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“Show me the data,” demand those who cannot see a recession forming all around them and who keep parroting what they are told about the economy being strong because it is what they want to believe; yet, the data look like an endless march through a long summer down the road to recession.Read the remainder of this entry »
Pretty good if you ask me. Most economic indicators this year have moved relentlessly in the direction of recession, and now the Cass Freight Index is saying a US recession may start in the 3rd quarter, fitting up nicely to my prediction that we would be entering recession this summer.Read the remainder of this entry »
Here is a journey in photos and facts to compare the present Great Recession with the past Great Depression to gain perspective on where we might be headed.Read the remainder of this entry »
News of significant recessionary drops in the US became as relentless this past week as the ping, ping, pang of drips from a leaking ceiling hitting pans in the New York Stock Exchange. I’ve been saying you would hear the sounds of recession everywhere as soon as the second-quarter earnings reporting season began this summer. Here we are, and here’s a list of the week’s downbeat economic news that quickly terminated the S&P 500’s rally … right where I said it would end … slightly above its previous summit.
The Cass Freight Index remained negative for the seventh month in a row.
Shipping reflects the whole manufacturing economy, and it has been sinking into the South China Sea like this all year:
Bellwether Dow Transports continued to lead the Dow down.
Rail freight company CSX stocks plunged more than 11% late Tuesday and into Wednesday when its corporate report came out with earnings below expectations and with forward guidance for continued decline. CSX CEO, James Foote, said,
The present economic backdrop is one of the most puzzling I have experienced in my career…. Industrial customers’ volumes (are) continuing to show weakness with no concrete signs of these trends changing…. We are not necessarily being pessimistic about the second half of the year. But in as much as we need to adjust guidance, we’re just setting out the obvious.”MarketWatch
Two small-to-mid-size trucking companies joined four others that have gone out of business this year, probably not due entirely to shipping declines, but certainly not helped any by the suddenly tough freight world. For the past few years, trucking companies couldn’t find enough drivers or buy enough trucks. As recently as last year, manufacturing companies were having a hard time shipping their goods because they couldn’t find enough trucks or drivers. Now, however, trucking companies are suddenly laying off hundreds of drivers.
US manufacturing has been on the same down trend as the Dow Transports all year
US manufacturing moved back to hovering right on the line of contraction:
In fact, according to Chinese government television, the Federal Reserve has stated the US entered “a manufacturing recession” in the second quarter:
I haven’t seen it reported quite that starkly here, but then economic reporting about the US economy here usually seems as rosy as Chinese reporting on China in China.
Even though manufacturing is in a broad half-year decline, manufacturing stocks did outstandingly well over that same period:
… continuing to prove stocks have nothing to do with how business is doing but simply turn businesses into gambling chips in a casino. Regardless, stocks are going to find it harder and harder and harder to rise against the drip, drip, drip of a declining economy; so, it is no surprise they did exactly as I said they would once earnings season started and began to fall away from their recent new highs.
Bond yields plummet
Falling government bond yields are also typically associated with recessions. Having risen the week before, yields fell back over the edge this week:
Bank floors get slippery when wet
The drippage of recession started to form puddles in bank basements this week as corporate reports came in.
JPMorgan cut its forward guidance for net interest income because of the impending Fed rate cuts. Wells did worse in its major areas of business. The first major banks began reporting this week, including Citigroup. The areas most to miss expectations in Q2 were income from trading and investment banking, but it is interest income that was projected in forward guidance to decline in the 3rd quarter under Fed easing.
These banks didn’t take a big hit in EPS or total revenue, slightly beating drastically lowered expectations on their rising top-line numbers. Revenue gains, especially at Wells Fargo, mostly came from (surprise!) increased fees. Still, the drop in investment banking and many lower revenue lines kept their stock values from rising more than a brief bump. JPM’s commercial bank revenue dropped 5%. In all, not terrible reports, just milquetoast, except for …
U.S. stocks pulled further back from their records on Friday to cap the weakest week for the S&P 500 since May…. Momentum for stocks has slowed since early June…. “The biggest overall trend is if you beat, you may be mildly rewarded and if you miss, you are going to get pounded,” said J.J. Kinahan, chief market strategist for TD Ameritrade.AP
Goldman Sachs. Who would have figured the bank that made bank by helping us all crash into the Great Recession would be doing so again? Who would figure that the bank that runs all the financial offices at the White House would do better than others? Call me cynical, but I feel like I see a pattern here. Goldman did much better than expectations, initially lifting the Dow 22 points to a new intraday record on the second day of reporting season as other major indices fell.
In all, so long as you’re good with morbidly obese banks getting their vast bulk to barely clear much lower bars of expectation, what’s not to love about these rotund high-jumpers? It’s like cheering “Fat Olympics” — more funny than fun:
While all four banks were able to surpass much lowered expectations for second-quarter performance, “the broad theme we’re seeing is slowing loan growth, somewhat muted trading revenues and shrinking margins,” said Stephen Biggar, director of financial institution research at Argus Research in an interview. “Lower manufacturing activity, lower housing activity and business-investment slowing are all manifesting themselves” in bank performance, he said.MarketWatch
Sounds like the perfect bankers’ world to me. No wonder stocks were barely phased by those early reports. What’s not to like in that mix?
Deutsche Bank experienced a run of sorts this past week, according to Bloomberg, as counterparties in DB’s failing investment banking business — especially hedge funds — started pulling out a billion dollars a day.
The Retail Apocalypse caught a breath … but got smoked
Overall retail sales went up … but not in malls (brick and mortar) where I’ve been saying since two years ago years of trouble would keep building. The number of stores scheduled to shutter their shops this year is 12,000, busting the doors off 2017’s record of 8,129. While there was a lot of talk early in the week about the statistical spurt in overall retail sales, they were actually only up 1.8% YoY, which was less than inflation, meaning they were actually down since price inflation alone should have lifted them 2.1%, given that the measure of retail sales (dollars) is 100% affected by inflation.
All stock indices lost their lift
Stocks gained from an armistice of sorts in the trade war over the previous couple of weeks but even more from the Fed bending over backward after its last FOMC meeting to assure markets of future free (or almost free) money. This is as I said would happen: investors would most likely get the interest-rate cut they were demanding, so stocks would rise at first upon the euphoria of investors getting the drug they want. Then, however, they would face increased gravity as soon as the earnings season hit. That would make it hard for stocks to get any uphill traction beyond the temporary shove from the Fed. So far, right on track!
Here’s why stocks were rallying hard this year:
Yeah, that makes sense: net income for S&P 500 companies falling hard into an income recession since the beginning of the year and estimated to be worse in the second quarter than the first. That should support a rise in stocks, right? Why not in an economic world that is entirely make-believe?
We’ve forgotten completely what investing in businesses was originally all about! This is Wonderland where everything is upside down. One invests in businesses in hopes that they will decline badly enough that the Fed will have to bail the economy out, and polite society all accepts that this is perfectly normal as they enjoin the Mad Hatter’s tea party. You see, it rains upward in Wonderland.
Corporate profits have declined back to where they were in 2014, but stocks are 60% higher than they were in 2014! And, yet, you cannot convince stock-market bulls that things might be getting a tad overpriced. No euphoria there, right? They even think I’m foolish to think a market like that is rickety and in risk of falling (like I was foolish to feel the same way last summer). I, on the other hand, think they’ve been working a little too long with the hat mercury that makes a hatter madder.
This week stocks cooled off.
It’s an earnings recession in addition to being a manufacturing recession
After a declining first quarter in reported earnings, the consensus for second-quarter earnings now that they have been coming in is that the mid-and-large size stocks of the Russell 1000 will average a 2.6% decline in earnings per share. And that’s with stock buybackacks running strong. It should be even worse in small stocks. FactSet estimates a 3% decline for EPS in the S&P 500, and says this will be the second quarter of YoY declines. If they prove right, that means we’re in an earnings recession.
So, stock index gains have been coming in, regardless of declining revenues, declining earnings, falling transportation stocks and manufacturing stocks, only because of delusional hope about global trade settlements changing the economic lay of the land and the promise of practically free Fed funds. But the drip, drip, drip seemed to be catching up with them this week.
Citi strategists pointed out the earnings recession is likely to continue into 2020. I’ll just note that the stock market behaved the same way in the run-up to the dot-com crash, rising quarter after quarter as earnings fell quarter after quarter. Of course, it will be different this time because today’s people are never as stupid as yesterday’s people!
With practically free Fed funds being just about the only hot air that is keeping the market aloft this month, the Fed dare not not come through with a rate cut at the end of the month, or the market will blow away like a house of cards in a windstorm.
That said, planetary retardation reached new lows. Financial reporting like the following by CNBC now raises no concerns about stupidity or what’s in the water:
Investors will welcome the strong start to the earnings season, but the outlook for corporate profits remains bleak. Analysts expect S&P 500 earnings to have fallen by 3% in the second quarter, according to FactSet data.CNBC
We now live in a day when a 3% decline is considered a strong start! No one sees a problem with the thinking there? Let’s hope whatever is in the water decreases human fertility as much as it does intelligence.
Trump announces trade war with China has “a long way to go”
Big surprise! And, so the airhead market that had bumped up a little on mediocre banking news tumbled on Trump trade news. Once again, Lucy snatched the football away from Charlie-Brown investors, and the market fell on its butt in a little trade tirade.
The United Stat’s main negotiators agreed with the president’s take, though their statements have often been at odds with his:
U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin spoke with their Chinese counterparts on Thursday but there was little sign of progress in the talks.MarketWatch
Yet another consecutive month of draining news for housing
US housing starts and permits both dropped further with permits hitting their lowest level in two years (significant given that the start of summer is when the most permits should be applied for). And this in spite of much lower mortgage rates.
The Fed’s most reliable recession indicator rises again
I pointed this out in a comment to my last article, but I’ll add it here so it is not missed:
The last time I reported on this particularly reliable recession indicator, it was just below 30. With another month now having passed, it is above the 30 level. As you can see, only one time in the last half century has this reliable indicator passed the 30 level when the US was not already in recession. Since the Fed says this is its most reliable indicator, you can see why Powell has promised rate cuts. By their best measure, we are probably already in recession.
The Leading Economic Index declines its most in almost four years
Following a completely dead April and May, the index took a dive. We haven’t seen a drop like this since the end of 2015 when the Fed first began raising interest rates.
The components that make up this index are … average weekly hours in manufacturing, average weekly initial claims for unemployment insurance, manufacturers’ new orders for consumer goods and materials and for non–defense capital goods, excluding aircrafts, the ISM® Index of New Orders, building permits for new private housing, stock prices of 500 common stocks, the Leading Credit Index™, interest rate spread on 10-year Treasury bonds less federal funds, and the average consumer expectations for business conditions.
Those are a lot of leaks in the ceiling for just one week. It’s going to take a lot of pans on the New York Stock Exchange floor to keep up with them. It looks like it was such a great recession, we’re headed back for more.
First, a decline in manufacturing, and then a slump in service industries, now a broad-spectrum inversion of the yield curve hitting its most critical metric this week, unemployment finally starting to rise again, a one-year relentless housing decline across most of the nation and the world, carmageddon pressing car dealers to offer big incentives once again just to hold sales flat, shipping everywhere sinking rapidly, broadly deteriorating general business conditions, plus tariff troubles for the US throughout the world — all of these economic stresses have gotten remarkably worst in just the past month.
At the same time, the stock market has soared back up to its three-time ceiling (now four-time) and managed to clear microscopically above that level. Apparently, the last recession was such a great recession, the stock market believes more of the same would be the best thing that could happen. And why not, the last recession made 10% of the US richer and 1% fabulously richer. Investors, it would appear, couldn’t be more delighted to see so many forces pushing the entire global economy — US now fully included — back into recession for another go at the best of times for the one-percent crowd.
With their best interests in mind, let’s take a closer look at all that is happening on that downhill run to recession — all the things that give investors sugar-plum dreams at night about the Fed being forced to inject more monetary narcotics into the market. Let me lay out all the recent hopeful signs that the economy is crashing just in time to force the Fed’s first interest-rate cut after a couple of years of rising rates — that cut of coke that the market is now demanding.
1. Factory orders/manufacturing are in repetitious months of decline
In May, factory orders fell 0.7%, month on month, which is the third decline in four months. April’s decline was revised lower to -1.2%. Within those figures, sales of transportation equipment plunged 4.6%, transportation being particularly indicative of where the overall economy is going. A look at the actual trend line makes the meaning of these drops much more apparent:
After months of decline, the ISM shows no signs of a bottom forming.
Here’s another view:
We are now the closest we’ve been to actual economic contraction since the Great Recession. Up to now, all talk has been about slowing growth. Now we are on the cusp of actual contraction (which means the same thing as recession if it lasts six months or more).
What is seen for manufacturing in the reports above is consistent with recent results from the Dallas Fed Manufacturing Survey, which crashed below the worst analysts’ estimates in June:
Things don’t look any better in the Empire State Manufacturing Survey:
Both are back in their contraction zones.
2. Services sector finally joins the fall
Many who have been seeing this decline play out over months in the manufacturing sector have been hoping that the services sector will save the day. Services have been holding up much better than manufacturing, so perhaps that sector of industry would carry the economy over this slump. However, as you can see in the graph below services are no long doing much better: (Anything below the 50 line represents economic contraction.)
Though serviced did see a minor uptick in June, it was barely visible and still leaves the service sector very near the “50” line. This keeps them just about at a three-year low, hardly encouraging given the massive business tax cuts in the US over the last year and a half that were accompanied with massively increased government spending. At the same time employment in the services industry dropped by its most in sixteen months. So, all that boost is creating now apparent lift at all.
An improvement in service sector growth provides little cause for cheer, as the survey data still indicate a sharp slowing in the pace of economic growth in the second quarter….. A major change since the first quarter has been a broadening-out of the slowdown beyond manufacturing, with the service sector growth now also reporting much weaker business activity and orders trends than earlier in the year. “Hiring was hit as firms scaled back their expansion plans in the face of weaker than expected order inflows and gloomier prospects for the year ahead. Jobs growth was the weakest for over two years and future expectations across both services and manufacturing has slipped to the lowest seen since comparable data were first available in 2012….IHS Markit
The services sector employs more than 80% of all American workers. But, hey, that’s good for Fed addicts, right?
“With momentum clearly fading, it won’t be long before the Fed begins cutting interest rates,” said senior U.S. economist Michael Pearce of Capital Economics.MarketWatch
Yay. Let’s all join in hoping the economy crashes spectacularly so stocks can benefit all over again from years of more free Fed funds than they’ve ever seen before! The One-Percenters are already stocking champagne for that day when Great Recession 2.0 is finally announced.
3. The yield curve just inverted at its most critical level:
The bond market flashed yet another warning signal for investors on Wednesday that a downturn for the economy may be coming. Despite the S&P 500 hitting new all-time highs, the yield on 30-year U.S. Treasury bonds briefly dipped below the overnight fed funds rate, a signal that has preceded the past five U.S. recessions.Yahoo! Finance
Economists have known for quite some time that yield curve inversions tend to be reliable predictors of business contractions (recessions).St. Louis Fed
It’s official. US 30-year yield just inverted vs. the Fed funds rate!— Otavio (Tavi) Costa (@TaviCosta) July 3, 2019
Same warning ahead of the GFC, tech bust, Asian crisis, S&L crisis, and 1980’s double dip recessions.
