market, which recognized the failure of stimulus and why stimulus hasn't stimulated. And something like stocks, which is where everybody's just looking for another excuse to buy. Give you an example. Just recently, despite the shy scenes plunge in manufacturing, the benchmark MSCI emerging market index rose four tenths of a percent after data showing Chinese manufacturing sector had its worst slumps since September 2022 with higher tariffs, taking a toll on smaller exporters. You may ask yourself, why would stocks be up in that situation? Well, the answer is the manufacturing sector data should increase the chance and size of stimulus from China said Michelle, the Nietzsche, who's a partner and portfolio manager at Vedra Partners. And there it is. The worse it gets in the economy, the better it is for stocks, at least in the short run until stock market gets to be gets to a point where it sees the same deflationary consequences, just more upfront and obvious than what we're getting right now. Stocks love the idea of stimulus until they realize why the stimulus has to happen in the first place. It's all a response to weakness. It's all a response to the deflationary signals that we keep getting all over the world. As I said in the introduction, it's not one big thing right now, like it was in April. It's all the little things that keep popping up all over the landscape and continue to pop up all over the macroeconomic and financial landscape. One after another, after another. I'll give you a couple more before we finish here in the United States. You didn't think the U S was left out of this. Did you factory orders? Those dropped sharply for the second straight month in April, down half a percent in both of those when excluding the distortion of transportation industries. So they already suggest a payback in the factory sector after several months of gains because of the artificial highs. And yes, the U S factory sector was benefiting from the artificial high because you had a lot of components that were coming in from outside the country before tariffs raised the costs on all those, which meant that there was a rush to get things done while all the components were still before they were tariff restricted. And it's not just factory orders. We also see the same thing two straight monthly declines in March and April in non-residential construction spending and non-residential construction spending or capital expenditures or cap X key cyclical signal that we always see rollover and turn lower, right as a traditional recession is developing in the U S economy. And it makes sense. Because investment outlays are going to be timed to perceptions of the longer run business claim. If you think the economy is going into recession, the last thing you want to do is spend a lot of money, borrow a lot of money, take up a lot of resources, building up productive capacity that you're not going to use maybe for the next couple of years because of the downturn in the economy and how long it takes for the recovery to really start. So businesses naturally pull back and spending capital expenditure spending when they're more and more pessimistic about business conditions. And while they're pessimistic about business conditions and pulling back on cap X, they're also holding the line on costs and everything else, including their payrolls and their labor. They're trimming hours. They're getting rid of hiring. They're stopping hiring. And you do see a relationship between lower construction spending and lower employment across the entire economy. There is a loose correlation with construction spending, non-residential construction spending and the establishment survey. So if we're getting a cyclical signal in non-residential construction spending, that's another deflationary sign consistent with everything that means that it isn't trade wars and trade deals. It is the weak economy that's being pushed too far. So we had the big thing, the big announcement in April where things really seem to be going wrong. Consumer sentiment really plunged. And then everybody said, well, it's just consumer sentiment, no big deal. But since then we continue to get signals one after another, starting in the marketplace, the Swiss franc. I mentioned that one. It went way high, came back a little bit, and now it's moving back higher again. Swap spreads. They dropped to record lows at least for their SOFR version back in April during the deflationary event. And then they've remained there the entire time. Two key deflationary signals that suggest something's going on that the stock market certainly isn't picking up. And now we're getting evidence and confirmation of it. And all of these data points for April as well as May that don't show inflation roaring ahead. Nor does it show an economy that's really holding up well, quite the opposite. You've got deflation in Swiss consumer prices. You've got undershooting already in European consumer prices. We've seen similar results in U.S. consumer and producer prices, producer prices especially. You've got the Chinese manufacturing sector that is incredibly weak. And according to the private estimates, fell to the lowest level since the lockdowns in 2022. We got factory orders in the U.S. that are falling. You've got Australia that's becoming so weak that the Reserve Bank of Australia has become full on dovish. All of these things together say the same thing. It's not inflation. It's a weak global economy that's getting weaker all the time. And the payback is still just now emerging. All of this is exactly why European and other banks around the global economy, especially in China and the United States, have become increasingly defensive. And I went over the latest for them in the video link below. As always, thank you very much for joining me. Huge thank you, Eurodal University members and subscribers. And until next time, take care.