Morning Report: Why we aren’t headed for a recession

Vital Statistics:

 

Last Change
S&P futures 2874 24.5
Oil (WTI) 54.62 -0.14
10 year government bond yield 1.55%
30 year fixed rate mortgage 3.78%

 

Stocks are higher on no real news this morning. There is a risk-on feel to the tape after a tumultuous week. Bonds and MBS are down.

 

Housing starts disappointed (again!) coming in at 1.19 million, lower than the 1.26MM street estimate. This is down 4% on a MOM basis, and up about 0.6% on a YOY basis. On the bright side, building permits surprised to the upside, coming in at 1.34 million versus the 1.27 million street estimate. Still, new home construction remains depressed due to labor shortages and lack of buildable lots.

 

Despite these issues, homebuilders remain optimistic. The NAHB / Wells Fargo Builder Sentiment Index rose in August to 66. Current sales conditions improved, while expectations for the next six months moderated. “While 30-year mortgage rates have dropped from 4.1 percent down to 3.6 percent during the past four months, we have not seen an equivalent higher pace of building activity because the rate declines occurred due to economic uncertainty stemming largely from growing trade concerns,” said NAHB Chief Economist Robert Dietz. “Although affordability headwinds remain a challenge, demand is good and growing at lower price points and for smaller homes.” Interesting about the tariff issue – building materials prices are down quite substantially. If tariffs were really that big of a deal, you would expect to see shortages and increases. We aren’t.

 

Given all the chatter about the yield curve and a possible recession, it is worthwhile to step back and take a look at the facts on the ground. The business press is awash with stories about the yield curve and how it is possibly signalling a recession. The yield curve shows interest rates along the spread of maturities, and short term rates are usually lower than long term rates. However, we are flirting with a situation where long term rates are lower than short term rates. That is a yield curve inversion, and historically a yield curve inversion has been a decent (but not perfect) predictor of an imminent recession. The reason for this is that it implies that businesses are taking less risk, which means they must see something wrong in the economy.

 

The problem with the inverted yield curve model is that it gives off a lot of false positives – an old market saw is that an inverted yield curve has predicted “15 of the last 10 recessions.” Many times an inverted yield curve is the result of technical issues in the bond markets, which are temporary and don’t really spill through to the overall economy. This current period is probably one of those cases, and the technical issue is central bank behavior. The Fed, ECB, Bank of Japan have been pushing down long term rates in order to stimulate the economy for years, and now we have negative interest rates in much of the world. Negative interest rates in Germany and Japan (two huge bond markets) is drawing down US bond yields as overseas investors sell things that pay less than nothing (German Bunds and Japanese Government bonds) to buy things that pay something (US Treasuries).

 

The business press is emphasizing the recession angle here because (1) it is a much simpler story to tell, (2) the partisans can blame it on Trump, and (3) many strategists are too reluctant to stick their necks out and discuss the implications of negative rates worldwide – this is a completely new phenomenon and quite simply people don’t know.  We have a bubble in sovereign debt that has been engineered by global central banks – unlike stock and real estate bubbles, and we don’t have any historical analogy. We know that bubbles end eventually, and how this resolves is anyone’s guess.

 

That said, what is the current economic state of play? Europe is doing its same-old Euro-sclerosis thing, which it has been doing for decades. Germany had a flat GDP quarter and most of the Eurozone is slowing down in sympathy. Japan has been in the throes of a sclerotic economy since the New Kids on the Block ruled the charts. China is also tempering its growth. On the other side of the coin, the US has the lowest unemployment rate in 50 years, initial jobless claims are the lowest since we had a military draft, wages are rising, inflation is under control, and the consumer is increasing spending. This simply is not a recipe for a recession. And to take this a step further, tariff income has been about $60 billion since they have been implemented. In the context of a $21 trillion economy, this is insignificant – about 1/3 of 1%. It is a humorous state of affairs with partisan talking heads accusing Trump of destroying the economy over small-beer tariffs, while Trump accuses partisan journalists of sabotaging the economy with negative stories – as if the press had the power to do that.

