Why The Market Is Exploding While The Economy Crashes w/ Henrik Zeberg
🎯 Summary
Podcast Episode Summary: Why The Market Is Exploding While The Economy Crashes w/ Henrik Zeberg
This episode of Milk Road Macro features macro economist Henrik Zeberg, Head Macro Economist at Swissblock and author of The Monetary House of Cards, discussing the divergence between soaring asset markets and deteriorating real economic indicators, framed through his cyclical business model.
1. Focus Area: The discussion centers on Global Macroeconomics and Business Cycles, specifically analyzing the current phase of the economic cycle, the impact of central bank liquidity, the divergence between financial assets (stocks, gold, crypto) and the real economy (employment, consumer health), and identifying key leading indicators for an impending market top.
2. Key Technical Insights:
- Zeeberg Business Cycle Model: The economy moves in four phases relative to its long-term average GDP growth trend: 1) Above trend and rising, 2) Above trend and declining, 3) Below trend and declining, and 4) Below trend and rising. The current market euphoria is occurring in Phase 2, as the real economy rolls over.
- Indicator Hierarchy: Zeberg emphasizes a three-tiered indicator system: Leading (e.g., housing, yield spreads, which signal turns early), Coincidence (e.g., employment, GDP, which confirm the turn later), and Lagging (e.g., inflation, yields, which move after the real economy turns).
- Leading Indicator Reliability: Zeberg trusts leading indicators (like those he models) that have historically provided accurate recession calls on a quarterly basis, noting a crossover in late 2024, mirroring the pre-2007 recession signal.
3. Market/Investment Angle:
- Current Bullishness as a Warning Sign: The explosive rally in risk assets (S&P 500, Gold, Bitcoin) is interpreted not as a sign of economic health, but as a classic blow-off top phase, often seen just before the end of a cycle when liquidity floods in late.
- The Dollar as the Ultimate Trigger: The entire asset rally is sustained by a declining US Dollar (DXY). The moment the DXY finds a technical bottom and begins a sustained rise (potentially targeting 117-120), it signals “game over” for risk assets.
- Investment Stance: Zeberg remains “extremely bullish” on risk assets for now because the blow-off top phase has not yet concluded, advising to enjoy the party while waiting for the dollar reversal signal.
4. Notable Companies/People:
- Henrik Zeberg: Central figure, macro economist, author, proponent of the cyclical model.
- Jerome Powell (Fed Chair): Criticized for being detached from the reality of consumer distress and brushing off concerns about consumer confidence.
- The Big Short (Reference): Used to illustrate the concept that critical negative data (like consumer stress) is often ignored by the financial world until it’s too late.
5. Regulatory/Policy Discussion:
- Central Bank Hubris: Zeberg critiques the post-2008 monetary policy of constantly injecting liquidity during slowdowns, suggesting this “monetary experiment” is reaching its end.
- Global Rate Cuts: The fact that over 170 central banks globally have already initiated rate cuts (challenging levels seen during the 2008 crisis) indicates widespread underlying economic weakness that the US market is ignoring.
6. Future Implications: The current situation is likened to the Titanic hitting an iceberg: the damage is done (iceberg hit/leading indicators rolled over), but the ship hasn’t sunk yet (real economy hasn’t fully registered the impact). The final phase will be triggered by a reversal in the US Dollar, leading to a sharp reckoning for highly leveraged assets, despite current euphoria pushing indices like the S&P 500 potentially toward 7,800–8,000 first.
7. Target Audience: Macro Investors, Portfolio Managers, and Sophisticated Retail Traders interested in cyclical analysis, leading economic indicators, and understanding the mechanics behind market divergence during late-cycle phases.
🏢 Companies Mentioned
đź’¬ Key Insights
"I'm in the most risk-prone assets right now. You can say I because I think you're going to see an extreme run in crypto here where we start to see the rotation from Bitcoin into Ethereum while Bitcoin finds its major top, by the way."
"Did that prevent a blow-off top and a very large—and a very large crash in the market? The answer is it did not. Now go back to the 1840s, and you had the railway mania... 1920s, and then we go to the year 2000. We saw the internet coming out. Did it change the world? 100%. It did 100%. ... But did it prevent that we had a bubble there? No, it did not."
"What are you going to do as an economist, as a business, then? Are you going to hire more people? No, you're probably going to lay off people because why would you need extra capacity if there's no buying?"
"Guess what? Every time the Fed comes in, they don't do it because things are great. They come in because things are bad. And just mention one time where we have seen a roll-over of the business cycle where the Fed actually saved the day. They never did."
"You have a whole crypto market that is just looking into say, 'Oh, with, you know, we don't care about what it creates of yields,' and 'I will still be speculating about this particular meme coin, and it's going to go to the moon,' which is probably this because of, you know, somebody else just coming to buy it. I mean, just the very talk of this and how it's actually being set up is the very definition of this bubble."
"This time is absolutely different in that we have the largest bubble ever, and when it crashes, it's going to be really bad."