The only false signal, 1986.
We now have the entire US Treasury curve below the Fed overnight rate. pic.twitter.com/P8sDJ5KVpO
4. Unemployment has begun to rise at last
The first upticks in unemployment typically are one of the last events to happen before a recession begins. So, renewed hope for the one percent is not far off. While the number of job layoffs remains near a half-century low, initial jobless claims have started to rise:
The four-week monthly average of claims, considered the more stable report, has also begun to rise, albeit incrementally. The pace of hiring has dropped, but the pace of firing has not yet risen.
With the unemployment rate at a nearly 50-year low of 3.6%, good help is hard to find and companies are reluctant to let go of workers. The economy would have to stumble badly to get firms to start handing out pink slips en masse.MarketWatch
Whenever unemployment has settled this low, an uptick in joblessness soon begins, and recession always begins shortly thereafter:
Historically, a trough in the unemployment rate also tends to be a reliable predictor of a business recession.St. Louis Fed
Well, good, then; the trough is already forming, and it doesn’t have to form for more than 2-3 months before recession is here. That uptick in job losses is particularly notable now in the bellwether small-business sector, where falling jobs haven’t looked this bad since the Great Recession (ADP’s worst plunge in jobs in this sector since 2010):
The small business sector leads the cycle and employment here has plunged 61k in the past two months. Haven’t seen this in over 9 years; same decline we saw in Feb-March of 2008 when the consensus was busy calling for a soft landing. This isn’t a repeat of 2016 by any stretch.— David Rosenberg (@EconguyRosie) July 3, 2019
In fact, the only time jobs have been this hard to get is inside of a recession. (See horizontal line near top of the following graph:)
Jobs-hard-to-get series from the Conference Board Consumer Confidence index only shoots up 4.6 points in a month when recessions hit. That’s all folks! pic.twitter.com/iJfHqxkyw1— David Rosenberg (@EconguyRosie) June 25, 2019
5. IPO insanity in the stock market is equal to that seen right at the dot-com bust
Unprofitability is no obstacle…. IPOs with negative earnings per share surpassed 80% in 2018, joining 2000 as the only period in which that dubious threshold has been reached in the last 28 years.Grant’s Interest Rate Observer
All investors love a good unprofitable company right now like only one time before. The last time it paid this well to be unprofitable was at the change of the millennium moments before everyone’s 401K got wiped out in a big stock-market bust. Is it any wonder unprofitable companies are coming on like gangbusters when we still have a stock market that falls because of relatively good news about a temporary reprieve in the decline of the job market? The market has no interest in a good economy because the junky bulls crave only their next hit of Fed meds.
If the Fed doesn’t deliver the dope later this month, watch out below. On the other hand the dot-com bust tells us the first part of these recessions isn’t even good for stock investors; but it is the extremely long recovery period after the fall the has them all salivating … that and the fact that they think they can somehow slide right over the recession part and just go straight into recovery mode. Good luck with that!
6. Housing continues its relentless decline
Speaking of another whacky IPO bubble, we also have another whacky housing bubble — the best of both of the last excellent recessions at the same time! This has to have the One-Percenters salivating with the hope of more repos. Since I announced the housing decline had begun last summer, housing has fallen in unusual places … like the major tech centers of the US (just to tie in all the better with that whacky tech profitless IPO bubble that has re-inflated:
One might assume that the IPO wave has spurred another leg higher in Silicon Valley housing as tech employees cash out their newfound riches, but that’s not the case. An analysis today from Kate Seabaugh, senior manager at John Burns Real Estate Consulting, finds that a nationwide slowdown in residential housing markets has hit the Northern California tech epicenter particularly hard. San Jose, San Francisco and Seattle saw net resale deceleration (meaning the change in year-over-year price growth this year compared to last) in home prices of 26%, 15% and 13% respectively, in May. For instance, San Jose went from a 20% percent year-over-year price gain in May 2018 to a 6% drop this year. That’s the worst three showings out of the 33 metro areas tracked by the firm.Grant’s Interest Rate Observer
Anecdotal evidence says two words never witnessed in Palo Alto real estate ads in the past thirty years are now common: “Price Reduced.“
Existing home sales have tumbled month after month … longer now than any time since the Great Recession:
For those like my lonely crow who still deny the reality of a housing decline across the US, just take a look at construction spending on a nationwide basis since I announced a year ago the housing decline had begun (as the first I know of to do so):
I see a slump there. I don’t know why some can’t. If the housing market were growing, contractors would be spending money. The last time we saw a drop this long in residential construction was during the housing collapse that gave us the Great Recession.
Here’s another view of the same thing that shows how the decline is not abating but is rapidly accelerating:
The housing collapse has spread throughout the global economy right now, too:
The global housing market is showing cracks. Those fissures could spread throughout the world-wide economy, potentially sending world-wide gross domestic product, or GDP, to its lowest annual pace of in 10 years, according to research from Oxford Economics…. “A combined slump in house prices and housing investment in the major economies could cut world growth to a 10-year low….” An Oxford Economics’ proprietary gauge of housing conditions in the globe shows that home prices have declined by 10% and investments in houses have shrunk by 8%. “Downturns in world housing markets have been important contributing factors to global recessions over the last thirty years, most dramatically in 2007-2009. As a result, the current slowdown in global housing is a cause for concern.”MarketWatch
7. Carmageddon morphs as it expands.
Carmageddon has now spread to the RV market.
May RV shipments fell by double digits.Seeking Alpha
Year-to-date RV shipments are down 22% Y/Y.
Free falling shipments could portend another recession.
As it turns out, RVs are a luxury item for the middle class. When times are good, middle-class people buy RVs. When middle-class people are preparing for harsher times (or are in harsher times), RVs are one of the first things to get scratched off the list of must-haves. During 2018, shipments fell off 4% for the year; the downtrend continues at a steeper rate this year.
The decline continues in other American vehicles as well … of course … just as I’ve said for months will continue to be the case:
Analysts at RBC Capital Markets … forecast steep declines for General Motors Co. and Ford Motor Co. sales this month, and also predicted some trouble for sales of the companies’ perennially popular pickup trucks.MarketWatch
Auto sales for June were projected to be 7-8% lower than a year ago, and that is in spite of significant “incentives” being offered through dealers.
Auto job cuts haven’t been this high since the wind-up of the Great Recession more than a decade ago:
Hopes are running high that potential interest rate cuts by the Federal Reserve will support the auto and housing sectors, two parts of the economy that are sensitive to borrowing costs. The risk, though, is rising that any relief won’t come until after these critical leaders of the current economic cycle have already fallen into contraction…. The rapid rate at which auto layoffs are rising suggest a spillover into the broader economy…. It’s one thing to have a continuation of losses in the beleaguered retail sector, but the loss of high-paying jobs in both autos and industrials threaten to further hobble the housing market.Seeking Alpha
You can see in the following chart the slope we’ve started down and how quickly it can fall off a cliff once we get a little below the present point:
8. Freight is a runaway truck down a steep mountain road
Naturally, if sales are pulling the economy down, you’d expect to see freight going down:
Looks almost as steep as a cliff from as high as a mountain to me.
9. Business conditions tightening quickly
The freight figures fit with Morgan Stanley’s assessment of overall business conditions, which haven’t been this bad since … well, once again, 2008 during the Great Recession.
10. Trade winds entering the doldrums
All of the above slowdowns have been exasperated by trade conditions, which have not been helped by the Trump Tariff Wars:
The surprisingly larger May trade deficit will be a modest drag on second-quarter GDP. A larger deficit is a negative for U.S. economic growth.
The oomph has gone out of trade, and the US trade deficit has actually gotten worse!
Maybe recession isn’t just around the corner any longer
All of this could actually make one wonder if we are already in a recession:
Gary Shilling, an economist and financial analyst who is credited with predicting several recessions over the past 40 years, thinks the U.S. is in a relatively mild slump. “I think we’re probably already in a recession….” Shilling points to: Declining industrial production … feeble job growth … the Federal Reserve Bank of New York’s recession probability chart … the Organization for Economic Co-operation and Development’s leading economic indicators … [and] weak housing data.USA Today
No wonder American sentiment is turning sour! I don’t put any stock in sentiment as being much of a predictor or driver of where the Economy is going because I think it is more of a following trend. As such, however, it is still useful for seeing how many people are now agreeing with my start-of-the-year proposition of a summer recession. especially since so few agreed back when I made it.
According to Bankrate.com 40% of Americas now believe a recession will begin in less than a year with half of those believing it has already begun … rising stock market notwithstanding.
The experts, of course, believe a recession is, at least, 1-2 years away. Of course, few if any experts saw the last recession coming, even when it had already begun. So, if you’re going to await the PhD experts, you’re not going to know we’re in a recession until it’s over. You’ll feel it, but you won’t know it.
All that remains to happen now to give the One-Percenters an instant replay of the Glorious Great Recession is for the Fed to make its first interest-rate cut because each of the last two huge recessions with their attending stock-market crashes began right after the Fed made its first rate cut cut following a period of rate increases.
So, Permabulls, keep hoping the Fed makes its first move in July, and you may get all the free drugs you are hoping for; but, if you think you are going to skip over the painful recession part where stocks lose big, it hasn’t ever work that way. So, good luck with that, and don’t be a baby about it when the pain comes because you asked for it. No pain, no gain in the world of free Fed meds.
These are not the tiny champagne bubbles Don Ho used to sing about, but those greenish-gray floats of foam that pile up against harbor docks where the churn of the waves meets the oil spittle of boat motors. They are the economic froth that has piled up around us and is now beginning to fizzle.
They are the bubbles of overbuilt retail space, heaps of junk bonds and layers of leveraged loans, rafts of student loans, bloated government spending. They’re the slop that formed from massive monetary expansion frothed up out of less than nothing — out of debt.
You’ve heard about all of them many times, but my concern in this article is that we are starting to hear tiny popping sounds, which leads me to the following scenario as a plausible path into recession this summer: (Not the only possible route, but one littered with likelihoods.)
How the bubbles start to pop
The market’s bump from the Trump Thump on Mexico is already proving to be short-lived as I said would be the case in the article I was writing earlier this week and published on Tuesday. The market is moving into waiting mode as the Fed’s next FOMC meeting where they have the opportunity to live up to the rate-cutting hopes they’ve raised comes next week. As it does, it is forming that topping pattern that keeps repeating at this level.
Barring some major unexpected news, the market is most likely to simmer along that ceiling for the remainder of this week and first half of next week to await the Fed’s decision. Because the market is levitating near its last peak again, the Fed will stand pat on rates. Fact is, the Fed has only gotten interest halfway back to normal and only taken its balance sheet halfway back to the new normal it had intended to maintain. That means the Fed is low on ammo to fire up the economy in the event of the next recession. Therefore, it has to be judicious in how it uses the small ammo store it has built back up.
For that reason, I think the Fed is more likely to disappoint the stock market at its meeting next week than help it out, given that stocks returned to rising this month. If the whining market was in the same state as last month, or if stocks should return to falling between now and next week, that would be a different situation. However, with the market now looking more stable and with some hope still hanging on for signs of a China deal at the G-20 summit, I think the Fed will feel it cannot risk wasting ammo until help is clearly merited.
We are currently seeing upward pressure on the Fed’s lowest, anchor rate (the Fed Funds Rate). The Fed seems to be barely managing to hold rates down at their present level. That creates another factor that could make it hard for the Fed to lower rates even if it wants to.
The market won’t like that, even though the Fed will soften the news with lots of cut-rate candied hopes for investors. That’s a second reason I think the Fed will not cut rates just yet. They got so much bounce off of their-end-of-May jawboning that I think they’ll go for more of the same. However, the market is hanging right below a tough ceiling that has endured for almost a year and a half, so disappointment from the Fed is likely to bounce it back down off that ceiling. (Whether it goes marginally above its previous peak as it did the last two times between now and next week is almost irrelevant. You’ll wind up considering such a brief move above its all-time high a test to push to new strata that failed. I don’t, however, think it will.)
Then China re-enters the news feed at the end of June and refuses to negotiate. The market won’t like that either, and there won’t be much the Fed can do about that for another few weeks (its July meeting). By the time of the Fed’s July meeting, US data will be coming in worse, but the 25% tariffs on all things Chinese won’t have hit the data stream yet nor any of China’s retaliatory measures (such as its recent reductions in rare-earth exports) nor will the collateral damage that falls from all of that. By the time the Fed acts, all of that will be in play, and no Fed action will be able to stop any of that anyway.
Under that worsening picture, the Fed will probably lower rates a notch in July because the stock market will be showing its wounds. That may arrest the stock market’s slide, but it won’t make a dent on the economic decline that is already happening (see below) and that will steepen significantly when the new tariffs and retaliation do start showing up in the stats. It might not even save the stock market because buybacks will be temporarily stopping at about that same time for the corporate reporting season, taking the only fuel that remains out of stocks for that period.
Summer trading is also slowing, leaving the market placid. Moreover, forward earnings forecasts will be generally more negative than they were last time. The market will also likely experience more negativity than it wants to hear from actual second-quarter earnings. (Though, by that time, expectations may have been lowered enough that the drop in earnings will be priced in. That’s still suppressive damage that just played out sooner. Better soon than swoon.)
I’m not saying all of that with the conviction of a prediction. My only prediction for summer is the start of a recession; but I see it as one likely way the coming recession will start to form; but it can open up in other areas first or in a different order.
These frothy bubbles are the kind you see at the end of an effluent pipe
While we won’t be singing about them, there are a few lighter bubbles. I think housing in the US may get a little summer reprieve because sales have been falling for a year now and prices in some places have started to follow. At the same time, interest rates have gone back down as the Fed backed off of tightening. So that may be a slight summer light spot. I never believed housing would lead the economic decline (and have said so here a number of times) but simply that it would be a contributing factor.
Another plus for housing and banks is that I don’t think there are as many ARMs because people, in a low-interest environment, smartly went for fixed-interest loans. So, at least, we don’t have as many of those time bombs. Housing’s second and bigger leg down will begin when the overall economy is clearly collapsing. The first leg was just to soften the economy up a bit.
But there is a lot of gunk in the pipe that will be oozing out in big glops this summer:
The US is entering a manufacturing recession, a retail recession, the knock-on-effect of so many store and mall closures, declining freight orders and declining transportation stocks (typically a bellwether for how the economy because “if transportation is moving, the economy is moving”), an automotive production and jobs recession, declining corporate earnings growth (from which the word “growth” may start to disappear in the reporting of this quarter, tax stimulus that is fading in effect and that didn’t accomplish much to begin with), an inverted yield curve, a housing decline, even as the Fed continues tightening through the summer (with a six-month lag for the full effect of Fed actions on the economy).
As part and parcel of all that, we’re experiencing declining US GDP growth, weak durable-goods orders, declining capital investments, falling prices of copper and lumber (leading economic indicators) and no supportive tailwinds of any kind anywhere. (You know, all the things I said would be eroding the economy this year in my first Premium Post of the year, “2019 Economic Headwinds Look Like Storm of the Century.”)