 

Here is the big picture: The US economy has been strong enough to withstand a tightening cycle from the Fed, and has had 2.6% GDP growth in the immediate aftermath of a tightening cycle. Inflation is low, and is probably going to go lower as Europe and China begin exporting deflation to the US. Oh, and by the way the Fed is now cutting interest rates, which is the equivalent of giving a can of Red Bull to your kid at 9:00 pm on Halloween night. Don’t buy the recession narrative. None of the required pieces are in place.

16 Responses

  1. I gotta agree with Ace of Spades here:

    UPDATED UPDATE: Tweet from Rancida: @RashidaTlaib
    Silencing me & treating me like a criminal is not what she wants for me. It would kill a piece of me. I have decided that visiting my grandmother under these oppressive conditions stands against everything I believe in–fighting against racism, oppression & injustice.

    This Tweet is an admission that the story about her ailing grandma was a crock from the get-go.

    I don’t really see any other explanation. If her grandmother is there, she had no intention of seeing her. This was all about protesting and making the (((jooooz))) look bad. And political posturing of some kind. Otherwise, after having made the request, why would she not go? Clearly she was planning on getting turned down and then going to the press with how the (((jooooz))) were evil and keeping her from seeing her ailing grandmother.

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  2. I too believe that Academia is rife with racism and the patriarchy and should be smashed. I suggest the immediate and irreversible termination of any university or college employee with even one drop of white or male blood coursing through their mongrel veins.

    https://m.dailykos.com/stories/1879291

    Like

  3. Interesting, leaked transcript of a NYT in-house meeting between Executive Editor Dean Baquet and the staff, instigated by the NYT’s decision to cave in to twitter/staff outrage and change a perfectly factual headline into an editorialized one.

    https://slate.com/news-and-politics/2019/08/new-york-times-meeting-transcript.html

    Most of the attention that this no-longer private meeting is getting revolves around how it makes plain just how deeply the NYT has bought into advocacy journalism. But worth special note is that about halfway through, a staffer asks Baquet the following:

    Hello, I have another question about racism. I’m wondering to what extent you think that the fact of racism and white supremacy being sort of the foundation of this country should play into our reporting. Just because it feels to me like it should be a starting point, you know? Like these conversations about what is racist, what isn’t racist. I just feel like racism is in everything. It should be considered in our science reporting, in our culture reporting, in our national reporting. And so, to me, it’s less about the individual instances of racism, and sort of how we’re thinking about racism and white supremacy as the foundation of all of the systems in the country.

    No one, including Baquet, pushes back at all against the notion that racism and white supremacy are the “foundation” of the country. Apparently this is the kind of simple-minded, second rate dorm-room thinking that has become the norm, and is perhaps even driving coverage, at the US’s most prestigious and renowned newspaper.

    As a side note, Baquet responds to this question by referring to an article by NPR’s Keith Woods, and in the process he completely misunderstands/misrepresents the not-all-that-complicated point of Woods’s article. How a person so incapable of grasping Woods’s simple point can rise to become the executive editor of the NYT is a good indication of just how far the NYT has fallen.

    Another thing worth noting….at one point Baquet also says this:

    And I do think that race and understanding of race should be a part of how we cover the American story. Sometimes news organizations sort of forget that in the moment. But of course it should be. I mean, one reason we all signed off on the 1619 Project and made it so ambitious and expansive was to teach our readers to think a little bit more like that. Race in the next year—and I think this is, to be frank, what I would hope you come away from this discussion with—race in the next year is going to be a huge part of the American story. And I mean, race in terms of not only African Americans and their relationship with Donald Trump, but Latinos and immigration.

    This strikes me as an obvious admission that the goal of the NYT is not to inform readers of current events, but rather is to drive specific narratives that have been decided ahead of time, all in an effort, as Baquet says quite explicitly, to “teach our readers” how to think about certain things. Clearly the focus of NYT coverage over the next couple years is going to be driving the narrative that Trump is a racist.

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    • They honestly believe they are the only thing standing between us and Literally. Hitler. and the 3rd Reich II.

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    • “No one, including Baquet, pushes back at all against the notion that racism and white supremacy are the “foundation” of the country. ”

      Have you seen the 1619 project they are referencing?

