The Great Recession Blog
by David Haggith
The black swans are circling like vultures now. Dark economic events seem to be flying in out of nowhere for those who have vision to see them. Even dovish New York Fed President William Dudley, who cannot tell the difference between money and hot air, sees a lot of black in the skies now and says that he is less confident about the economy than he was when he and his Feddish partners voted to raise interest rates last December:
Dudley, a close ally of Fed Chair Janet Yellen and a permanent voter on U.S. monetary policy, suggested that the sharp global economic slowdown, stock-market sell-off and oil price slide since the beginning of the year may force the Fed to tighten monetary policy even more slowly…. With turbulence in global financial markets reflecting mixed economic signals, the risks appear to have increased. (NewsMax)
Yes, Dudley did wrong with perfect timing and voted to raise interest rates into a crashing economy. For some reason, he didn’t see the global slowdown coming, never mind that it had already begun last fall; but he sure sees it now. He could have read all about it right here for months before he took part in an ill-fated decision. Now he’s losing confidence. If he’s not confident in the recovery, and he was one of the architects, why should you be?
US stock market cheerleader, Jim Cramer, is counting black swans, too
Jim Cramer, CNBC’s hyperactive host of Mad Money, thinks the Fed is flying blind. He believes the Fed might not understand the life of the common man from within their first-class flights to Fed meetings and chauffeured limousines. Gee, yathink?
I almost wonder if they live in a vacuum. Who are they talking to? Don’t they at least have some buddies who are concerned about a recession? Don’t they know some people are pulling back from investing…? When you look beyond the market’s tight linkage to the price of oil, the idea that we could be headed into a recession has become a powerful theme, a whispered undercurrent in this environment that surfaces whenever oil takes a dive. (NewsMax)
You almost wonder? Of course, they live in a vacuum. And from their vacuums, they are creating a world of Hoovervilles. Of course, Cramer likes to roll dice in the Fed’s Wall Street casino. He knows that Fed free money was the only game in town, driving the stock market higher in past years. He loved a good rigged game of predictable market gains! The market soared every time the Fed threw money around the craps tables. It didn’t even matter what number you rolled. Almost every bet was a winner. It’s hard to make money now without Fed free money floating down like confetti over the marketplace everyday.
So, yes, recession is now a powerful theme that keeps popping its ugly black head out from unexpected places, such as out of the mouth of Jim Cramer. It whispers among the chatter of Citigroup’s flock of analysts. It keeps JP Morgan meetings all aflutter. You hear it everywhere now. Not a day goes by without people wondering if recession is lurking in the wings.
Here are a few of the dark whispers and black swans that are swirling above the US economy
- Gold is up 17% since the beginning of the year, while stocks are down about 5%. The flight of capital from the Wall Street casinos into gold provides a touchstone’s proof of how insecure major investors are feeling. (And that’s with a gold market that is, in my opinion, fully rigged by central banks not to get too excited. Central banks hate the laying of golden nest eggs. To keep people from filling their nests with gold, the central banks own the world’s greatest hoards of gold as ballast to dump whenever gold prices rise so that gold doesn’t compete too strongly against their proprietary product called “money.”)
- Citigroup says the chances of recession are high and only going up. The Citi’s gaggle said they suspect that global growth was actually about 2% annually if you correct China’s bogus numbers for its economy.
- JPMorgan strategists say they have scanned 115 years of US stock market history and have divined a sign that is 81% accurate in predicting recessions. That sign — two consecutive quarters of declines in corporate earnings — is fully in play now. The news gets worse: In ALL of the remaining 19% of the times, recession was only avoided by Federal Reserve stimulus or fiscal stimulus from the government, but the Fed just ended its stimulus, after exhausting its accelerant from years of pedal-to-the-metal acceleration; and the government has not been able to agree on a plan of fiscal stimulus for years! So, there goes our only hope of being one of the 19% of the times when the dark omen of double declines doesn’t deal us a bad hand!
- Another bad sign is when a survey of market analysts shows that the best investment strategy in recent months would have been to do the exact opposite of whatever your analyst told you to do. The stocks most beloved by analysts have fallen 11% in 2016, while the companies they ranked the worst are only down by 3.4% Come to think of it, that still means everything is down; but you’d still do best to put no stock in anything your analyst says.