Elsewhere, rest of the world is already crashing. Manufacturing growth has gone negative in many parts of the world. UK manufacturing just fell almost 4% in one month, far more than the 1% drop that was expected and the biggest drop in seventeen years as UK auto manufacturers went ahead with planned shutdowns. The drop also came because earlier stockpiling for Brexit, which brought sales forward from the future, finally was felt as an impact. The future arrived. UK GDP receded for its second month in a row (down 0.4% in one month). Even with negative bund rates, Germany remains in decline, being particularly impacted by the global auto manufacturing slowdown, and Australia is deep in a retail recession with the general economy being at its weakest since 2009. The Reserve Bank of Australia has now cut interest rates to their lowest in the nation’s history, but the economy is still slip sliding away. Housing there is tanking.
The impact of far higher tariffs this summer piles on top of all that. Do you really think we are going to be able to just sweep all of that under the rug this summer and in the months to follow? The economy is running on fumes while the stock market is smoking hope, and the China trade deal is exacerbating all of that, though it is far from being the sole cause or even primary cause.
The bubbles are bursting or are about to burst all over
Meanwhile, the Shiller Price/Earnings ratio higher than it has been at any time other than the crash of ’29 and the dot-com bust (more of a market problem than an economic problem):
Ultimately, the stock market is a slave to the economy. The economy will school the market, not the other way around. So, reality is just going to keep pounding its way in relentlessly from this point forward because it is increasingly hard to see where the market is going to get any lift. Even an interest increase, incremental as it will be, isn’t going to go very far.
High household net worth is a good thing right? Well, not when it is built on correspondingly mountainous bubbles of debt: (Make that “balloons” in my parlance, as “bubbles” is starting to seem far too tiny.)
Long periods of low interest created the hot air those bubbles are made of, and we’ve just come out of the longest period of the lowest interest ever. As I explained in an earlier post, the Fed’s move from lowering interest to raising interest cocks the gun for shooting down the debt balloon, but it is almost always the first rate reduction subsequent to those increases that squeezes the trigger. So, the market may want rate reductions right now, and the Fed has indicated it will give them, but watch out when it happens because the Fed has a track record of popping bubbles by squeezing off its first rate decrease. I know that sounds odd, but that is how it has happened again and again.
Note in the graph below how recessions typically do not start while the Fed is raising rates but immediately after the first decrease following such a raise (usually after a short period where it held rates steady like the present):
Perhaps the first decrease trips the economic decline, or perhaps the Fed always waits to decrease until it knows economic decline is about to begin. Either way, if the Fed raises rates at its June or July meetings … my predicted summer start for a recession could be right on.
On 13 occasions the futures market expected a cut in the funds rate the day prior to a scheduled FOMC meeting. The Fed cut rates in all 13 instances. In other words, the Fed has always cut interest rates when the market priced a cut on the day prior to a FOMC meeting…. And while … futures prices currently imply an unchanged funds rate by the June 19th meeting, the market is pricing 20 bp of easing by the July 31st.”ZH
With the economy clearly fizzling away, the Fed has said it MIGHT cut rates if economic conditions warrant. What does that tell you about whether or not they will cut rates soon enough to avert a recession — something I think they have never managed to do, as they confess they are the culprits who cause recessions.
Recessions also usually start as soon as unemployment starts to rise. So, beware May’s surprisingly low new-jobs number. That can start the rise in unemployment if it proves to be more than a one-month blip. A decrease in the Fed’s target interest rate coupled with an uptick in unemployment is almost the perfect set of marks for the starting point of a recession.
The graph here shows the point at which I said early last summer housing sales had turned over (for the worst) and would remain on a downtrend indefinitely, and it shows how that prediction has panned out.
Existing home sales were down again nationally (4.4%) in April (fourteenth month in a row of declining sales year on year). That is the longest stretch without a single positive month since the housing-market collapse that brought on the Great Recession.
So far as I am aware, I was the first to state that what we had seen by the start of July, 2018, was clear evidence that the housing market was going into another decline. I pointed to the Seattle/King County market as the bellwether at the time because it had been the strongest and last market to collapse during the last housing crisis, so trouble in that robust market is trouble, indeed.
Prices are now down 3.5% in Seattle YoY. Another hot market in Washington State has been the tri-cities area in Eastern Washington where the median price is now 12% lower than a year ago. Redmond, WA, home of Microsoft, prices down 18%. Pricy Mountain View, CA, (between Palo Alto and Santa Clara), prices down 2.2% YoY. Portland, OR, prices down 1.2%.
[You can check what is happening in home prices wherever you want at this link on Zillow.]
For several months, it was mostly just sales that were down. As I said at the time, it would take awhile for prices to follow because sellers are highly resistant to dropping the value of their number-one asset; so, the squeeze needs to be on for awhile for median prices or average prices to fall. Well, the squeeze has been on long enough, and sellers are starting to capitulate to the long drop in demand. Prices are falling.
There are other parts of the country where prices are going up, of course; but overall the trend is down for sales and starting to move down now for prices. Prices had risen in most parts of the country to the same housing-bubble heights of the last time around.
I don’t think prices will probably fall as hard this time because the Federal Reserve probably will jump in sooner if it can, but there is not a long ways the Fed can go to lower interest or ease credit terms either in order to stimulate the market. Credit terms are already pretty slack.
I also don’t think the housing market will be the primary cause of the overall economic collapse we are slowly going into this time around, as it was last time; but it will be a contributing cause to the bursting of the everything bubble, along with Carmageddon, the Retail Apocalypse, the trade war, the bursting of the bond bubble and the credit bubble and student loans, and a deeper stock-market crash, the fall of China’s economy and Europe’s — all the things that I have been saying for the last couple years will be the major forces to watch that will determine the tractory of our economy.
A review of the year ahead
All of these things that are consistently continuing to get worse and exert their own gravity on the US economy were on my January list titled “2019 Economic Headwinds Look Like Storm of the Century,” which was my first Premium Post (the reward I offer to all who support with donations of $5 or more).
All of these things and the rest of the items that I covered extensively in that list are playing out this year as I said they would, with the the exception so far of repatriated tax money, which is still more in play in stock buybacks than I thought it would be, and GDP, which took what I believe will prove to be a temporary bump back up. I remain as certain now as I was then that everything on that list will continue to build negative pressure against the economy, and with five months now to judge by, the list stands on its own merits.
Let me share my one statement on housing in that list so you can see how each point gets exploded in detail:
Housing over the hump: We all know the American economy has long been designed for housing growth to be its major driver. Nearly two years ago, I said the Fed’s balance-sheet unwind, which primarily impacts long-term interest rates, would drive down the housing market. I’ll have a full article on housing soon, but suffice it to say in this headwinds overview that we saw a housing decline begin in 2018, and it will grow worse in 2019 as mortgage rates rise even further. New housing feeds real-estate agents, mortgage brokers, bankers, developers, road crews, carpenters, landscapers, drywall installers, painters, plumbers, electricians, furniture salesman, cabinetmakers, glazers, appliance manufacturers, furnace manufacturers, lumber mills and loggers, the grocery stores, restaurants and gas stations that supply them all. You get the point, and that is why we build our economy around it. It’s why so many people want immigrants (partly for cheap labor and partly because they will need more housing). That is a minuscule part of the total list of people who make money off of new housing and off of remodeling old housing. So, with housing now clearly going down, the economic impact comes down to simple math: higher interest equals higher payments in a land of flat wages, which means fewer buyers and/or lower prices to get the payments back down. Housing sales and prices are falling now in Australia and Canada, too.
And this decline was triggered by only a minor nudge upward in mortgage rates because the Fed quickly reversed course on all of its tightening plans, bringing mortgage rates back down. Yet, the damage is done as shown by the fact that housing continues to decline, even though interest rates have stabilized barely higher than they were. (See Wolf Richter’s “US Home Sales Drop, Drop, Drop Despite Lower Mortgage Rates. But Mortgage Applications Jump. What Gives?”)
Because of the importance of my January list (which has now solidly proven itself) to understanding where we are going in the remainder of this year, I’ll make sure you have back access to that original Premium Post after donation payments process at the start of June if you sign up to donate before the end of May.
(Premium Posts don’t come every month, but close to it. I write them as a special thank-you for voluntary donations, not so much as a subscription. Those who want to support what I’m trying to do here will get some of my most important material because they have made themselves part of a team effort to get people stirred up before the next bankster bailouts are tried (and they will be); but I try to keep as much of my writing free as I can because the goal is, after all, to get the word out as far and wide as possible. About twenty other websites publish my articles besides my own site, but none of them pay for content. A number of people have signed up well above the $5 level that gets you into the Premium Posts, and I thank them for seriously backing what I’m trying to do here. I thank everyone for doing what they can as I do what I can.)
The 2018 stock market crash is now a fait accompli, having taken a polar bear plunge that put ice in the veins of the Fed and electrified their collective spine with such a deep chill they ran like a fat walrus from the bear market to halt their long-nurtured plans of economic tightening. With that event fulfilled, I’m now predicting a 2019 recession as the major economic news for this year (both US and global).
To confirm my bearish claim on the market’s crash:
Several leading stock market indexes around the globe endured bear market declines in 2018. In the U.S. in December, the small cap Russell 2000 Index (RUT) bottomed out 27.2% below its prior high. The widely-followed U.S. large cap barometer, the S&P 500 Index (SPX), just missed entering bear market territory, halting its decline 19.8% below its high.Investopedia
But the Dow fell completely into bear territory and the NASDAQ even further into the bear’s territory. Even the S&P hit an intraday low that was 20% down, so it’s stop right at the edge by the end of the day is nothing but a rounding error.
In terms of real cost, anyone who scoffed at my 2018 warnings and held their stocks through 2018 is still recovering from his or her losses. That we have only just this week recovered those losses is quite easily proven with one simple graph of 2018 where the breakdown begins in January where I said it would and hits full crash velocity in the fall:
And, technically, we’re still in the bear market, as we’ve recovered to the point where the market broke all to pieces in January 2018 but not to the point from which the bear market began.
If you like wild financial roller coaster rides that end right back where you started, stocks were the place to be in 2018. Obviously, it was an extremely bumpy ride to worse than nowhere for those who bought and held in the market thoughout 2018. The year was, however, a completely pleasant financial ride for those who were in cash all year, which was the only major asset that performed positive for the year! (And, of course, if you are the rare prodigy who can accurately time every peak and every trough, years of high volatility can make you more money than a steady climb; but then you are a very rare bird with a very high tolerance for risk — some would say a fantasy.)
I can attest to the calm because that is where I sat out the turbulence, being someone who doesn’t prefer bumpy rides to worse than nowhere. Moreover, those who jumped out at January’s peak, as I did, and remained out of stocks for the rest of the year, could also have experienced a joy ride of pure gains over the past three months in the stock market, instead of waisting the whole rally on mere loss recovery.
Now the losses are finally made up, and so reported here, but that doesn’t diminish the risk of a 2019 recession. On the contrary, US stock market crashes usually correspond with a recession, but often happen before or after the recession:
In the US, most analysts agree that bear markets and domestic recessions have generally been fairly closely related, though the exact leads and lags between the two may differ considerably across cycles. Furthermore, there have been several bear markets, notably in 1987 and 1978, that have not been accompanied by recessions, and vice versa.Financial Times
That is not to say the stock market will make it back up to its record summit ( or not go deeper into its polar region than in December; but, whether it does or not, a 2019 recession is in the making.
What will spark the next bear market? An economic recession, or the anticipation of one by investors, is a classic trigger, but not always. Another trigger has been a sharp slowdown in corporate profit growth, as we are seeing now…. Stock market pundits are widely divided about the nature of the next bear. For example, Stephen Suttmeier, the chief equity technical strategist at Bank of America Merrill Lynch, has said he sees a “garden-variety bear market” that will last only six months, and not go much beyond a 20% dip, per CNBC. At the other end of the spectrum, hedge fund manager and market analyst John Hussman has been calling for a cataclysmic 60% rout.Investopedia
Whatever continues to play out in the stock market, the main economy now steps into the forefront of the picture for me. The stock market’s 2018 trip on the Polar Bear Express already did its damage to investor confidence and pushed fleeing money into bonds, bringing long-term bond interest down, even as the Fed was dumping bonds, which should, otherwise, have pushed interest up. (After all, the Fed bought bonds in the first place to lower long-term interest.) That changed the bond market significantly enough to decisively align with recessionary sentiment in a historic bond inversion. And that makes 2018’s bear market a game changer.
While bond-market inversion has never failed at predicting a recession in the last half century, that is not, by any means, the only reason I’m predicting a 2019 recession, which I did before the full inversion. I laid out in my first Premium Post the numerous headwinds that would likely assail the US and global economies in 2019, regardless of anything that happens in stocks. So, my attention this year moves along to those things and to the likelihood of a 2019 recession hitting around summertime (as noted before not to be officially declared until half a year after that because that is just a fact of how recessions are declared — always more than half a year after they start as we wait for the stats to come in).
We may well see a second crash in US stocks because of this year’s recession, but whether we do or not is irrelevant now that we have already taken a trip with the bear. Another game-changing result of that excursion into the polar regions that happened because of the Federal Reserve’s Great Rewind is that it proved to everyone the Fed cannot do what it has always said it could (and I always said it couldn’t), which was to reduce its balance sheet and return to normal interest targets after building a fake (as in unsustainable) recovery. Therefore, confidence in the Fed is also badly shaken, leaving it weaker in its ability to lift us out of a 2019 recession than its bloated balance sheet and already-low interest rates leave it. At this time, the Fed’s moves are just following the market’s dictates. The Fed is now the market’s bitch in nearly everyone’s eyes.
Moreover, the Fed’s damage to the economy is still coming in. I’ve noted before that there is typically a half-year lag between any major Fed action and where the economy goes; yet, the Fed is continuing to reduce its balance sheet by the same amount this month and next, cutting that by half in June but not stopping until the end of summer. That means there will be half a year of lagging results after this summer, even as the Fed’s actions from this past winter are still playing out into this summer. With the Fed continuing to let more hot air out of the balloon until the end of summer, things certainly aren’t going to get more buoyant. So, there is plenty of downdraft still to carry through the general economy all the way to the end of this year as a result of the Fed’s recent and continuing actions.
My past statements about the next major economic downturn have always said the Great Recession will return like the undead because the Fed will go too far in sucking liquidity out of the economy. I believe the Fed has already done that, but the results of that withdrawal will take time to become fully realized. That’s why President Trump and his two stooges of finance are begging the Fed to go back to QE “immediately” because, if they wait until it is obviously necessary, it will be WAY too late!
You see, any results from the Fed jumping back into full economic-stimulus mode — if the Fed does as the Trump administration demands and as most financial analysts and investors now appear to expect — will also take time to be realized … other than in stocks and bonds. Moreover, any results they do get will have diminished returns at best. At worst, new Fed stimulus will now have an opposite effect if people are smart enough to realize it all means we are right back where we started and that Fed money–printing must now go on ad nauseam. So, the Fed has done its damage (which it really did by the recovery path it chose), and the bond market knows it. For stocks, as I laid out in that first Premium Post, this will be a year of turmoil whether stocks are generally up or down.
Now on to the talking points throughout the past week’s news that show we are, as I’ve claimed, goose-stepping our way into a 2019 recession as metrically as the ticking of a coo coo clock:
Tick tock goes the clock, counting down to a 2019 recession
The U.S. private sector added 129,000 jobs in March, the weakest reading in 18 months and below consensus expectations of 165,000, according to an Econoday economists survey. The report is watched for clues to official labor data due Friday.MarketWatch
New hirings around 120k or less are usually recessionary.
