Video Update: Why You Won’t Be Afraid of the Scary Headlines in 2024

2024 is going to bring some scary headlines.

A recession, worsening economic conditions, wealth and savings disappearing… You’ll see all kinds of news articles about these topics.

But you won’t be spooked by them. That’s because you’re keeping up with Chief Analyst Adam Galas’s video updates.

The economy can be complicated to understand. And you might be confused how to react to today’s data or prepare for tomorrow’s readings. But Adam translates all the noise into actionable advice and what it all means for Fortress members.

Today, he continues on this mission by sharing the results of the U.S. economy’s “physical checkup.” And he’ll go in detail on one of his favorite portfolio picks to prepare for what the results show.

Arming yourself with full knowledge of the bigger picture is what lets you sleep well at night through whatever is coming up next.

Click below to watch the video or scroll down to read the transcript.

Happy SWAN (sleep well at night) investing,

Brad Thomas Editor, Fortress Portfolio

Welcome, Fortress Portfolio members. I hope you had a wonderful Thanksgiving with your loved ones. Mine was absolutely legendary.

I know I am pumped and ready to talk about the coming 2024 recession and why you 100%, absolutely, positively do not have to care about the terrifying headlines you are about to see next year.

First, we're going to review some economic data that you've never seen that is critical to understanding what's coming next year.

Then, I'm going to show you, using an example from Fortress, why you can sleep well at night. Because we are playing a completely different game than your neighbors and pretty much everyone else on Wall Street.

In the chart below, you can see the baseline and rate of change, or BaR, economic grid. You can think of this as a lab test, just like you have your cholesterol, blood sugar, and various liver enzymes that you check at your annual physical.

(Source: Econ P.I.)

This is like a physical for the economy. It consists, as you can see below, of 18 economic indicators (nine of them leading indicators) that collectively have predicted every recession for the last 30 years.

(Source: Econ P.I.)

This works by comparing where a metric is above the historical baseline and how fast it is accelerating or decelerating each month.

As you can see below, we have some key metrics in the last three months. The Chicago Federal Reserve's National Activity Index has fallen off a cliff, as have existing home sales and Michigan consumer confidence.

(Source: Econ P.I.)

The overall average of all 18 has gone from 2.3% above baseline to 1.4% below. So if we look at the last three months, and the last 12 months, we can see pretty much everything has gotten worse.

(Source: Econ P.I.)

The chart above shows the average of the last three recessions. If you were within 2% of the baseline and trending down, that is potentially weeks away from a recession.

Right now, we're at -1.4. And the leading indicators, which generally estimate within three months where the average for all of them are going, is down to -2.2.

So we could even be in a recession right now. And in fact, that's what JPMorgan thinks is happening.

(Source: Econ P.I.)

In the chart above, we can see the rolling three-month average. And you can see that things have been getting steadily worse for most of the year.

Now, I want to be very clear. Notice where we were during the pandemic. We were about -23% below baseline. That is a severe recession.

What we are likely facing here is potentially the mildest recession in U.S. history. That current record is from the 9/11-induced recession of 2001, where the GDP contracted by 0.4%, unemployment barely increased, and pretty much the only ones who felt it were Wall Street traders.

In the chart below, you can see the consensus of economists who are very optimistic about the economy.

(Source: The Daily Shot)

They're patting Jerome Powell and the Fed on the back, saying, “Congratulations on the soft landing. The first time inflation was ever above 5% at its peak, and you pulled off a soft landing by increasing interest rates and not causing a recession. And inflation came back down.”

The problem is, as we'll see in a few seconds, inflation has not, in fact, been conquered. The economic data says, “No, no, no, no. We're likely headed for a recession.”

Remember, economists are famous for never in history forecasting a recession ahead of time. So let's take a look at the smart money on Wall Street.

(Source: CME Fed Probabilities)

This is the bond market, which is now breaking in 1% where the rate cuts next year. There are two ways of reading this.

One, inflation is going to drop by 1%. That would be pretty much back to the Fed's target or very close to it, one or even two years faster than the Fed's own models project.

Or it simply means a 73% chance of a recession starting by June of 2020 or a 99% chance of a recession beginning sometime next year… Which is, as we just saw, what the economic data is showing.

What about the evidence for inflation crashing?

Let’s take a look at the Cleveland Fed's daily updated real-time inflation monitoring tool.

(Source: Cleveland Fed)

The Fed cares specifically about Core PCE. This is the official metric that has to get down to 2%. And Jerome Powell has made it very clear at the last meeting, at every meeting, “2%, 2%; we will not tolerate anything less or above 2%.”