- The G-20 failed to formalize any kind of global stimulus agreement, which investors were hoping for. (I wasn’t hoping for G-wizz salvation, but they were. I think all their stimulus accomplished was to defer the pain we are now about to face, making it so much worse for the upcoming months.) Several people warned that, if the G-20 meeting was an economic dud, the stock markets would tumble. I wasn’t one of them, and didn’t bother to repeat these warnings last week. The G-20 came up with nothing, and the markets went up. Still, we know there is no salvation about to emerge from that quarter either.
- Freddie Mac and Bank of America have returned to the hog trough in which they partner to offer 3% down mortgages. That has a nasty ring to it because it was about the final step in slackening loan terms before the mortgage crisis of 2008. Stupidly low down payments were the only way the government and friends were able to keep ratcheting up housing inflation by endlessly loosening credit terms so people could qualify for ever bigger loans. (We never learn because we are greedy like that.) The good news is that Bank of America skates away freely if any of these new loans default. (It’s good for them.) For the rest of us, it means that the company determining whether loans should be issued has nothing at risk and walks away free. I’m sure they will screen those loans well as they did last time. Once again, BofA is protected by the quasi-government entities. (Did I just say something about how stupid we are to never learn?) Meanwhile, banks are still sitting on defaulted mortgages from the first dip of the Great Recession.
- My recent warnings are already coming true! Subprime auto delinquencies are on the rise already. Repo rates are at historic highs! So, yes, the news last week and this was good again for auto manufacturers and dealers, who had a blockbuster month; but the bad news is they seem to be attaining that success the same way the housing industry did prior to 2008 and the same way it is doing now — by relaxing credit terms to the level where they assure higher levels of default. (And, again, we learned nothing because it is the same road car makers travelled into the last recession that became such a dead end of derelict Dodges and Daimlers.)
- Estimates are that as much as 40% of student loans are in technical default. That means the government has agreed to allow interest payments to float if the debtor passes a new income-based test Obama initiated. The government underwrites those loans with pass-through payments to the creditor while the student defers all payment or stops paying interest. I’m not against helping students avoid flocking into jail; but this is, nevertheless, 40% of a $1.3 trillion of debt obligation that taxpayers underwrite. I’ve been pointing this one out as a problem on the horizon for a few years. It’s now coming home to roost.
- Several states report their employee pension funds are underfunded by about 50%, and those figures are assuming rates of return on fund investments of 7-8%, which looks highly unlikely at present, meaning the problem is actually worse. “Underfunded” is a politically correct term for saying, “We made sure never to invest money into the fund so that we could buy the programs we wanted with our employees’ retirement so that our taxpayers would keep voting us into office. We enticed workers to give their life’s energy now in exchange for substantial retirement plans tomorrow. Now the miserable people feel entitled to what we promised them when we exacted cheap labor from them with the lure of deferred benefits.”
- China is sinking further. Factory output fell further in February. That means purchases of resources from other countries are also likely to keep falling, including oil. The drop month to month has been continuous for fifteen months. The service industry in China has also fallen to its lowest point … since 2009. The fall of service industries tends to follow the fall in manufacturing industries, so more decline in the service sector is expected. That’s with stimulus already happening, making it appear that stimulus may have little effect. With bank stimulus having no effect, that leaves China with the option of expanding its national debt to make government the buyer of last resort. They can build more empty skyscrapers — a certain road to nowhere.
- US productivity fell in the last quarter of 2015 at the fastest pace in two years. Perhaps that is the result of hiring cheaper, temporary labor with fewer benefits. You get what you pay for. Nevertheless, when productivity drops, you know wages are not likely to rise (not that they have ever risen much when productivity was improving).
- Golden Ocean Group, a massive global shipping company, says the overseas shipping industry has never seen things this bad. They expect that the dry-bulk shipping industry will soon be seeing a lot of bankruptcies just like the oil industry due to an oversupply of new vessels and a reduced demand for shipping of resources. According to Norwegian owner John Fredriksen, shipping hasn’t been this bad any time after the Vikings. One can now rent a 1,000-foot ship for a less than $1,000 a day. That’s the lowest price ever. A glut of supply at a time of falling demand is the recipe for widespread bankruptcy.
- The number of troubled companies is nearing its 2009 Peak. “A Moody’s Investors Service tally of the least-creditworthy companies rose by 10 to 274 this month, pushing it nearer to April 2009’s record 291. The list comprises companies rated at least six notches into junk territory with a negative outlook–which suggests a further downgrade could come soon.” (WSJ)
That is not intended as an exhaustive list or even as a list of the worst things flying around us. That is just a short list of headline items from the past week’s news. So, call it the most current flurry of dark rumors and black swan events. Not all of these are true “black swans” because, if people were paying attention they could see them coming (for example, if they were reading this blog ; ) A “black swan” event is meant to mean a deadly event that comes in out of nowhere; but many refuse to see these things coming. For those people, who are wearing the blinders of economic denial, many things fly in out of nowhere that were anticipated by the minority that has been paying attention.
