I don’t like to say “I told you so,” but…
In the summer of 2008, I told my hedge fund clients to sell everything ahead of the greatest economic crisis since the Great Depression.
And on March 27, 2009, I predicted in a front-page article the “oncoming and unexpected bull stampede” before one of the longest bull markets in history.
And in December 2015, in front of a national TV audience, I told viewers to “sell everything in January” before the markets lost an estimated $8 trillion in the worst start to a new year ever.
Now, I’m going to tell you something else, so listen up.
I’m watching three crucial “barometers” right now, and they’re giving me a clear picture of the economy’s immediate future. And it’s not good.
A global recession is coming – and the signs couldn’t be any clearer.
We’re already seeing it in countries like Greece, Belgium, Italy, Portugal, Netherlands, Czech Republic, Venezuela, Brazil, Russia, Taiwan, and as of Monday, Ireland.
And we’re next.
The U.S. saw a paltry 0.7% (annualized) GDP growth rate in the fourth quarter of 2015. But for all of 2015 notched an estimated 2.4% growth rate, so it doesn’t appear close to turning a corner into recession.
However, based on a host of recession barometers, including industrial production, consumer spending, and stock prices as a reflection of sales and earnings, as far as the U.S. and the global economy go, dangerous “objects in the mirror may be closer than they appear.”
Recession Barometer No. 1: U.S. Manufacturing
Industrial production in the U.S. showed negative readings in ten out of the last twelve months. Over the past six months, industrial production is down 3%.
The Institute for Supply Management’s Purchasing Managers Index (a survey of private sector manufacturing companies in five different fields) just came in at 48.2. That’s four months in a row the index has been below 50. A reading below 50 points to contraction in U.S. manufacturing.
The January ISM report additionally says customers’ inventories are “Too High,” the backlog of orders is “Contracting,” exports are “Contracting,” and prices are “Decreasing.”
But don’t take my word for it.
The chief executive officer of Fastenal Co. (NASDAQ:FAST), North America’s largest fastener manufacturer and a major supplier to other businesses, this month repeated that “the industrial segment of the U.S. economy is in the midst of a recession.”
And the CEO of CSX Corp. (NYSE:CSX), operator of the largest railway network east of the Mississippi, said demand will drop amid a “freight recession.”
The question right now isn’t that U.S. manufacturing will enter a recession – it’s already there – but whether or not that slowdown will creep into other parts of the economy, namely our next barometer…
Recession Barometer No. 2: Consumer Spending
In spite of the apparent jobs growth that’s pushed unemployment down to 5%, U.S. consumers, responsible for a full three quarters of GDP growth, aren’t stepping up.
According to the Commerce Department, personal spending in December was flat from a month earlier. Spending on durable goods, meant to last at least three years, fell .9% in December. And spending on nondurable goods also fell .9%.
That translates to the end of the most important quarter for retailers – and the true picture of the consumers’ propensity to spend – as being a disaster for the economy.
For all of 2015, retail sales, including autos, were the worst since 2008-2009.
One reason consumers aren’t spending is wages have only increased 2.2% in the past five years. With rising healthcare costs courtesy of Obamacare and an uptick in the savings rate to 5.5%, it’s unlikely still deleveraging consumers will be much of a positive for GDP growth in 2016.
Recession Barometer No. 3: Global Stock Markets
And then there’s the stock market, make that global stock markets.
Not all steep market selloffs signal a coming recession. But, frighteningly this time around, that’s exactly what they’re doing.
The January 2016 selloff in U.S. stocks followed global equity markets getting hit last summer through yearend 2015. Now we’re all headed lower.
Selling isn’t the result of a valuation correction, what’s happening is investors are selling over fear of falling earnings, or an outright collapse.
The root cause of global market volatility, and why equity markets selling off portends a coming global recession, is all about currencies.
The currency market is the largest market in the world. Trillions of dollars of currencies trade every single day, dwarfing the volume of all the world’s equity markets, combined. That’s because currencies are used to buy goods and services the world over and as global trade has grown, more and more trading is necessary to make payments in different currencies.
Currencies don’t just move up and down based on short-term buying and selling based on daily trade transactions. They mostly move up and down relative to each other based on interest rate differentials between countries.
And interest rate differentials are now the “last stand” for central bankers whose no-interest, zero interest and negative interest rate policies have done nothing to keep staggering economies from slip-sliding back towards recession.
By managing their currencies down, exporters cheapen the cost of the goods and services they sell globally. With the sole exception of the United States, which has the largest domestic consumer economy in the world, and is still an export juggernaut, almost every country in the world relies on exports to propel growth.
But, when lowed interest rates, which cheapen a country’s currency relative to its trading partners, are met with counter-party interest rate cuts, trading partners and exporting competitors have nowhere to go but try and keep lowering interest rates.
When countries compete to lower rates to spur exports they’re are said to be engaging in a “race to the bottom” strategy to maintain export revenues.
Not only has that been happening, it’s going to get a lot worse as exports everywhere are falling.
The IMF recently noted that the 2015 year-over-year change in global exports was the second-lowest its seen since 1958. The smallest change was in 2008-2009.
As “currency wars” heat up in Asia, South America, and elsewhere, the U.S. dollar remains strong and on a relative currency basis is getting more expensive.
That means trillions of dollars of Chinese, emerging markets and other global debtors, all of them exporters, who grew their economies and export businesses by funding growth with dollar-denominated loans are going to see the cost of their debt skyrocket.
The only way they can pay it off is to export more to generate revenue.
It’s that “negative feedback loop” that’s going to cause major devaluations in currencies, debt defaults and bankruptcies worldwide. At the same time, U.S. multinationals who get increasingly larger revenue streams from overseas will see those revenues decimated when they have to translate earnings in foreign currencies back into U.S. dollars.
Stock markets see this. Earnings are going to get hit, and even collapse for some companies.
Between faltering industrial production in the U.S. and across the globe, retrenching consumers here and elsewhere when layoffs will be announced in the first quarter and throughout the year, and stock market investors selling on account of rapidly diminishing earnings in the face of escalating currency wars, the warning lights couldn’t be any brighter.
