Now here’s something you may not have expected me to talk about today: The Association of American Railroads (AAR).
The AAR recently released its July data, and there’s a lot behind these reports, which just showed a 4.4% decline in Class I rail traffic compared to the same period last year. In June, the decline was over 6%.
The report covers carloads and intermodal containers (just over 534,000 of them) traversing the railways of our country. Nearly 70% of all carload commodity groups reported negative YoY (year-on-year) numbers with only petroleum and nonmetallic metals showing gains.
Weekly intermodal container volume was down 5.3% YoY.
It Doesn’t Stop at the Railroad
What does such a slowdown in industrial rail traffic mean? Well, it tells us manufacturing and industrial productivity – key components of our GDP and market strength – are also slowing down.
The U.S. Leading Index of Manufacturing PMIs has slipped to a three-year low, and Markit MPI (which polls specific business sectors) has hit a ten-year low. And this isn’t just isolated to the U.S.; it’s a global issue.
Here’s how manufacturing is faring overseas…
Such data suggests further declines in rail volume through and into the fall months. As we press forward, we’re going to see lots of market volatility, so brace yourselves for a bumpy ride – even a derailment.
Rail freight may not seem sexy, but this key data point – one otherwise ignored by the Fed, media bubbleheads, and sell-side spin artists – is in fact an insider’s way of getting infinitely more honest data as to what’s really happening in our real economy.
The Real Economy
Specifically, such freight declines are a frightening indicator that our so-called “mid-cycle” economy (in fact, the longest/Fed-spiked growth cycle in our history and nearing a tired end rather than “mid-point”) is weakening.
Unlike the markets, the Fed can neither manipulate nor address a falling economy. The faltering economy, in turn, will likely trigger our next recession, and hence a massive market sell-off thereafter.
You see, most investors are waiting for tanking markets to send the economy into a recession – as in 2008.
But with record-breaking Fed intervention to inflate markets, it’s far more likely that this time a recession will send the markets tanking.
As we’ve shown, the markets are totally rigged by central banks playing with interest rates and money printers as if a rising market can outlaw recessions.
The Fed serves Wall Street, not Main Street, and for years has conned most investors into confusing the rising stock market with a healthy economy. Big mistake.
And as I mentioned recently, trucking companies – a key part of our overall industrial pulse check – are dropping like flies, further confirming the ominous implications that our real economy is dropping too.
The Cass Freight Index, which tracks the shipment of industrial and consumer goods (the heartbeat of our already comatose GDP), has fallen below its prior boom periods and has now put the Transportation industry into its own recession.
Should Buffett Be Worried?
I would think so. Look what’s been happening to Union Pacific Corp. (UNP), CSX Corp. (CSX), and Norfolk Southern Corp. (NSC)…
North American railroads are going to have to work pretty darn hard to become more productive, to raise freight rates, and (sadly) to borrow more to buyback even more shares to prop up the stock and offset the hit from declining freight volumes as trade tensions mount.
Shorting opportunity? Perhaps, but note the stocks have already dropped. Normalized, Union Pacific may be your best short if this keeps up – the farthest to fall.
The great Warren Buffett has to be a bit concerned over BNSF railroad (not publicly traded), as earnings for Berkshire Hathaway’s manufacturing businesses have barely budged due to declining sales in the wake of continued tariff impacts.
Trade War Origins
These declines, in turn, are the direct result of a national and global downturn in industrial production that has poisoned American manufacturers with a virus originating in Europe and Asia – all directly tied to the synchronized decline in production and trade volumes germinating from our trade war with China.
The data confirms that tariffs are hurting more than just U.S. farmers, who are now seeing record high loan delinquencies in the green belt.
Manufacturing is taking big hits as well – and that never bodes well for the real economy.
It’s all connected. As we’ve argued long ago, no one really wins a trade war, and even if we were to “beat” China, we’d be shooting our own foot to save a toe, as China is 40% of global GDP. If China limps, the world trips.
Furthermore, China’s recent currency moves (cheating) suggest they plan to outlast the U.S. in this game of trade “chicken.” Will they win? Will they try to hurt the White House by refusing to “settle” before the 2020 elections?
It’s hard to say. Politics are difficult forces to time or measure, but regardless of this fact, we are already seeing clear signs that the tariff war is hitting global manufacturing in general, and U.S. manufacturing in particular.
Stocks Plummeting Indicate a Bumpy Autumn Ahead
As we head into late August, these forces, along with declining growth and earnings forecasts for Q3 and Q4, are already colliding with major hedge funds selling to cover bullish bets in June and July that went against them in early August. The Dow Jones fell 800 points on Wednesday, previewing what’s ahead.
In sum, a front just came through, and many weather patterns are converging to suggest more rain than sunshine for this autumn’s markets.
Our storm tracker is currently blowing at 46 knots and recommends 46% cash allocations for those of you seeking to manage risk while sniper shooting optimal trades as we see them – both long and short.
Who’d have thought that a simple data point out of the rail freight industry could be so telling?
Fortunately, Critical Signals Report focuses on the facts, and no matter how fantastic the Fed says things are for the U.S. economy, the real numbers say otherwise.
And just as a reminder, next week’s What’s Happening Now will be pushed to Tuesday rather than Monday. Keep an eye out for that one – I’ll address what really happened on Wednesday, with an update on Déjà Vu that you will not want to miss.
10 responses to “Here’s What Warren Buffett Should Be Worried About”
August 16 2019