      “The 1619 Project The 1619 Project is a major initiative from The New York Times observing the 400th anniversary of the beginning of American slavery. It aims to reframe the country’s history, understanding 1619 as our true founding, and placing the consequences of slavery and the contributions of black Americans at the very center of the story we tell ourselves about who we are.”

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      • jnc:

        Have you seen the 1619 project they are referencing?

        I hadn’t, but I’m not surprised. The only hope is that the NYT business model destroys itself with this nonsense before it can infect too many more people with it.

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      • FWIW, this is derived from an argument that arose in the late 1970s, when southern based historians began to argue that the antebellum south was the stronger economic engine than the pre-civil war north. The argument was based on the cotton economy – 2/3 of the world’s cotton was produced in the South, and cotton was America’s largest export, by far.

        The counter facts were indisputable, as well.

        By 1860, 90 percent of the nation’s manufacturing output came from northern states. The North produced 17 times more cotton and woolen textiles than the South, 30 times more leather goods, 20 times more pig iron, and 32 times more firearms. The North produced 3,200 firearms to every 100 produced in the South. Only about 40 percent of the Northern population was still engaged in agriculture by 1860, as compared to 84 percent of the South.

        Even in the agricultural sector, Northern farmers were out-producing their southern counterparts in several important areas, as Southern agriculture remained labor intensive while northern agriculture became increasingly mechanized. By 1860, the free states had nearly twice the value of farm machinery per acre and per farm worker as did the slave states, leading to increased productivity. As a result, in 1860, the Northern states produced half of the nation’s corn, four-fifths of its wheat, and seven-eighths of its oats.

        The industrialization of the northern states had an impact upon urbanization and immigration. By 1860, 26 percent of the Northern population lived in urban areas, led by the remarkable growth of cities such as Chicago, Cincinnati, Cleveland, and Detroit, with their farm-machinery, food-processing, machine-tool, and railroad equipment factories. Only about a tenth of the southern population lived in urban areas.

        Free states attracted the vast majority of the waves of European immigration through the mid-19th century. Fully seven-eighths of foreign immigrants settled in free states. As a consequence, the population of the states that stayed in the Union was approximately 23 million as compared to a population of 9 million in the states of the Confederacy.

        Thus the counter argument is that openness to innovation and immigration, and rapid development of competitive manufacturing, mechanized commerce, and retail merchandising in the north became the sustainable basis of American capitalism, while the reliance on slave labor and the rejection of “foreigners” and mechanization and innovation practiced in the antebellum South was a dead end.

        I believe American capitalism has much to do with the encouragement of innovation. Take Lincoln’s Land Grant College Act that envisioned farmers as technicians, and engineers as the lifeblood of growth, or the American patent system, which outstripped all of Europe by the late 19th century, and owed nothing to slavery. I think it has little to do with the debasement of human labor exemplified by slavery.

        YMMV.

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  4. Agreed about the posturing and hand wringing over an inverted yield.

    However, we are headed for a recession someday. The question is when.
    And I don’t know when, but I suppose it is a good bet that an episode that can be labeled a recession will happen within ten years, and likely before I die.

    On another note:

    https://reason.com/2019/08/17/rachel-maddows-racist-smear-of-second-circuit-nominee-steve-menashi/

    What are the chances that she will apologize? I am guessing not in my lifetime.

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  5. Honestly, this is a fun read and, once again, the comments are… (chef’s kiss).

    https://m.dailykos.com/stories/1879189

    Like

    • This comment is particularly amusing.

      He does something outlandish says something outlandish and the press will lap it up. He know how to stay in the news that is who he is.
      The guy keeps creating acting heads of departments so HE IS THE HEAD of the Department he controls the departments manipulating those who have the job temporarily and seeking a permanent position = government shut down or take over by the despot.

      hulihuligirl August 18 · 10:39:12

      Imagine, the elected head of the Executive branch wanting to exercise control over it’s departments?

      Scandalous!

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  6. See, our terrorism is better.

    https://www.greenwichtime.com/news/article/Two-mass-murders-a-world-apart-share-a-common-14341707.php

    Left unmentioned? Edward Abbey’s attitudes towards immigration.

    Like

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