QI PRO HOLY GRAIL DASHBOARD

QUICK QUILL — The ongoing slump in the Architecture Billings Index should extend the downturn in real nonresidential structures investment. The more volatile (and nominal) Dodge Construction index’s above-trend streak adds technical overvaluation and downside to the construction outlook. Most importantly, the divergence between rising U.S. construction payrolls on one hand and weakening state construction employment breadth amidst the multiyear slump in architecture billings that’s dragged on the sector’s payrolls on the other, builds the case for a benchmark revision to, and a recognition of a top in, national construction payrolls.

TAKEAWAYS

  1. The AIA’s Architecture Billings Index has been negative on a z-score basis for 35 straight months, taking out the 33-month streak seen during the GFC; the stretch suggests real nonresidential structures investment, down 5.9% YoY in Q1, will continue to languish
  2. In the nine months ended June, the Dodge Construction Index ran an average of 17.7% above its trend, a record relative outperformance over the last 15 years; the results suggest a pullback is likely in the medium term, putting further downward pressure on sector activity
  3. The correlation between Construction and Architecture Service Worker Payrolls was 0.94 from 1990 to June 2023, but has since inverted to -0.92; 39 states have passed their peak on construction payrolls, and a large downward revision is likely with the next NFP benchmark

LONG MACRO

Recession probability to rise into 2025’s second half as private demand underperforms. The tariff shock should generate greater risks for a downshift in business investment and a more challenging environment for consumer cyclicals vis-à-vis consumer non-branded noncyclicals.

Manic shifts in U.S. politics harken first a deflationary gully to cross followed by the threat of impeachment and ultimately, a fourth change in administrations in as many U.S. presidential elections, a first in sequential terms since the precipice of the U.S. Civil War. The subsequent pendulum swing will manifest as Universal Basic Income/Modern Monetary Theory, and with it, the secular rise in inflation being prematurely predicted today by those positioned to profit from being short Treasuries.

Saturday Intelligence Briefing — 7.18.26

“You Deepsunk my Battleship! AGAIN!!” Gray-haired veteran traders heard this in their heads Friday alongside the sting of being fooled twice. The thing is, few were surprised about Moonshot, which needs no description. On Thursday, Bloomberg reminded the Street about DeepSeek’s adoption using simple math in the heart of San Francisco: “Lindy AI had been using Anthropic's Claude Sonnet, but switched to DeepSeek after six weeks of evaluation. ‘We're now paying about 10% of what we used to pay,’ said Flo Crivello, the company’s CEO, adding the startup is saving millions of dollars annually — more than the total cost of its entire 27-person workforce.”

The disconnect between America’s AI reality -- that of sunk costs on an unfathomable and unprecedented scale -- and investors’ sanguine view of the economy’s prospects is mindboggling. We know that the illusion of AI has been levitating everything from infrastructure and construction to industrial production and GDP in the U.S. economy. And yet, Bank of America’s July Global Fund Manager Survey (FMS) revealed a record 54% surveyed were in the ‘no landing’ camp for the global economy in the next 12 months (yellow bars). This was decisively higher than the 39% expecting a ‘soft landing’ (green bars) and the exiled 2% record low who foresee a ‘hard landing’ (red bars).

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TACTICAL

RATES:

Short-end and Belly best opportunities for total return. Rally keys off weaker macro. Challenged private demand, higher unemployment and lower core inflation raise Fed rate cut probabilities.

Long-end holds at elevated levels with de facto caps at 4.5% for the 10-year & 5% for the long bond with the term premium supported by fiscal malfeasance exacerbated by falling sovereign revenues and despite diminishing stimulus to the U.S. consumer.

Curve view – Bull steepener in 2025’s second half.

USD:

A sidelined Fed contrasting with most global central banks easing catalyzed a selloff in the greenback. A Fed forced to play catchup could easily thin the massively crowded trade, especially as global trade weakness impairs an open global economy vs. its closed U.S. counterpart.

CREDIT:

•  Underweight HY, overweight strong cash-flow IG

•  Lower-rated buckets at risk of dispersion with Fed Higher for Longer

•  Jobless claims deterioration makes a cautious Street rethink already-wider-spreads 2025 expectations, i.e., up default estimates as bankruptcy cycle speeds up and size

•  Fitch’s acknowledgement of cyclical consumer sector “deteriorating” fits this view

EQUITIES:

OW     Utilities
OW     Fossil Fuel Energy
OW     Senior Living

UW     Consumer Staples
UW     Consumer Discretionary
UW     Large & Midsize Banks

OTHER ASSETS:

•  USD view supports UW commodities & EM

•  Oil is a different story with geopolitical risk ramping (Israel v Iran)

•  Long MOVE to capitalize on runaway lending to Nondepository Financial Institutions triggering a credit event