Following last month’s weak ADP print which front-ran the dismal “must be an outlier due to weather, shutdown, or anything else” payrolls data, expectations were for a slightly weaker ADP employment headline in March. However … ADP disappointed, adding just 129k jobs in March (well below the expected +175k…. This is the weakest growth in employment since Sept 2017.Zero Hedge
On the other hand …
The BLS reported that the US added 196K payrolls in March, higher than the 177K.Zero Hedge
Since the job reports are all over the place, it’s hard to know who to believe — the ADP or the government’s Bureau of Lying Statistics. You may recall that February’s jobs came in at an extremely disappointing 20k, which the BLS just revised upward to an almost equally disappointing 33k. To sort out the messy disagreement in job statistics, consider the following for the BLS’s more optimistic numbers: If you average all three months of the first quarter, 2019 is down from 2018’s average for the first quarter by a fairly significant 40,000 jobs per month. Annualized, that would be the lowest level in almost five years! So, even the better BLS numbers are not the numbers you want to see if you believe the Trump Tax Cuts and government hyperspending — now in effect for more than a year — are taking the economy upward! Kocain Kudlow must have lasting damage from his old habit in order to call this a strong economy, even as he begs for more immediate Fed assistance. No wonder he’s begging!
Meanwhile 2019’s rise in continuing jobless claims is the worst we’ve seen since the start of the Great Recession!
The overall unemployment rate just started trending back up as well:
Those little upticks at the end of each graph may seem insignificant, but they are actually highly significant because the first uptick in unemployment downtrends from a low bottom always immediately precedes a recession:
That means two of the most accurate predictors of recession, according to the Fed — yield-curve inversions and unemployment trend changes — are now lined up on the same side for a 2019 recession.
On average, since 1969, the unemployment rate trough occurred nine months before the NBER-determined recession trough, while the yield curve inversion occurred 10 months before…. The minimum lead times were one month for the unemployment trough and five months for the yield curve inversion.St. Louis Fed.
On the downside of the above jobs report, wages (which had been seeing a little better improvement, albeit briefly) fell off badly to just a 0.1% gain. Manufacturing jobs within this report also dropped significantly; so, on to manufacturing statistics of the week just passing …
Markit’s March services purchasing managers index [PMI] came in at 55.3 above consensus expectations of 54.8, according to FactSet. A reading of at least 50 indicates improving conditions.MarketWatch
Pretty good except …
US Manufacturing PMI dropped to weakest since June 2017Zero Hedge
So, services up but manufacturing well down … and …
The Institute for Supply Management’s services sector gauge fell to 56.1% in March, down from 59.7% in February.MarketWatch
A broad slide in manufacturing — as verified in both the jobs report and the PMI — is more likely to bring a 2019 recession than the converse rise in health-care and education jobs is likely to bring economic salvation.
In a world where Caterpillar is considered a global industrial bellwether and a key indicator of economic inflection points … today’s downgrade of Caterpillar by Deutsche Bank is a harbinger that the recent risk on euphoria may be coming to an end….. Dilllard says that “synchronized global growth has collapsed, the China Land Cycle is rolling over (and will continue to weaken despite the single positive data point this week), Europe is slowing more than expected and the US is oversaturated with construction equipment…. Together this synchronized slowdown will not only usher in a negative earnings revision cycle, but also make 2019 the cyclical peak.Zero Hedge
Then again …
The Financial Times reported that the U.S. and China were nearing the final stages of trade talks (paywall) and had two issues left to resolve—the current tariffs on Chinese imports and details on an enforcement mechanism to keep China compliant with the deal.MarketWatch
US stocks jumped euphorically this week upon China’s PMI (manufacturing index) getting a mild bump; but, in fact, a rise to 50.5 is not considered expansionary for China’s economy, but merely flat; and that tiny bump came after a huge one-off bump in credit by the People’s Bank of China, now mostly used up.
Meanwhile, other Asian countries are fully in a manufacturing contraction. PMI throughout European nations also continued to plummet.
Autos, retail and housing continue to sputter “2019 recession”
Auto sales in the U.S. wrapped up an ugly first quarter with dismal results for the month of March as the buying frenzy from last year’s tax cuts wore off and the economy continues to decelerate…. General Motors saw deliveries drop 7% for the quarter, with all four brands falling…. Fiat Chrysler sales fell 7.3%…. Ford sales were down 5% in March….Zero Hedge
All other major manufacturers with plants in the US were down, except Honda. Even pickup sales — a formerly hot performer — are sputtering.
Another area where the jobs report fell off was in retail. Only two periods in retail sales looked as bad as the presen — the dot-com crash and the Great Recession crash:
And that is including online sales!
One more higbly accurate indicator the Fed gives for timing a recession is a decline in housing:
Housing downturns have preceded every U.S. recession since World War II. For example, one measure of the momentum of residential investment turned negative before each of these episodes…. Recent movements in several housing indicators—mortgage rates, existing home sales, real house prices and the momentum of residential investment—resemble those seen in the late stages of past economic expansions. Could these storm clouds gathering over the housing market be signaling a broader economic downturn in 2019 or 2020….? Each of these indicators is in a range that, in previous cycles, preceded a recession by a year or two.St. Louis Fed
The hottest housing markets are still cooling, which doesn’t bode well for jobs in construction either (where job growth remained moderate in the latest reports):
Listing prices are declining in what were some of the hottest housing markets in the country…. For instance, the median asking price in San Jose, California, was $1,100,050 in March – the highest of 500 metro areas, but down 11.6% from a year ago. Median asking prices in Denver and Boulder, Colorado, experienced similar declines. The median asking price declined the most year over year in Lynchburg, Virginia, plunging 37% to $145,000. Overall, 114 of the 500 markets Realtor.com surveyed saw a drop in the median listing price. On the other side, smaller markets in the middle of the county experienced the largest increases in asking prices.USA Today
This is all just this week’s news!
Elsewhere, the Canadian housing market is falling hard (just a fun fyi, not that it has anything to do with a US recession … but certainly fits the picture of a simultaneous global recession:
The Real Estate Board of Greater Vancouver (REBGV) reported today … the lowest sales total for [March] since 1986 – down 31% from a year earlier and 46% below the 10-year March sales average.Seeking Alpha
And Australia’s is looking precarious:
Australia’s housing boom/bubble could unravel badly. Last week, Grant Williams highlighted a video by economist John Adams, Digital Finance Analytics founder Martin North, and Irish financial adviser Eddie Hobbs, who say Australia’s economy looks increasingly like Ireland’s just before the 2007 housing collapse.Mauldin Economics
Elsewhere on the global recessionary front, German industrial orders just took a slam to a level Germany hasn’t seen since the Great Recession, and Germany can always be counted on as doing better than any other part of the EU:
Germany estimates that, if Brexit doesn’t happen neatly, Germany’s own numbers will get much worse.
On the other hand …
Global recession fears are exaggerated and … a recovery is most likely in store for both China and the Eurozone in the next several months.Seeking Alpha
Sure. And what was this bit of good news based on?
While the financial media continue to fret over the global slowdown, a salient piece of good news having positive economic implications was largely ignored…. The good news is that at the end of the first quarter last week, the S&P 500 Index registered its best start to a year since 1998…. In years when the SPX was up strongly and didn’t suffer a significant decline in the first three months, it nearly always finished higher at the end of the year.
Yeah, that’ll do it. We’re safe from a recession in 2019 now. You can all go back to sleep. However, bear in mind, that assurance comes from a permabull who calls last year’s stinging bear market “a 20% correction,” making him, I think, the only person on earth who defines a 20% plunge that radically changes the course of the Fed and sets up a bond inversion as a “correction.” That man is from mars.
Why we NEED a 2019 recession
I am reasonably confident the few people (if not the only person) who mocked my prediction of a stock market crash in 2018 and of a housing downturn, both of which hit on every beat throughout the year, aren’t going to do any better betting against me on a 2019 recession.
I know that sounds smug, but here’s why I don’t care: I like to taunt them into trying to because, when this all proves out just as 2018 proved out, it all goes to demonstrate that the massive failure of the Fed’s fake recovery was as predictable as I’ve always said. The Fed’s plan is going to fail; it was always obvious it was going to fail; and it is now, in fact, failing in exactly the manner I’ve said it would.
What I really want to do is utterly destroy the Federal Reserve’s unmerited credibility and, with that, its centralized planning and manipulation of the global economy as well as its rigging of stock and bond markets. I want to see Capitalism rise again from the Fed’s ashes. To that more important goal, I think a big, fat recession in 2019 could be the best thing that every happened, even though it would be the worst thing that ever happened.
So, bet on the Goliath Fed, or bet on this little David. The Federal Reserve went down hard last year even as each of my little stones hit their mark (stock-market crash, Carmageddon, Retail Apocalypse, and Housing downturn). So, the Fed bears some disgrace by lying flat on its face already. Now, it’s time to cut off its head, which it will do for me when the 2019 recession starts to undo the whole well-Fed world, and Father Fed is helpless to prevent it.
Two Down, One to Go, and the Fed is Stuck: My most important economic predictions have come in rock solid
Two of my biggest and longest-term predictions for 2018 and 2019 proved resoundingly true this week, and my sole prediction for this year — a prediction of recession bolder than anyone else’s — moved a big step closer to coming true.
Prediction #1: The Fed will prove to have no exit plan from its recovery program
The oldest prediction on my blog, repeated like a refrain throughout the writing of this blog, has been that the Fed would discover as soon as it tried unwinding from its recovery program that it cannot do it. I’ve claimed over and over we’ll all discover the Fed has no exit plan that will work for the simple reason its recovery plan was never sustainable. It is important to prove now that that claim was clearly laid out and is, once and for all, established fact because if people don’t get their head fully around that fact they have been denying for years as I have been writing this blog, then we are destined to repeat this delirium forever.
For years the Fed promised that it someday would unwind its balance sheet and that this process would be “as boring as watching paint dry” or that it would happen “on autopilot,” but I pointed out the end-game problem for quantitative easing clear back in 2012 when the Fed first began its QE program:
Regardless of its objective, the debt IS what The Fed has been buying with the money [from QE]. With the Fed now as its ready buyer for long-term bonds, the U.S. government is assured of auctioning all its bonds at very low interest rates. Apparently the Federal Reserve as a whole has decided this is only a bad game if you keep playing it, but what is the end game so that you can stop playing it?“An Idiot’s Guide to Quantitative Easing“
I stated again in 2012 that there was no actual exit strategy from quantitative easing:
The political leaders of this world — U.S. and European both — will continue to run the presses at full velocity because the cost of admitting they are money-printing and that they are on a bad course is too high politically. They will stay with their present plan, hoping they are buying enough time for an exit to emerge.“Economic News Articles in the Great Recession“
In 2013, I predicted in a similar vein that the QE-based recovery would only hold so long as some form of QE held (which would mean you can certainly never unwind it):
While luminaries like Marc Faber predicted a great economic collapse in 2013, I decided the government has a lot of energy to keep powering through a bad plan…. My economic predictions at the start of 2013 [were] the leaders of the world would continue to believe they could resurrect the dinosaur economy by trying to pump it up with debt. It is what worked before and what worked before that, so it is all they know, and all they’ll try. They will do all they can to save the economy through low interest rates, designed to entice people to to buy homes and take on debt again…. Since quantitative easing has never righted the situation for good, it should be evident that is nothing more than a prop … a crutch…. I have said from the time the first quantitative easing was promised by the Fed, that it would fail to have any lasting result, and each round has failed as soon as it stopped…. So, I predict the dinosaur economy I have written about will continue to breathe awhile longer, but … what we have seen in recent years is not a recovery at all. It [is] merely the intoxicating effect of trillions of dollars mainlined into banks for free. It lasts as long as the drug lasts and is not, in the least, sustainable.“2013 Economic Predictions Revisited“
In December of 2015, I noted again that it continued to be evident the Fed had no end game after it equivocated all year on starting its rise in interest rates:
Does the Fed not believe in its own recovery? Will we suffer the uncertainty of “will they/won’t they” like a repeating, nauseating dream forever? Does the Fed have no end game? Have they really painted themselves into a corner?… The Fed will lose all credibility, and in the fiat money game, credibility is the core value of money….“The Epocalypse: What Will D-Day Look Like?“
Two years ago (in 2017), I wrote in a comment to one of my articles …
Of course markets respond to free money! How could they not respond to trillions of dollars of free money? But there is no end game to that. It only creates wealth for those who have extra income that they can afford to put at risk and who also think they understand markets well enough to gamble in that casino; but there is no end game because it ends as soon as the free money ends.“Is the Central Bank’s Rigged Stock Market Ready to Crash on Schedule?“
And in another article that year, I wrote …
I have always stated that the recovery program is completely unsustainable and that all signs of life end as soon as the artificial life support is removed…. There is no end game…. These people are flying by the seats of their pants to go where no man (or one Yellen) has ever gone before. They are trying to figure their way out as they go, just like Japan, which finds itself endlessly pitched back into new and greater rounds of QE every time it tries to taper…. The Fed’s recovery is a failure because it was never sustainable from its onset….. The end game was supposed to be that a thriving economy would be able to absorb the Fed’s very gradual unwinding, but that vital economy never emerged…. The central banks have painted themselves into a corner.“Central Banks Buying Stocks Have Rigged US Stock Market Beyond Recovery“
As if that wasn’t strong enough, I came even more strongly to the point in July of 2017:
I believe the Fed WILL start to unwind, as they’ve said they will, and havoc will begin in stocks and bonds and housing and all kinds of markets as quickly as the Fed starts to do what it has long said it will do and people begin to see that it cannot do it. I have always suspected they have no end game, but they thought they would eventually unwind into a strong economy with a lot of resilience toward their unwinding. They probably even thought their recovery would build to where some gradual cooling might be necessary to avoid inflation. Their unwinding would cause that necessary cooling. Instead, they find they have, at best, a nearly stagnant economy where borderline stagnation promises to be the best they can hope for throughout years to come, and they have almost no inflation (by their measure). So, they must now figure out how to unwind in a situation of borderline stagnation … or never unwind.“How Will the Federal Reserve Untie its Gordian Knot?“
Here’s how I said that would play out for the stock market:
Rising interest on bonds will tend to draw money out of stocks, so stocks will fall unless they receive even more extraordinary propping.
And so it happened last year.
I even wrote …
Since the Fed used quantitative easing in order to lower interest rates (especially long-term interest rates, such as on mortgages) and to increase liquidity, I don’t see how they unwind their QE without causing interest rates to rise. In a robust economy, they might want interest to rise; but in the present flagging economy, a rise in mortgage rates will cause the latest housing bubble to collapse because the housing market already looks like it is turning.
And so that happened, too.
Many have seen this conglomeration of collateral problems coming (or, at least, something like it), but the Fed continues to tell everyone it can manage its way through all of that. I think investors in most markets have just been covering their eyes, saying, “Well … OKaaaay….” but have no idea how the Fed will actually be able to do what it says it will do. Investors are extending blind trust in order to avoid thinking about the party ending. They are saying, “Well, the omniscient Fed gave us a recovery and made us rich on stocks and bonds all at the same time, so they will be able to do this, too.” That’s dogma, not science or even math. It’s also denial.