If you think either the global economy or the stock markets of this world are riding a rally back to success with all of that bad economic news in just one week, you’ve been hitting the happy juice again.
I’m not always right, but when I’m wrong, I’m still right
I sometimes miss my mark when I make predictions, but when I do, I admit it. Last fall, I missed it very pointedly on one thing. I predicted two major black swan events would contribute to a crashing stock market. One of those events would be that Republicans would let the US default on its debt by November third. Obviously, that dark swan never landed and is a bird that never bit.
Fortunately, I didn’t bet my blog on that one as I did with the other date I predicted for an event that did become a major contributor to an immediate stock market crash. Boehner wrangled his rascally gang into a going-away present for himself, and then they anointed Paul Ryan as the Great White Swan.
But I made a bigger point in that “Black Swan” article (linked at the start of this one) over falling commodity prices. And that cause of a market crash proved true. So, the US stock market crashed, even though one of the anticipated causes didn’t happen. That’s the more important sense in which I say, somewhat tongue in cheek, “Even when I’m wrong I’m right.” It was the fall of the stock market that I bet my blog on, not which anticipated event would come through as the cause.
The one cause that I talked about that did come through remains the biggest, blackest swan of all. It’s the swan that floated in, drenched in cheap crude oil in January. That raging swan, black due to the deluge of oil, stomped the market every step of its way down, and it is still mucking about on the beach, stirring up trouble.
[Added note: Market lunacy (sheer euphoria) over the oily swan is growing worse each week. I can’t write fast enough to keep up with it. Take this article that I’m revising into this post after having published the post:
From the “successful” talks between Saudi Arabian Oil Minister Ali al-Naimi and his Venezuelan counterpart early last month, to the Feb. 16 Saudi-Russia output freeze announcement, to Iran’s rejection of the plan as “ridiculous,” the CBOE Crude Oil Volatility Index averaged the highest level since 2009. Since the pact was announced, the measure of expectations of price swings has tumbled to the lowest in almost two months while oil has gained about 18 percent to trade near $35. Since the Saudis and Russia reached an agreement to freeze output, volatility in the market has eased and oil prices have stabilized with the focus shifting back to fundamentals. (NewsMax)
In other words, because 1) the Russians stated they absolutely will not decrease oil production and because 2) the Saudis stated they absolutely will not decrease oil production, but will both maintain oil oversupply at the current level, and because 3) Iran said the whole concept of freezing production was stupid, so they have committed to increasing their rate of oversupply, the market stabilized. Now that everyone has been told for certain that the glut in oil will grow for months to come (because no one is cutting production while Iran is increasing theirs), the price of oil is going up, and stocks are going up. That’s just so absolutely stupid it turns my neck into a pretzel. I don’t think I’ve ever seen a more ludicrous example of markets hearing only what they want to hear, even if they have to turn it inside out to stuff it into their ears.]
The point with the list above is is that no particular event has to happen to take the market down the next leg of its collapse. There are so many black-swan events and dark rumors waiting in the wings to take over that it is virtually certain some of these will grow to a size that becomes devastating, even after the crude swan is finished trashing everything around it. There is practically a parade of black swans lined up for action. Look at how many poked their heads up in just the past week — all just waiting their turn to have a go at the market.
Will it be bankruptcies in shipping, oil drilling, auto loans and student loans that pile up into a big enough heap to implode a couple of major banks; or will it be the Chinese flush turning into a whirlpool that sucks all industry down; or will the US economy manage to hold on until the next housing collapse when the next wave of adjustable-rate mortgage failures hits people who only put 3% down so that banks lose a bundle in foreclosures during a market of falling prices? Or will it simply be that recession is already here as a sinking tide that lowers all boats? Or will the next big drop arrive in next week’s list where a true black swan emerges that NO ONE saw coming, not even me?
My point has always been that with so much bad economic news building up in the world and such monstrous overhangs of national, corporate and personal debt — mostly worse than the last time around — the odds are strongly stacked on the side of major trouble. If you’re wise you’ll prepare for that in reasonable and prudent ways.