Right now, you can see it's 3.6. It is expected to remain at 3.6 through the end of the year. It’s actually expected to get worse next month but still remain essentially at an annualized 3.6% rate.

What about some other kind of inflation? Well, we have the 10 million-data point model of Truflation that is highly correlated with CPI inflation.

(Source: Truflation)

That's running 2.9% and pretty stable recently, basically stuck 1% higher than the Fed wants.

So the bottom line is that the Fed is not likely to be cutting interest rates next year, at least anywhere close to what the bond market currently expects. And we might already be in a recession.

But it’s a mild recession, quite possibly the mildest in history. And here's what matters. Here’s why you don't have to lose a wink of sleep about this recession.

A recession is coming. But if you own Fortress and companies like Enterprise, you don't have to lose a wink of sleep. Enterprise is up already. It’s up 12% since our initial recommendation.

And as this chart shows, this is the gold standard of high-yield exchange-traded funds (ETFs).

(Click to Enlarge) (Source: FAST Graphs)

The top 1% of high-yield ETFs is down 6%. And Enterprise is absolutely crushing it.

The equal weighted S&P, meaning everything other than the Magnificent Seven, is up 6%. So Enterprise is doing a fantastic job. That’s because even though cash flows are suffering a bit, commodity prices are pulling back.

Last year, they soared. They’re still very stable. You can see the dividends steadily growing each year over time. And 2024 cash flows are coming back because Enterprise has new projects coming online.

But remember, this fell off a cliff during the pandemic. Oil was -$38, and the yield on Enterprise at the time was 17%.

Rest assured, had Fortress existed at the time, we would have been pounding that table in these videos. Do you have a word for someone who buys Enterprise at a 17% yield already retired?

Now, let me show you in comparison what you can get from the S&P 500.

(Click to Enlarge)(Source: FAST Graphs)

Remember, the S&P is 12% historically overvalued, while Enterprise is around 20% undervalued. And Enterprise is already baked in for the decline in the recession in terms of its cash flows.

Compare that to the S&P, which as you can see, analysts are expecting 23% earnings growth in the next two years… 18% upside if we don't get a recession… And the economic data is quite clear.

A recession may have already started. But again, it’s not going to matter to you because we are playing a completely different game at Fortress.

Wall Street, you might have noticed, is obsessed with price. And I understand the importance of price long term. You want to grow your wealth.

But remember what Fortress is all about. We're not playing Wall Street's game. Share price is vanity, cash flow is sanity, and dividends are reality.

Everyone’s talking about how the S&P is going to finish this year. What about next year's results? 12-month price forecast?

We care about income because that is ultimately how you retire rich and stay rich in retirement. We play the Shark Tank game of investing. We buy great companies, collect our royalties.

Like we saw in the pandemic, Enterprise fell off a cliff. But the company kept paying those distributions. And if you are reinvesting your dividends at the time, if you are buying with new cash, you are locking in the best opportunities in history.

Right now, you still have a great opportunity. And guess what? In a recession, share price doesn't matter. The only thing funding your retirement is the safety of those dividends based purely on fundamentals.

And that is what Fortress is always about. We have the models. We have the data. We have years of experience, so we can gather all of this together and tell you what's coming.

The purpose of this recession update was just to warn you so that when your friends and your neighbors are freaking out – “Oh my God, my 401(k) is down 20%!” – you knew it was coming.

And most importantly, you knew that your money was safe in the hands of the world's best management teams. Companies with exceptional risk management and strong balance sheets that can ride out anything, including -$38 oil for an energy company.

That is a kind of resilience from an A-rated dividend aristocrat that… I mean, when Enterprise cuts its dividend, the sun is probably burned out and we're all too dead to care. That's the kind of safety we're talking about, and that is what Fortress is all about.

Our portfolio today yields 7.2%, and over the last five years dividends have grown by 12% per year. How bad was inflation? Four-point-four triple the rate of inflation, and that was the worst inflation in 42 years.

This is what we're talking about. This is the power of disciplined financial science. The power of the Fortress Portfolio. Trusting in the world's best companies to work hard for you, so one day you don't have to.

Thank you for joining me for this weekly update. I hope you join us next week.

Please send us your questions and comments, so I can respond to them in these videos and our monthly issues. Just a reminder, I can't legally provide personalized investment advice.

Until next week, this is Adam Galas, wishing you and your family a marvelous, joyful, healthy, happy holiday season and a wonderful, relaxing weekend.