After all of this played out at the end of 2018, I reiterated …
I have always said there is no end game. That is, there is no way out of years of quantitative easing that will not undo what quantitative easing did.“It’s Up, It’s Down, It’s Done — a Day in a Year of the Dow“
Then in February of this year, I wrote…
Here is a single chart that proves how completely the Fed’s end-game for its recovery failed, which means the fake recovery, itself, is failing…. 2018 became a year filled with market explosions…. 2018 gave us the worst stock market crackup by far since the bottom of the Great Recession. (So much so that it stands out like a fire on a hilltop in the graph above of that entire period. You don’t have to look for it to find it.) We can now clearly see the market’s breakup coincided perfectly with the Fed’s balance-sheet unwind. In only three months the market lost almost a quarter of everything it had gained over the entire past decade of massive quantitative easing! There is not the slightest chance the Fed would have made such a hard reversal of its stated plan, causing Powell to look (as many commentators are now saying) like “Trump’s bitch,” if the Fed did not believe the market was crashing hard. That it caved in on its master plan so quickly says to me that it feared the market’s blow-off top risked becoming an all-out crash if it did not capitulate to Trump’s demands.“The Fed’s Failure is a Fait Accompli, Exactly as This Blog Said it Would be!“
My repeated claim about the Fed’s inability to unwind, of course, was a prediction that took years to prove out (as I said it would) because there were years of recovery effort before the Fed even tried to stop economic stimulus — as I said would be the case (see the final section below) — and then more time beyond that before the Fed started to try to unwind its balance sheet. Yet, the time of the Fed’s last stage of its exit plan finally came in 2018, and my prediction has now proved resoundingly true.
It all turned into such a massive blowout that it caused the Fed to back away from an end-game that it had just told us would be so easy it would run on autopilot — the very statement that triggered the market’s collapse. It did that at the end of December. Now the Fed has gone a step further in showing just how done it is with raising interest and unwinding its balance sheet. Says one economic advisor,
The Fed’s abrupt policy reversal says it all. No more rate hikes (yes, one is “scheduled” for 2020, but that’s fake news), and the balance sheet run-off is being “tapered,” but will stop in September. Do not be surprised if it ends sooner. Listening to Powell explain the decision or reading the statement released is a waste of time. The truth is reflected in the deed. The motive [for the statement] is an attempt to prevent the onset [of] economic and financial chaos.… As the market began to sell off in March, the Fed’s FOMC foot soldiers began to discuss further easing of monetary policy and hinted at the possibility, if necessary, of introducing “radical” monetary policies.Seeking Alpha
(You can read the Fed’s full sanguine summary of its latest March meeting here.)
The short of it all is that the Fed no sooner got up to full unwind speed in the fall of 2018, than the stock market crashed. The Fed now knows it can go no further down that road and, therefore, it just added the assurance in last week’s meeting that it will retain indefinitely a much larger balance sheet.
Today, Four time best-selling author Jim Rickards sees the Fed’s situation as having turned out just the way I said it was going to all along:
Rickards says, “Bernanke painted them into a corner, and they can’t get out. There is no escape from the room…. They got into it, but they can’t get out of it because every time they try, they sink the stock market. They sink the housing market. They raise the specter of recession. They slow economic growth. They don’t want that. So, they sort of pause and maybe tiptoe back into it, but they really can’t get out of it.”USA Watchdog
The Fed got only as far as reversing its quantitative easing a mere 10%, and it had to do a hard stop! Even so, the Fed’s attempt to stop economic chaos by doubling down on how fast it is ending its reversal, which is called “quantitative tightening,” only led to the fulfillment of my other big prediction regarding the Fed’s end of its recovery program.
Prediction #2: The Fed will find itself stuck between a rock and a hard place
The market vomited on Friday, the day after the Fed’s March meeting where it talked of stopping its unwind and retain a huge balance sheet for good. So, it’s not going any further forward with tightening. However, it can’t go back either to easing either.
One of my other refrains has been that, after tightening, the Fed would find it cannot move back toward more quantitative easing without crashing the economy because doing so will jar markets into the reality that the Fed doesn’t know what it is doing. We saw that prove out this past week when the Fed could not even make a statement about staying on hold, much less easing, without a huge negative effect on interest rates and stocks.
Here is the Fed’s rock and here is the Fed’s hard place:
Rock: The Fed’s increase in interest rates and its balance-sheet rolloff caused a housing slump and crashed the stock market in 2018. The stock market’s dive into a bear market (3 out of 4 major indices), pushed money rapidly into bonds, lowering bond yields, and that lowered mortgage interest rates, even though the Fed was still raising its target lending rate and dumping bonds from its balance sheet. You can see below how mortgage interest started rising in late 2017 with the Fed’s first little nips off its balance sheet and how, when its balance sheet unwind doubled in speed at the start of 2018, mortgage rates shot up and then shot up again as the balance-sheet unwind hit full velocity in the fall of 2018 but then fell rapidly away when rising yields began drawing a massive flow of money into bonds, driving interest back down and sucking money out of stocks:
In the recent past, such a long slump in housing as the past six-month decline caused the Great Recession. You may recall the team action of the Fed and Fannie May and Freddie Mac that led to that housing crash. The Fed lowered interest, and Fannie and Freddie eased mortgage qualifying terms, such as down-payment requirements, to keep goosing the market up until none of those things could go any further. When the market looked too hot, the Fed started to raise interest, and the low-interest-dependent housing market crumbled.
What have they done this time?
In January 2015 … Fannie Mae and Freddie Mac began reducing the qualification requirements for government-backed “conforming” mortgages, starting with reducing the down payment requirement from 5% to 3%. For the next three years, the government continued to lower this bar to expand the pool of potential homebuyers and reduce the monthly payment burden. This was on top of the Fed artificially taking interest rates down to all-time lows. In other words, the powers that be connected to the housing market and the policymakers at the Fed and the government knew that the housing market was growing weak and have gone to great lengths in an attempt to defer a housing market disaster. Short of making 0% down payments a standard feature of government-guaranteed mortgage programs, I’m not sure what else can be done help put homebuyers into homes they can’t afford.Seeking Alpha
In other words, this threesome of fetid finance did exactly what they did to create the last housing bubble, and then the Fed did what it did to pop that bubble. the Fed began raising interest, as it did in 2007. Look at where we are now. The housing market’s decline through the last half of 2018 and the stock market’s hard fall in the fall, caused the Fed to back off immediately (by Fed glacial speed comparisons).
The housing market in February of this year responded with some notable improvement, and the Fed backed off one final step more. However, it’s too late. I doubt that February’s bounce in housing sales is going to turn into anything more than a temporary reprieve after months of continuous decline in sales. Here’s why:
Hard place: Backing off a tiny bit more this week on interest-rate increases and its balance-sheet rolloff, as the Fed did, instantly caused a yield-curve inversion, the biggest and most reliable recession indicator (or cause) there is. That’s because an inversion of the yield curve pushes banks away from making mortgages and other kinds of loans. That leads into recession because available credit starts to dry up, causing its own tightening of the economy, for credit is the slack we run with.
This inversion looks even worse than previous inversions:
What’s unusual about this yield curve inversion … is that typically the spread between the 10-year and 2-year Treasury yield inverts first – rather than the spread between the 10-year and 3-month yield. “The difference between the 10-year and the 3-month is the bigger deal,… so make no mistake: this is a sign that the market needs to take very seriously.“Seeking Alpha
The yield-curve inversion means Fed is stuck. It has no room to move back into more easing in order to help the housing market with lower interest rates again because its back is up against the inverted yield curve that resulted from prior years of easing.
The stock market felt the lurch the Fed is stuck in so it fell off a little cliff of its own on Friday, reinforcing the wall that the Fed has backed into. At first, the stock market responded by soaring upward on Thursday. Before I could even put together this article to say that was a meaningless euphoric bounce, the bond market put in a response of its own, inverting the yield curve, and stocks fled in terror. The VIX (volatility index) leaped up 24%.
For stocks, Friday was the worst day since the start of the year with the Dow down 460 points and the Nasdaq down almost 200 points (2.5%), primarily due to the yield-curve’s first full inversion since 2007 but also due to a few staggering blows in economic data. (That being said, I would not be surprised if the stock market gets a bump at the start of this week due to the weekend release of the long-awaited Mueller report, which largely exonerated President Trump. If so much relief from concerns about how impeachment will throw twists and turns into the economy doesn’t give the market some temporary lift, then it is falling like a rock.)
It wasn’t just the yield curve, though that sent stocks plummeting, it was the very fact that the Fed has so sharply backed off. Many commentators have been talking about how the Fed spun on a dime and about how embarrassing that must be after all the assurances about how easy unwinding was going to be, calling to question the Fed’s credibility. The market took also the Fed’s further step back from tightening as a warning that the Fed sees something dangerous immediately ahead:
“The Fed has set the tone for the markets, and if you trust their ability to ‘see around corners,’ then you will continue to maintain a risk-off position,” said [Kevin Giddis, head of fixed income capital markets at Raymond James] in a note to clients.MarketWatch
There’s something brewing in the financial sector that could be worrisome to stock-market investors, especially those who shiver recalling events that led to the 2008-09 financial crisis…. The SPDR Financial Select Sector exchange-traded fund, XLF, tumbled 2.8% Friday, with 64 of its 68 equity components losing ground…. The financial sector is viewed by many on Wall Street as a leading indicator for the broader market…. The XLF has been in a downtrend for the past 14 months…. This week, it broke below the December trough to hit the lowest levels seen since October 2016.MarketWatch
Perhaps Friday’s big plunge in the overall stock market indicates the market is now paying attention to where financials have been leading.
The Fed couldn’t go any further forward with its Great Recovery Rewind without causing a housing recession and a stock market crash, but when it backed one tiny step further back this week, bond buyers pushed for recession anyway, and the stock market returned to crash-mode anyway.
So, the Fed is now jammed in place, which is where I’ve said all along it would find itself very early in its attempts to return to normalcy. The instant inversion of the yield curve is a screaming warning that the Fed has tightened us into a recession:
S&P 500 could fall 40% as yield curve inverts, says analyst of one of 2018’s best hedge-fund returns…. Stock investors should heed the warning emanating from the bond market, says at least one hedge-fund manager, as the yield curve staged a stunning inversion Friday. “I think people are going to be surprised where the S&P 500 is trading at the end of the year. We’re going at least for a 40% decline from the S&P’s top,” Otavio Costa, a macro analyst at Crescat Capital, a hedge fund that oversees $52 million, told MarketWatch in an interview…. An inversion of this spread — the most closely watched by economists — has preceded every recession since 1960, though the timing between the two events can vary.MarketWatch
“Yield curves are responding to what they see, to what I believe is a global economic slowdown,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “You don’t see this kind of move in curves, not just here but everywhere, unless you get one.” Short-term yields moving ahead of their longer-duration counterparts is seen as a sign that growth will be higher now than it will be in the future….CNBC
In short, the bond market didn’t believe Jerome Powell when he said at the close of last week’s FOMC meeting that the US economy was stable because, if the economy is as good as the face Powell tried to put on it, why has the Fed gone full dove?
“All anyone needs to do is read the first paragraph of the Fed press statement to see that the central bank has marked down its assessment of the economic landscape – the choice of words suggests far more than the tweaking that was done to the numerical projections,” David Rosenberg, chief economist and strategist at Gluskin Sheff, said in his daily note Thursday.
Rosenburg notes that the real yield on the ten-year note never got this low even at any point in the Great Recession. That overall yield shifted so far in twenty-four hours was nothing short of stunning. On the other hand, Ed Yardeni, who is always too optimistic in my opinion stated with his usual rosy glow in this same CNBC article,
“Could it be that the yield curve is signaling weak global economic growth and low inflation without necessarily implying a recession in the US? We think so, and the US stock market apparently supports our thesis,” Ed Yardeni of Yardeni Research said in his morning note Friday. “So why are global stock markets also doing so well? Perhaps there is too much pessimism about the global economic outlook.”
Too bad he published that only moments before the stock market strongly disagreed with his thesis and capitulated in a major roll-over response to what was happening in bonds. Perhaps there was too much optimism about the global economic outlook in Yardeni’s permabearish smile.
“It will come down to the U.S. consumer. That’s the last thing that’s holding us up,” Boockvar said. “We’ll need a decline in the stock market to tip over the consumer. So if the stock market can hang in, I think the U.S. can continue to see some growth. If we start to go back to the December lows again, that could be enough to tip us over.”
“There’s a host of worries out there and those worries continue to mount,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “The fear of recession is increasing. As a result, we have a market that is rethinking some of the optimism that was priced in….” Friday’s moves come after Fed surprised investors by adopting a sharp dovish stance on Wednesday, projecting no further interest rate hikes this year and ending its balance sheet roll-off.CNBC
Two steps back from tightening turned out to be one step too many. There is no end-game that works for the dilemma the Fed has created.
Jeff Gundlach, the new anointed bond king now that PIMCO’s former CEO, Bill Gross, has abdicated the throne, seems to agree:
Three months ago the Fed predicted totally different policy than where they are now. How can they predict 2020 policy with a straight face?— Jeffrey Gundlach (@TruthGundlach) March 21, 2019
In an interview with Reuters, Gundlach said,
“This U-Turn – on nothing fundamentally changing – is unprecedented…. Three months ago, we were on ‘autopilot’ with the balance sheet – and now the bond market is priced for a rate cut this year. The reversal in their stance is stunning.”
Gundlach says the Fed’s hard stop and double-dovish statements could hurt the central banks credibility. As I’ve noted many times credibility is all the Fed has to sell.
Just because things seem invincible doesn’t mean they are invincible. There is kryptonite everywhere. Yesterday’s move created more uncertainty.
As with my own prediction of a stock market crash in 2018, Gundlach correctly predicted 2018’s negative returns for the S&P 500, and he sees the S&P as set for another negative year this year, just as I said last year would be the start of a long market crash that would be interrupted by a number of major rallies, taking a couple of years to find its bottom — maybe more. “It feels eerily like ’07,” Gundlach noted.
Even the Fed admits it went too far with its tightening and is scrambling to avoid the problem it has created:
The Powell Fed is moving fast because it “recognizes that it was behind the curve on ending the balance sheet runoff,” said former Fed governor Larry Meyer, in a note to clients.MarketWatch
When the Fed flinches, better everybody flinch. The stock market, the housing market, and the general economy couldn’t handle it … just as I said would be the case.
Prediction #3: We’ll be in recession by sometime this summer
On February 17th of this year, I wrote …
My first prediction for 2019: I believe the US will go back into recession as soon as the Fed actually reverses course on interest rates. I believe things will be generally bad enough by late spring or summer (for all the reasons I laid out in my Premium Post titled “2019 Economic Headwinds Look Like Storm of the Century“) that we’ll see the Fed actually stop QT and reverse interest rates. However, we will already be in a recession when they do, though it will not be officially declared that the US entered recession until the end of the year or start of 2020 because recessions are only declared a month after GDP has receded for two straight quarters.“The Bears Have it Right: Economy went Polar Opposite of Bullish Predictions“
The first part of that already proved exactly on with the Fed stating it will cut QT in half before summer starts and will stop it altogether at the end of summer. (They will phase the stop throughout the summer, ending it in September, the last month of summer.) Whether the Fed will reverse interest rates by then remains to be seen, but the main part of this prediction was that we will be in a recession by or before summer.
I was leaning toward making that prediction in January when I wrote …
I think the Fed actually sees the recession coming but can never say so because its mere change of a pronoun reverberates throughout markets. What would happen if it ever said it sees a recession developing? Why else would the Fed start easing if it didn’t see trouble coming? By the time the Fed returns to easing, a recession is already foaming at the mouth. So, either they see it coming but lie and say they don’t — as Ben Burn-the-banky famously said in the summer of 2008 — or they are blind in the area of their supposed expertise.“The Great Recovery Rewind: How the Federal Reserve’s Balance-Sheet Unwind is Unwinding Recovery“
By the end of January, I added …
… the Fed had said that runoff would continue unless there was a substantial risk of a recession…. If such a face-losing change of course is due only to economic data, the Fed has surely put us all on economic watch.“Powell Put Sends Stocks Soaring, Recession Must be Near“
The Fed, of course, also stated in February that the US economy was solid, a statement it removed in its March meeting summary.
A month after I made my bold February prediction (having seen no one else make it), others are starting to line up with my recession timing, which many would have though premature when I made that leap (and most still do):
“The indicators are stacking up to suggest that this [a recession] is not a 2021 phenomenon, that we could actually see the possibility of a recession starting maybe later this year,” Liz Ann Sonders, chief investment strategist at Charles Schwab, told CNBC’s “Closing Bell.”CNBC
One of the reasons I gave for my prediction in the article where I made it was that the yield curve was close to inverting:
The yield curve has already twisted and contorted into portions that are flat or inverted. Nomura’s Charlie McElligot notes that steepening of the curve after inversion is the actual point at which we have almost always gone into recessions historically. My way of putting it is that “flattening of the yield curve cocks the gun; reducing interest rates again fires the gun.”
I had just noted in another article that yield-curve inversion is the most reliable predictor of recessions there is, using the following chart:
An inverted yield curve has happened shortly before every US recession because the Fed has always tightened up financial conditions at the end of its recovery programs by raising interest rates until the yield curve inverts…. If you click on the link in the caption to the graph, you’ll see that even the Federal Reserve is aware of the fact that it tightens interest until it creates recessions. Apparently it doesn’t care because it continues to do this every time.“BOND PRIMER: Does Inverted Yield Curve Indicate Recession?“
And, so, here we are. They’ve done it again, tightening until things go bonkers and the yield curve inverts. The fact that the yield curve stepped into full agreement last week with my February prediction is the strongest support that prediction can ask for, short of the final proof of a recession measuring out in GDP.
The reason the yield curve has been an absolutely reliable indicator of imminent recessions is that inversion of the yield curve makes it almost impossible for banks to borrow money cheaply now in order to loan it out longterm for a profit. Banks do poorly in that kind of abnormal interest environment. Caught in that odd position, credit starts to dry up.
That’s why bank stocks have been leading the downhill the charge in stocks. Lack of easy credit creates a liquidity squeeze on the entire economy, and that is why the rest of the stock market rapidly followed banks over the cliff like a bunch of lemmings on Friday. With easy credit rapidly drying up and cash hoards from foreign profit repatriation last year now diminishing, stock buybacks will also dry up soon, leaving no money left to pump stocks up since companies have already entered an earnings recession.
Bam! The whole economy hits a wall.
The following recession indicator by Bloomberg and Financial Sense Wealth Management shows we are now right at the point where most recessions begin.
Just as the following chart shows we are as high and long in the business cycle as we have ever been:
Usually the business cycle has turned down just ahead of a recession, but in four instances it turned down exactly at the start of a recession or even slightly inside of a recession. So, any time now is fine.
Other US signs of recession: The Empire State Manufacturing Index took a huge plunge last week from 8.8 in its February report to 3.7 in March. (Wall Street’s rosy-eyed economists were looking for a robust reading of 10!) IHS Markit’s purchasing manager’s index hit a 21-month low, dropping from 53 to 52.5 when America’s brilliant economists expected it to rise to 53. E-commerce sales (not brick-and-mortar) dropped from 2.6% growth in the third quarter of 2018 to a just-reported 2.0% growth in the fourth quarter. (And the third-quarter growth rate was revised downward from a previously reported 3.1%.)
The world is awash in chaos
At the same time, we just learned this week that the Donald’s trade war with China (with all of its attending tariffs) has likely been extended into the summer, according to the South China Morning Post. Brexit got pushed against a hard-Brexit wall by the EU, and the European economy is sliding so far backward that German bunds fell back Friday to yielding negative interest rates as the European Central Bank slashed its already low economic growth projections and rapidly switched from its promise to follow the Fed in tightening immediately back into easing (seeing how the Plan Fed failed) and as Europe’s German industrial giant flash crashed.
The ECB cut its GDP growth projections from from a sad 1.7% to a pathetic 1.1%. German manufacturing PMI fell from an already low 47.6 (under 50 leans into recession) to 44.7, its lowest reading since 2012! France followed a similar path — dismal news, given that our dim-bulb economists had generally expected a nudge of improvement but got a face-plant instead.
The British were told by Europe, either accept the Brexit deal that the UK parliament has already overwhelming rejected twice, or crash out of the EU with no deal on April 12th. They got a wee bit of extension from the end of March to chew on that and then take the deal as it stands or get their butts out the door.
South Korean exports dropped 19.1% last month.
Parts and pieces of the global economy are falling like ice calving from a glacier in the summer heat. After ten years of red-hot stimulus recovery efforts, the Fed and its European counterpart thought they could tighten things up a little, and within the shortest time imaginable the global economy hasn’t looked this bad since the Great Recession.
And that is why the Fed and the ECB put a panic stop on their tightening efforts.
Never been a permabear
For the sake of those who wrongly claim I’m a permabear who just keeps predicting recession and stock market collapses from year to year, I’ll highlight that I said there would be no stock market crash or economic recession in 2013:
No spectacular end in site for the economy in 2013. Nouriel Roubini, and Jim Rogers also predicted an economic collapse in 2013. The … parties mentioned … believed it would be triggered by the “fiscal cliff” we would slide off of at the start of the year. I believe they are right that greater economic collapse is coming, but I did not believe their timing. Instead, I predicted, “we are more apt to see a long and worsening economic malaise than an imminent crash.”“2013 Economic Predictions Revisited“
More to the point, I went on to say back in 2013 …
The Fed will hit its end limit, and it’s repeat failures to accomplish anything that sustains itself are solid evidence that I am right…. We are out of recession only because quantitative easing continues at a huge level. As said above, that locks the Fed into continuing it.
In 2014, I also refrained from predicting a stock market crash or a recession:
I’m not going to go so far as to say there will be a 2014 stock market crash this fall, but there are some concerning forces building up…. I’m still not crying in this blog that the sky is falling this year — not putting the indicator at red just yet.“Will there be a 2014 stock market crash?“
I did, however, predict a critically bad time for the stock market to come in the fall of 2014, and such a time hit like a truckload of bricks. The market broke, and after the break failed to rise again for two full years:
This is coming from someone who has not been crying the sky is falling for some time…. I won’t go as far as I did with the housing market [in 2007] by predicting a stock-market crash based on the evidence at the moment, but I will say it is looking like a significant risk this fall…. I avoid sensationalism or market pessimism, but unlike bullish market optimists I will predict doom when doom really is on the horizon, but not before. I would move the needle on my gauge that monitors the likelihood of an economic crash this year from yellow to solidly orange where I predicted in the spring that it would be come fall … while most others are saying it has moved from yellow toward green. The sad tale to be seen in the market today is that we have learned nothing from the economic crash of 2008 and less than nothing from the high-tech crash at the beginning of the millennium…. The likelihood of that market toppling in the fall has increased. I’m still not crying in this blog that the sky is falling this year — not putting the indicator at red just yet — but you need to keep your eye on these forces.
As soon as fall hit, the market broke. It didn’t crash, just as I said it might not get that bad, tumbling only into a correction, but it truly broke in that it did nothing but churn violently sideways all the way up to the day Trump was elected two years later.
In an earlier article for 2013, I had stated,
With the U.S. and most of Europe financing their toppling debts with Ponzi schemes, I predict years of malaise that will not go away until our economies either blow apart from their own centrifugal forces or until leaders break denial and realize they have not laid groundwork for a new sustainable economy but have tried to keep alive a dying dinosaur. That dinosaur has to fail because its principles of building “wealth” out of debt were wrong in the first place.“2013 Economic Predictions“
That is essentially where we are now: the Fed realizes its recovery is not sustainable without maintaining an enormous balance sheet (though it has no idea why); nor is it sustainable under normalized interest rates. So, the Fed has stopped interest increases just below the level that it said last year it would consider “normal” and has promised to sustain a huge balance sheet indefinitely.
One tiny second step away from tightening just caused as much market mayhem in both stocks and bonds as a little too much tightening caused. Imagine what a move back, toward actual quantitative easing would do! The Fed is jammed in tight.
And why is it so important to make all of this crystal clear? Because the bailout banksters — Fed and pocket politicians included — will soon be telling you no one could possible have seen something like this coming. Yes, you could. It was baked into the phony recovery recipe from the beginning.
As happened with the first housing market crash that began in 2007 but didn’t become widely recognized until mid-2008, the present housing crisis began exploding one story at a time last summer, and this blog was perhaps the first to state that summer’s change was the turning point from decades of ascent into a collapse in housing sales and prices. I said the same thing back in 2007, and people didn’t believe me then either.
The present housing market crash, like the last, was created by the Federal Reserve artificially pressing mortgage rates down, then down further, and then down as deep they dared push for years and years. Falling interest, allowed people with flat incomes to keep purchasing increasingly expensive homes. Since people buy payments more than house prices, housing prices kept rising as payments were kept in line via these artificial interest reductions.
The Fed’s ill-conceived plan, however, was never sustainable prior to the last housing market crash and is not now. I’ve said throughout the Great Recession and ensuing years that, sooner or later, we’d get to the point where the Fed would have to raise rates, and I’ve said its quantitative tightening will certainly raise rates as much as it increase in stated interbank lending interest targets. I’ve also said that, by the time the Fed started raising rates, housing prices would be unaffordable without the Fed’s artificially lowered interest; therefore, the market would have to crash all over again because , all over again, people would find themselves underwater on their mortgages.
And now here we are. US banks have not started to go down, but they are feeling serious pressure as this article will point out, while eight months of statistics now prove housing is relentlessly falling with NO hint of letting up. As I wrote in my first Premium Post, “2019 Economic Headwinds Look Like Storm of the Century,” Housing Market Crash 2.0 is one of the numerous forces that will be knocking the US economy down in 2019. The rest of the global economy is already down further than the US.
The principle driver in Housing Market Crash 2.0 is the Federal Reserve’s Great Recovery Rewind (the downsizing of its balance sheet, which tightens financial conditions). This, I said two years ago, would cause mortgage rates to start rising one year ago, and you can now see that mortgage rates did exactly that all of last year:
Mortgage rates rose only a minuscule blip when the Fed started with a tiny rolloff (tightening) near the end of 2017, even as I had said the Fed’s unwind would not likely cause any serious damage to the economy until January 2018. Rates, however, immediately ramped up steeply went the Fed doubled its roll-off rate in January (which was when I said the balance-sheet unwind would start to have serious market impacts). This has hit stocks, bonds and housing the worst … so far.
Since the housing market is one of the major areas where Americans store wealth and since it is an industry that buys products and labor from a multitude of other industries, a decline in housing impacts the economy more than any other industry.
US Housing Market Crash 2.0
Here is the path US housing prices had been following until the market rolled over:
And here is a play-by-play of how the housing market crash has gone since I made my brazen summer proclamation that it had arrived on schedule:
June-July, 2018: Average housing demand in the US was reported to have fallen 9.6 percent in June YoY, while the number of listings increased. Overall, 15% fewer offers were made on homes, which is probably why the inventory grew. In many major markets, however, inventory declined. Agents in So. Cal reported bidding wars were cooling down. Where homes had been getting 10-15 offers (causing a bidding war), they were now just getting one or two.
Prices continued to climb or remained high because sales have to slump a lot before sellers become willing to accept the harsh reality that their homes, in which they have so much of their wealth invested, are not worth as much as they were. As inventory rises, buyers become more choosy and make offers on only the best-priced homes, rather than bid prices up. As a result, prices stall so do buyers until eventually their waiting overcomes seller inertia and sellers start to move down to find the more deeply coalesced pool of buyers.
In affluent areas, however, prices already began to fall. In part, this jolt down at the top was due to the Trump Tax Cuts, which funded some cuts by curbing deductions for mortgage interest and particularly for property tax. That hit areas like Manhattan, Westchester County, New Jersey and Connecticut the hardest because of their high property taxes that had been paid on behalf of the wealthy via income-tax breaks. (Property-tax bills in Westchester County, one of the highest in the nation, commonly hit $50,000 per year or more.)
On a quarterly basis, purchases nationally plunged 18% in the second quarter.
August, 2018: Near the end of summer, reports like the following started to appear for the first time in almost a decade:
“We all think next year is going to be a tough year for real estate sales,” said Matthew Roach, a property attorney in Yorktown Heights, New York…. Some buyers are saying, “‘Look, I’m not going to spend more than $35,000 in taxes,’ ” said Angela Retelny, a broker at Compass. “Houses … have to be reduced — because their taxes are just way too high for the price range….” The state of the market is such that you’re seeing “dramatic price reductions every single day — every hour, pretty much,” she said.”Bloomberg
But it was not just high-end markets that hit the skids. Farms in the midwest had been seeing rising bankruptcies for a few years, and finally broke above the peak they hit in the last housing market crash:
The rise in farm bankruptcies, however, had little to do with mortgage rates or housing prices, and everything to do with commodity prices (particularly dairy); however, as goes the farm business, so goes the sale of the farm. More people selling in distressed conditions coupled to fewer people interested in buying into a failing industry equals tougher sales; and, so, this distress was certain to flow out into declining sales and prices. (Fire sales of land and equipment due to distress last summer are now well underway.)
The impact hit first in delinquent Ag. loans in the upper midwest, which rose (when measured against the farm capital backing those loans) to strike a level worse than what was seen in the pit of the Great Recession. The Kansas City Fed predicted farm income would worsen into 2019. The Trump Trade War certainly isn’t helping.
(During this same time my wife and I — putting my belief in a housing market crash to practice — listed our farm in the hope of selling near the peak, possibly renting and then buying back in at a lower price in a couple of years. We hope to retire our mortgage so that we can more easily retire five years from now. We both have jobs that are fairly recession proof, so we’re not too concerned about needing to grow our own food. Still, if we can’t sell at near-peak value, we’ll happily hold on here since the farm produces relatively passive income. (We let other people rent agricultural use and do 90% of the work.) If things ever did go extremely bad, we can grow a huge amount of food in a valley that always has abundant mountain water. So, we’ll be happy to sell at peak value, but happy to sit it out here if we’re already too late to get that value.)
September, 2018: By the end of summer on the east coast, some markets like Connecticut saw a rise in people choosing to wait out the foreseeable housing market crash by renting, even at $10,000 a month for higher-end homes, in hopes of buying low at the bottom of the market in a not-too-distant future. Several east-coast counties saw rentals rising sharply as sales fell just as sharply. Owners also began choosing to rent out homes rather than sell them at a loss because losses on a primary residence are not deductible; but if a home has been rented for two years, it can be converted into an investment property so that, at least, the loss can be deducted from taxes. (They may have also hoped that, by renting, they could wait out the decline in prices.)
Todd David Miller, a vice president of sales at the Higgins Group, said that of the $57 million in sales his team has done so far this year, primarily in the towns of Westport and Fairfield, almost all of the sellers have either moved out of state or are renting in the area. Those who are staying in the area are gravitating toward home rentals near the beach.
“These are mainly higher-end transactions, and the majority of them had to sell at a loss,” Mr. Miller said. “They don’t want to put any more money into real estate right now….”
“We’re going through this era of uncertainty. And what do buyers do when the near-term seems uncertain? They pause. People are just nervous that values will continue to decline, and for that reason, more people are opting to rent, if they are not forced to buy”, Miller said.
The New York Times
October, 2018: New home sales were expected to start rising again in October but, instead, fell miserably (8.9% MoM). That marked the seventh month of missed expectations. The midwest led the slump that month, falling a hard 22%, but the fall was bad in all parts of the US. At this point median prices began dropping nationally, too (down 3. 6%). As a result of a backlog from declining sales, inventory began to soar (climbing 7.4 in one month). Sentiment, too, had taken a bad plunge by October with the number of people who said they planned to buy a house in the next twelve months falling by half over the past year.
Sales of new U.S. single-family homes tumbled to a more than 2-1/2-year low in October amid sharp declines in all four regions, further evidence that higher mortgage rates were hurting the housing market.Reuters
The Fed crush was fully on.
November, 2018: By November, mortgage rates across the United States had hit their highest level since the Great Recession 8-1/2 years earlier. As a result, new mortgage applications across the US fell to their lowest level since December, 2014. Since refinancing mostly happens when mortgage interest is lower than it was when a mortgage was taken out, refis hit their lowest point since the year 2000. So, clearly, the Fed has crushed mortgage activity.
By this point, year-on-year sales had fallen for eight straight months across the nation. The west coast — with Seattle leading the earlier procession in sales and prices — had long been one of the nation’s hottest markets, which is why I stated at the start of last summer the housing market’s initial decline in Seattle was a “bellwether” for the whole US market. While my one crow on a wire (detractor) insisted I didn’t know a thing, time has proven my summer proclamation that Housing Market Crash 2.0 had begun to be dead on with Seattle leading the recession in sales and prices:
Since that proclamation, inventories in the region have soared due to a buildup from declining sales. Lending limits have increased due to falling prices and less assurance on the part of banks that collateral will hold its value or that repossessions won’t be the next wave. King County where Seattle is located, has led the decline to where the number of single-family homes on the market has doubled in just a year.
Since my summer declaration, King County has recorded a bruising fall. In just half a year, the median price plunged from its peak of $726,000 last spring to $644,000 in November. According to Mike Rosenberg, a Seattle Times real estate reporter, this was the fastest price drop anywhere in the nation (over 11% in half a year — a crushing reversal from years before when rises 10% in a full year were seen as evidence of a superheated market; so, doesn’t that make this flash-frozen fall?) The last drop that steep was back at the start of the Great Recession in 2008! Not a time for housing anyone wants to compare to.
In Southern California, home sales in November plunged 12% YoY. In California, however, prices remain above their 2008 summit and have so far largely resisted following sales down. Nevertheless, Bank of America proclaimed, “We are calling it: existing home sales have peaked.”
LA Times noted if volatility in the stock market and Washington significantly affects consumer confidence and business investment decisions in 2019, the housing market could be due for significant correction into 2020…. Richard K. Green, director of the USC Lusk Center for Real Estate, told the LA Times, he is very pessimistic about the housing situation in Southern California. Green warns prices could plunge 5% to 10% into 2020, even with the current level of economic growth.Zero Hedge
Things looked just as stark in Las Vegas by November where, out of the 10,000 homes on the market, 7,000 of those had not received a single offer, a figure 50% worse than the year before. Realtors started warning sellers not to panic, which, in itself, easily becomes a self-fulfilling warning. In the last few years, Las Vegas had risen to become one of the most overvalued markets in the nation. It looks like prices have finally peaked now that they have risen out of site on the back of low-interest loans and now that interest is higher and now that the Trump Tax cuts have stripped away some of the benefits of home ownership in favor of a larger general deduction that goes equally to renters or buyers.
By the end of November, the US Census Bureau reported that new-home sales had rolled off a cliff. New homes sitting on the market were at their highest point in five years, and unsold supply per quarter was growing at an alarming annualized rate of 33% (meaning should it continue).
In another sign the market has turned under, housing flips have flopped in the Chicago area. The flipper boom has nearly gone bust. With properties taking longer to sell, higher interest on loans to acquire and repair those fixers eats up more profit and increases the risk involved in flipping homes. With profits sometimes now shifting into reverse, flippers are backing out of the market. The number of homes turned around by flippers in the Chicago area went from a high of 7,600 in the first three quarters of 2017 to 4,000 in the first three quarters of 2018. Across the nation, the number of homes flipped dropped 12%.
December, 2018: The median price of a home in Manhattan fell below the one-million-dollar market for the first time in four years, and it took 15% longer to sell even at those lower prices. Again, real estate agents noted that the Trump Tax Cuts were making the situation worse, but particularly in high-end markets.
Relief started spreading to the boroughs, too. Most of Brooklyn’s trendiest neighborhoods saw more than a fifth of sellers pressed to lower their asking price. And in the pricy Hamptons, home purchases in the 4th quarter of 2018 crashed a full 35%, the biggest quarterly fall since … you guessed it, the Great Recession in 2009!
Inventory is piling up across the city, and that’s good news for buyers in search of a bargain. For sellers with dreams of making a big profit, it’s time for a reality check.Bloomberg
Most of us don’t care what banksters are paying (or getting) for a home near their Wall-Street office, but the massive year-end plunge in NYC and its surrounds is further evidence that the fall in home prices is not only unabated but worsening. What started showing up at the top of the market in the hottest markets like Seattle last summer is now, as I said would be the case, trending down to lower sectors just as seen in the spread from Manhattan to the boroughs.
This is all terrible news for my crow. If he had any integrity, he’d cannibalize and eat crow. Of course, neither crows nor trolls ever have integrity. However, for those who would like to become first-time home buyers someday, this is news to crow about. How you look at it depends on where you’re standing. Someone might even be able to become a first-time home buyer in Manhattan in a couple of years if the Fed doesn’t quickly spin on its heals and reverse its Great Recovery Rewind, as it is already sounding ready to do.
Nationally, sales dropped 11% in December, but the most valuable thing about December stats is that we get a final tally to reveal how the entire year went. A total of 5.34 million homes sold in 2018, proving the year to have the largest annual drop (about 10%) in total home sales since … you guessed it … the bottom of the Great Recession eight years ago.
Business Insider summarized 2018 as the year that …
The US housing market took a dark turn … as homebuying fell off a cliff and mortgage lenders saw a steep decline in applications, originations, and profits. Interest rates are partly to blame for the slide in housing, but that’s only half of the equation, according to analysts. It’s too soon to panic, but a deeper drought in housing is bad news for just about everybody, not just the banks. Significant housing declines have foreshadowed nine of the 11 post-war US recessions, according to UBS…. The decline has been broad, affecting every region in the US.
And here is where home-buying sentiment now lies:
So, eat crow, Crow. In short, sentiment across the nation is as bad as it has ever been. It looks like how people feel after they’ve already fallen off a cliff.
How hard is Housing Market Crash 2.0 hitting banks?
At Wells Fargo, mortgage banking revenues fell 50% to $467 million in the fourth quarter, while originations declined 28% to $38 billion. JPMorgan, meanwhile, saw mortgage income fall to $203 million, a 46% drop from the same period last year. Originations fell 30% to $17.2 billion.
Looking forward: Pending sales are a forward-looking indicator. Due to the lag of a month or two between a pending contract and closing, the direction of movement in pending sales tells us where we’ll most likely be in final sales a month or two down the road. November’s pending sales told us that sales in January when all reporting is completed in February will likely be down to their lowest since May, 2014. And December’s sales, which were way down in November’s pending report, already came in worse way worse than November’s actuals, falling a whopping 2.2% from where they were in an already bad November. So, we can expect January’s to do no better once all reports are in.
Real estate bimbos had expected a 0.5% rise in December! Of course, they were also ebulliently predicting a warm spring market for 2019 and recently were forced by facts to temper their predictions. In my opinion, real-estate sales people (as a group, not all individuals) fit somewhere among the following groups for lying: 1) transportation sales people (car dealers and horse traders); 2) banksters; 3) stock brokers; and 4) politicians.
“It’s been dripping down, down, down,” NAR chief economist Lawrence Yun said…. “Frustrating that the housing market is not recovering.”Wolf Street
Pending sales strongly indicate that Housing Market Crash 2.0 is still fully on track for 2019. Moreover, year-on-year declines have been worsening each month since the start of October even though interest rates improved in November. That, to me, supports my view that the Fed has already gone too far to stop the damage, even if it quits tightening altogether.
On a longer-term perspective, consider the demographics: School-debt-ridden, under-employed millennials, who are more into buying experiences in life than things, are not inclined to buy homes that are in the housing-bubble price zone. Neither are baby-boomers looking to retire, which often involves downsizing.
None of this bothers me because my wife and I have the best of all worlds — very low fixed interest, a home we bought at the bottom of the market last time around, a chance to sell now high or stay and keep reaping the rewards of living in a beautiful place..
I benefited from the last crash. I hope others are able to reap the same same reward by turning the next bottom into their blessing. It’s all about seeing clearly what is coming so you can sell high and buy low. It is what can happen to those who see reality clearly and don’t live in economic denial like my crow who could only see what he wanted to see in praise of his choice for president. My lone crow on a wire, who scoffed at a good call because he didn’t like it, now looks like the fool I warned last summer he would prove to be. He has fallen off the wire because he hasn’t a leg left left to stand on. All reports everywhere have come in against consistently month after month for over half a year.
(I’m not advising anyone as everyone’s particular situation is different — just saying what I’ve done, what I’m doing and why. I’m saying what I believed would happen and is now happening so you can weigh all risks and possible rewards for yourself in your own context and your own ability to take risk in order to do as you feel best.)
Here is a picture of where we are in our developing 2018-2019 housing market crash:
Canada Housing Market Crash
One major difference between Housing Market Crash 2.0 and the last time is that this one is already global. The last one started in the US and mostly stayed in the US. This one is rapidly building in several nations because it is part of the bursting of the “Everything Bubble.”
Vancouver, June-July, 2018: Residential property sales fell 14.6% from June, 2018, to July but a massive 30.1% from a year before. The 2,070 transactions that took place were the fewest since the end of the last millennium. Buyers and sellers were both reportedly sitting things out in confusion as to whether recent price gains would continue or whether the housing bubble had already burst. (As of August, prices had not started to drop.)
Sales of detached properties in July decreased 32.9% from a year before, and apartments dropped 26.5%. In fact, July’s sales were 29.3% below the 10-year average for July. Much of the plunge was attributed to Vancouver’s new law aimed at shutting out absentee Asian buyers that were ramming up housing prices while leaving the homes abandoned to become derelict in high-end neighborhoods. So, the decline is, in large part, intentional; but, if declining sales bring down prices, the dangers of falling prices to people who find themselves underwater and to their banks remains just as high.
The topping of the Canadian housing market looked like this:
January, 2019 The B.C. Real Estate Association claimed the huge drop in British Columbia housing sales was due to mortgage stress testing. In spite of the plunge, prices are holding in the province, though no longer rising since last spring. Inventory is building to a level that will probably force prices down by or before summer.
Australia Housing Market Crash
Australia is faring even worse. Melbourne housing prices have plummeted at their fastest quarterly pace ever recorded! Less than two months ago, Australian housing regulators were warned to prepare “contingency plans for a severe collapse in the housing market” that could lead to a “crisis situation.” The Australian market peaked back in October, 2017. It’s been downhill ever since with momentum now hitting break-neck speed. Sidney prices are down 12% from their peak.
Experts have been left stunned after Aussie house prices plunged at “the fastest rate of decline ever seen”. And there’s more pain to come…. “We have seen the downturn accelerate over the last three months. At 4 per cent down in Melbourne that’s the fastest rate of decline we’ve ever seen of any rolling three-month period, and Sydney is virtually (the fastest outside) a really brief period in the ‘80s.” Sydney’s total decline is now the worst since [CoreLogic] began collecting records in 1980… One analyst has even tipped falls of up to 30 per cent, based on the revelation from the banking royal commission that almost all mortgages written between 2012 and 2016 … over-assess borrowing capacity.News.com.au
The defaults will be cascading in soon. While Melbourne and Sidney are in an all-out housing crash, other cities in Australia are feeling the pinch, too. Every capital city marked declines, except Canberra. As in the US and Canada, the most expensive end of the market is taking the biggest fall first. Melbourne and Sidney, however, constitute half the value of Australia’s total housing market; so a drop in only those two cities if the plunge were isolated could still be devastating to Australian banks.
Hong Kong Housing Market Crash
Even the world’s hottest housing market is in decline. In stock-market terms, one could say it has “entered a correction.” After its longest streak of falling values since 2016, the price of existing homes is down almost 10% from their August peak. This is actually seen by many, including some Chinese government officials, as relief to a market that had long run too hot.
The article above would have been one of my Premium Posts, available as a reward to readers who support the continuance of my economic writing at, at least, the $5 per month level. Such articles are long to read perhaps, but are intended to present the most comprehensive overviews you’ll find anywhere. I chose to make this one available to all for two reasons: 1) to show the depth and breadth of Premium Post articles so readers can assess what they are like; and 2) because it concludes an argument made last summer over a prediction made almost two years ago for last summer. We still have to hit the $500 support level if my writing on this subject is going to continue. Any less is too big of a sacrifice on my end, and we seem to have stalled near the $400 mark. (Patreon dialed the stated support level back after processing payments an adjusting for declined credit/debit cards and card processors’ fees.)
We are in the end time of an unprecedented era of financial expansion — the greatest expansion of the world’s money supply ever attempted, expansion of the Federal Reserve’s vast and unchecked powers far beyond what the Fed could do before the financial crisis, and super-sizing expansion of banks that were already way too big to fail.
I am calling this time in which we are now unwinding this monetary expansion the Great Recovery Rewind because I believe this attempt by the Federal Reserve and other central banks of the world to move us away from crisis banking is taking us right back into economic crisis. That is why this was the top peril listed in my Premier Post, “2019 Economic Headwinds Look Like Storm of the Century.” It is more potent in possible perils than all the trade tariffs in the world.
Even the CEO of one of the Fed’s largest member banks says no one knows what devastating effects the Fed’s unwinding of its balance sheet will cause. JP Morgan Chase’s Jamie Dimon warned that the Fed’s unwind is a massive experiment as untried as the quantitative easing that is being unwound.
“QE has never been done on this scale,” he said. “We cannot possibly know all of the effects of its reversal.”Financial Times
Jamie Dimon, the chairman and CEO of JPMorgan Chase, is one of many prominent figures in finance who warn that this reversal of direction could send stock prices plummeting and derail the U.S. economic expansion. “I don’t want to scare the public, but we’ve never had QE [before]. We’ve never had the reversal [before]. Regulations are different. Monetary transmission is different. Governments have borrowed too much debt, and people can panic when things change….”
Earlier this year, noted bond fund manager Bill Gross expressed his own concerns about the effect of this unwinding. Last year former Fed Chairman Alan Greenspan warned of a massive bond market bubble that will be deflated in the process….
Former U.S. Treasury Secretary Lawrence Summers says, “tightening involves real dangers and needs to be carried out with great care.”
According to Peter Bockvar, the chief investment officer (CIO) of … Bleakley Advisory Group, “I believe the market … is headed for a brick wall the deeper quantitative tightening gets.”
Ray Dalio, founder of hedge fund Bridgewater Associates, observes that quantitative tightening is bound to produce effects entirely opposite to those from quantitative easing, namely, “higher interest rates, wider credit spreads and very volatile market conditions.”Investopedia
Sounds like now.
Even the Fed Prez, himself, uses language that casts the Great Recovery Rewind as experimentation:
“We are looking carefully at that [the unwind’s impact on interest rates], and the truth is, we don’t know with any precision,” Fed Chairman Jerome Powell told reporters on Wednesday…. “Really, no one does. You can’t run experiments with one effect and not the other. We’re just going to have to be watching and learning. And, frankly, we don’t have to know today.”Bloomberg
However unprecedented the Great Recovery Rewind is, some outcomes can already be readily extrapolated; and they are playing out as I thought they would.
The withering economic effects of the Great Recovery Rewind
Rising reserve risks. You may recall the Fed pumped up its member bank reserves to make us all more secure in case of runs on banks as we almost saw during the financial crisis of 2007-2009. Now, as you’ll see below, the reserves in the accounts of member banks have been bleeding out faster than red ink in the last days of a failing Ponzi scheme.
For those banks to drain their reserves, the Fed has to reduce its reserve requirements; so the Fed has to be involved in this great reserve flush. It may be allowing this on the basis that it believes the world is more financially secure now, so it thinks the concern about runs on banks is long gone; but we all know from the last financial crisis that the world can become financially insecure in a small window of time, while the scars from an economic crash can endure a lifetime.
Compounding US government debt. One of the side-effects of the Fed sucking money out of the global monetary system is that the Fed used to roll over its holdings in US treasuries by purchasing more at an incredibly low interest rate for the US government. The government is now forced to sell a lot more treasuries in auctions to its primary dealers (member banks in the Federal Reserve System) without the Fed backstopping that by sucking them all up.
That presses the government to either pay higher interest on its treasuries to attract new buyers or raise less money with each $1,000 bond it issues. (Say, sell a $1,000 bond for $945, instead of $950.) Either results in higher yields on government bonds. (See: “BOND PRIMER: What is the difference between bond yield, bond interest, and bond price?“) That accelerates the government debt vortex.
Interest impact. Here’s another side effect that justifies calling this time the Great Recovery Rewind: Because government bonds are foundational in the credit market, higher yields on government bonds result in higher interest on all kinds of things, including home mortgages and auto loans. On large items, people shop payments, so those items are now less affordable. Therefore …
Housing Collapse 2.0 and Carmageddon. Rising interest is already taking us into another housing crisis and Carmageddon. I’ve been writing about these as the first major industries that will get the impact of the Fed’s Great Recovery Rewind. (My next article will show how deeply into a new housing crisis we have already fallen, and we’ve all heard about the number of automobile factories closing in the US.)
I think there is an insidious way rising mortgage interest is taking down the housing market besides just making houses more expensive. While mortgage applications are down by almost half due to rising interest, an even more interesting development is that the percentage of applications that are getting approved is also down by about half.
With total applications being down, you’d think banks would be inclined toward approving a higher percentage of the apps they get. So, why are they approving a lower percentage from an already much smaller stack of applicants? Losing half of your applicants and then cutting the percentage of those that get accepted in half is a 75% drop in approved loans! (See Business Insider‘s “Americans stopped buying homes in 2018, mortgage lenders are getting crushed, and an economic storm could be brewing.“)
Here is what I think is happening: Banks don’t usually issue loans to carry them until they are paid off. They issue them to resell them to other banks and investors. In terms of the loan resale market, loans are somewhat like bonds. In the same way that the bond you hold falls in resale value (price) when bond interest on other bonds is rising, fixed-interest loans a bank issues today will be worth less when it resells them in a month if interest rates are rising quickly. (Who’ll want to buy that loan when they can buy one that pays higher interest?)
Even if a bank plans to carry the loan itself, it might think it makes more sense to wait another month or two to loan out its money at an eighth-of-a-percent more interest for the next thirty years than to loan it out now if it is certain rates will rise that much in a short time. (Or it might just want to use its money to buy and hold those risk-free government bonds now that interest is getting interesting again!)
A full rewind back into the housing market collapse that began in 2007 could be readily foreseen as an obvious effect of the Fed’s tightening because 1) tightening after a period of sloppy easing triggered the last collapse; and 2) one of the reasons the Fed gave for buying government treasuries was to reduce mortgage interest and other long-term interest specifically to prop the housing market back up and stimulate the economy.
This is why I’ve repeatedly maintained that, when the props are pulled, we’ll fall back into the same recession. It took total denial to believe doing the opposite would not have the opposite effect. We have seen the opposite effect happening with long-term interest ever since the Fed began its balance-sheet unwind. Falling back into the same pit by winding back what we did to get out of the pit is why I call this the Great Recovery Rewind.
Hence, my prediction a couple years ago of a major stock market upset last January (as began in the last week of January) with a much worse one in the fall of 2018 when the Fed would hit full Recovery Rewind speed. (O.K., I also said something big would happen in the summer with stocks, and not much did, except the deFAANGing of the high-tech market that drove the bull market for a decade.) That’s why I was so certain of the timing of these stock market’s major plunges turns and of the summer start of a repeat crisis in housing and automobiles that certainly materialized.
Stock drop. This brings us to another inevitable side effect of the Federal Reserve’s Great Recovery Rewind — loss of stock values. Think about it: Another one of the main reasons the Fed eventually admitted for hoovering up government bonds was to save us from the 50% crash in stock values that happened between 2007 and 2009. It did this by taking interest so low on bonds that it pushed investors into riskier assets in order to make money. In the process, this created money in bank reserve accounts that banks could use to buy those riskier assets. That worked.
Naturally, reversing that flow would raise bond interest and correspondingly suck money back from stocks by providing safer assets that are starting to provide a profitable return again. How could it not? We witnessed that throughout 2018, seeing each major increase in the Fed’s Great Recovery Rewind speed immediately cause greater damage to stocks.
That is why I’ve always maintained the Fed cannot unwind without crashing its fake recovery. (Fake in that it’s not really a recovery if the patient has to stay on artificial life support forever. It’s just prolonged dying. It’s only true recovery when a patient becomes capable of living on his or her own.)
Another effect of all this, of course, has been the flattening of the yield curve, which typically presages a recession (as I wrote about in two recent articles titled, “Does Inverted Yield Curve Indicate Recession?” and “What is an inverted yield curve and what does it mean?“)
How could the Federal Reserve not see its great recovery rewinding?
When the Fed merely suggested it would begin tapering its purchase of bonds (quantitative easing) in 2013, it created what became known as the “Taper Tantrum,” a full-scale financial panic that I remember well because the Fed made this surprise announcement the day after my wife and I decided not to lock in the interest rate on our pending home purchase. Over the weekend, we saw our new interest rate rocket upward; so, we locked in as fast as we could on Monday and have forever paid a little more because of what felt like the fastest rise in mortgage rates even known to humankind.
Stock prices plummeted then, too, as the 10-year treasury note soared a full 100 basis points to 3% yields. The Taper Tantrum cost a lot of people a lot of money, and that was just an announcement many months out that the Fed would slowly begin to buy fewer additional treasuries, not that it would start rolling back the actual number it already held. The Fed was very careful this time to telegraph its unwound intentions more slowly and sedately.
So far, the Fed’s Great Recovery Rewind has certainly not been “as dull as watching paint dry,” as Fed Chair Janet Yellen assured us would be the case. The crisis in stocks grew so severe so quickly last fall when the Fed finally kicked its rewind up to it full projected speed that the Federal Reserve has already voiced possible capitulation to the market’s fear by stating it is taking its balance-sheet unwind off of autopilot after all.
Fed Chair Jerome Powell pivoted and said the Fed will be monitoring the stock market with a more patient approach in the Fed’s deliberate raising of interest targets. He’s even hinted the Fed may slow or pause its balance-sheet unwind. That contradicted his own auto-pilot statement in the fall when the Fed rose to full rewind velocity. Such an abrupt about-face makes it clear the Great Recovery Rewind sure ain’t paint drying.
While flattening of the yield curve happens before recessions, the recessions don’t occur until right after the Fed reverses policy and starts lowering interest rates again due to the problems a flat yield curve creates. With talk already of reducing rewind velocity, a move back to easing may not be far ahead.
I think the Fed actually sees the recession coming but can never say so because its mere change of a pronoun reverberates throughout markets. What would happen if it ever said it sees a recession developing? Why else would the Fed start easing if it didn’t see trouble coming? By the time the Fed returns to easing, a recession is already foaming at the mouth. So, either they see it coming but lie and say they don’t — as Ben Burn-the-banky famously said in the summer of 2008 — or they are blind in the area of their supposed expertise.
My reservations about reserves
If the Fed continues to tell banks they must hold a certain ratio in reserves-to-loans as the most liquid form of protection against runs, then liquidity is going to tighten up if reserves fall and interest rates are going to rise due to shorter supply of loans. That could also explain why banks are not approving as many loans because reserves are falling.
It appears that the Federal Reserve’s member banks are buying up US treasuries with their reserves and holding them, rather than reselling them, because their excess reserves are depleting rapidly. (Remember my comment above about how banks may not be issuing as many loans if treasuries with rising rates are looking attractive because they are seen as completely safe?)
It also appears the Fed is telling banks they have to maintain that ratio:
One reason why people may have underestimated bank demand for cash to meet the new rules is that Fed supervisors have been quietly telling banks they need more of it, according to William Nelson, chief economist at The Clearing House Association, a banking industry group.Bloomberg
The Fed’s Great Recovery Rewind is reducing bank reserves as follows:
By shrinking its balance sheet, the Fed reduces the amount of reserves in the financial system, therefore lowering the amount of money banks have to lend to consumers and businesses.FXCM
In a Premium Post that accompanies this post, I contacted the Federal Reserve and got a direct explanation of how the unwind actually draws down member bank reserves. (I was never satisfied with the answer that they are just evaporating the money, and they are not.) Even without that complex explanation, you can see how the balance sheet unwind is playing out in the following graphs from the Federal Reserve with the top graph showing the Fed’s own holdings and the bottom graph showing the reserves of all its member banks that are held in Federal Reserve banks:
First, the Federal Reserve stopped quantitative easing (flat part of the black and blue lines in the top graph), which meant the Fed stopped buying government treasuries (black line) and mortgage-backed securities (blue line) from its member banks, which it had been doing by creating deposits in the banks’ reserve accounts that they could lend against. Then you can see how, as the Fed began unwinding its balance sheet (were the black and blue lines in the top graph begin to fall), bank reserves (red line) plunged more.
Finally, you can see how bank reserves (red line in the bottom graph) have declined by almost half already during this time. Although Janet Yellen recently reminded us that “correlation is not causation,” I can tell you that my correspondence with a Fed economist in the Premium Post says there is direct correlation to what is happening in bank reserves.
What I cannot prove is motive, but I believe the Fed encouraged banks to start reducing their balance sheets in order to provide liquidity to the stock market and other markets during its tapering from QE and now during its final runoff of bonds. The member banks may even be holding government treasuries to protect the government from rising interest rates just as the Fed did. The consumption of bank reserves looks to me like a massive buffer for the government and the economy as trillions flow out of bank reserve accounts and into sopping up treasuries.
The Fed’s largest member banks are the primary dealers for Fed treasuries, which they buy in auctions. They transfer money from their reserves to the government treasury when they buy those treasuries. Now that the Federal Reserve is no longer buying those treasuries back from banks by creating new money in the bank’s reserves, their reserves are dropping, whether it is because the banks are choosing to hold the treasuries for the interest or because they cannot resell them all or because they are putting the money they make from selling treasuries to other uses. The bottom line is their reserves are plummeting in step with the Federal Reserve’s Great Recovery Rewind.
The Fed has told me it deletes money from the government’s bank account as treasuries mature because the Fed is the government’s banker. So, the Fed loses its treasury asset in the roll off, but it also wipes out an equal liability in the government’s reserve account as its payment from the government. Thus, both sides of the Fed’s balance sheet come down the same amount in order for the sheet to “balance.” (Deposit money is considered a liability by banks because they have to give that money back upon demand.)
That, however, would not deplete the nation’s money supply, except that the government has to replenish its bank account (or build it up in advance of the Fed writing it down), which it does by selling new treasuries to the Fed’s member banks that are the government’s treasury dealers. Those banks transfer money from their reserves to the government’s account at the Fed to pay for their treasuries.
I suspect the member banks’ purchases of the new treasuries the government has to issue to replenish its funds have been the mitigating factor that has kept government bond interest from soaring during the roll-off by providing a market as ready and large as the Fed, itself. However, if they buy and hold the treasuries, it depletes their reserves, which means they have less money to loan against in the general marketplace. That would be how money exits the monetary system.
Alternately, they may buy and resell the treasuries but not put the money from their treasury sales back into their reserve accounts because they now have better investments than the interest the Fed pays them on their excess reserves (“excess reserves” meaning those that are above what their Liquidity Coverage Ratio is requiring of them). Either way, the money from all those treasury sales the government is making is not going back into the the member banks’ reserve accounts.
If the banks don’t soak up those treasuries by holding them as their own assets, they resell them on the open market. That would likely drive the government’s financing costs up in order to find enough buyers. That can happen in the form of higher interest on the open market or a lower bond price (as described above). That would feed back through the system to what the primary dealer banks will expect in government auctions in order to assure a retail profit on the treasuries.
While I don’t have all the facts about what banks are doing internally, it is obvious from the graphs above that the monetary is tightening up in direct correspondence with the termination of QE and its unwinding. We know banks are approving a smaller percentage of a smaller pile of loan applications, and we know their reserves have plummeted, which means they have less money to loan against and could easily explain why they are approving far fewer loans.
We are seeing declines in housing prices, declines in the auto industry leading to closing factories, increases in the government debt due to rising interest (in addition to the increases that happened due to declining revenue and the increases that are due to rising spending). The rise in interest that is happening due the Fed’s Great Recovery Rewind will also mean a decrease in stock buybacks just as the extra cash from the Trump-Tax-Cuts repatriation (a one-time occurrence in 2018) is used up so that corporations have to return funding buybacks with credit if they’re going to do them. Stock buybacks have been one of the leading drivers in the stock market’s climb over the past decade. So, all of this is a complex and toxic brew of chemical reactions.
Some have opined that the Federal Reserve’s Great Recovery Rewind will not be as potent as its initial easing because it created new money at the rate of $80 billion a month and is only backing out of that at the rate of $50 billion a month. However, it could actually become more intense. Consider that the Fed was creating $80 billion a year when the economy was shrinking and needed a push. So, it was pushing against the drainage. Now the Fed is subtracting $50 billion a year just as the economy has started shrinking again and still needs a push. So, the unwind pulling things down with the drain.
The Fed is also tightening as global trade is tightening and as tariffs are going up, making things more expensive to consumers. It’s also doing something that makes a lot of people feel unsettled, rather than something that makes them feel happier. No one is likely to enjoy unwinding as much as they enjoyed economic stimulus. The Fed is unwinding in an unforgiving environment that might be more reactive to withdrawal than a stifled economy is to stimulus.