Welcome back to What’s Happening Now, your weekly guide to what’s going on right now and why it matters to you – and your money.
Today, we’re going to look at one of the main recession indicators we track, namely globally declining GDP growth.
“Global” is the operative word for this column, for it’s not just about U.S. growth and markets. Rather, it’s as much (even more) about global growth when it comes to forces impacting your dollars.
Hurricane Dorian (which ravaged Grand Bahama and the Abaco Islands and left 70,000 people homeless) developed from a tropical wave well off our shores in the Central Atlantic.
Our next market hurricane could similarly spawn from well off our shores, triggering the next U.S. recession, never mind that we are currently the best horse in the global glue factory.
There are country recessions, regional recessions, and global recessions, the last of which have the greatest impact for their size.
Let’s define a recession.
In the U.S., the National Bureau of Economic Research (NBER) officially calls a recession following two verifiable and consecutive quarters of declining GDP. That’s a country concept.
For a global recession, there is no official definition, although International Monetary Fund (IMF) weighs in, using broader measures of global economic decline such as a decrease in per-capita GDP worldwide along with coincidental indicators like trade, capital flows, and employment.
Let’s take a peek at recent global GDP performance in three simple charts that date back to the start of 2019, namely a chart on Q1 Global GDP, another on Q2 Global GDP and, finally, a chart on the trend that emerges from the two.
Chart 1 (below): In Q1 of 2019, Global GDP trended up on average across the 39 countries and regions pictured below, with just six countries (those marked in red) dragging down the average.
Chart 2 (below): Fast-forward one quarter later to Q2 of 2019. In Q2, GDP trended down and was negative in four countries. In short, the overall trend had reversed, from GDP generally gaining in Q1 to generally falling in Q2.
Chart 3 (below): Here’s the rub. Measuring the difference in GDP across these countries from Q1 2019 to Q2 2019, we see that GDP deteriorated between quarters across 23 countries/regions – nearly 60% of our sample size.
And these aren’t just any countries. Count them. They, too, are marked in red in Chart 3 below.
They include Australia, Austria, Belgium, Estonia, the Eurozone as a whole, Finland, Germany, Hungary, Israel, Italy, Japan, Lithuania, Poland, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, Taiwan, Thailand, the U.K., and, yes, the United States, too.
Bonus Chart (below): And here’s a bonus chart – one more way to gauge an offshore trend toward global recession. We’ve simply reached back one more quarter to track the quarterly trend across the same regions and countries since Q4 2018.
Hmmm… not so good.
We’re going to want to track any further deterioration in the current Q3 2019, which ends just two weeks from now. If we see more counties fall into negative territory and/or others clock two down quarters in a row, that could tip us into a global recession – and inform us well before the NBER or IMF, which does so with a lag.
Like Hurricane Dorian that started small and spread like wildfire, these offshore countries can have as much if not more impact on triggering the next recession than the internal games we are playing here in the U.S.
Forget the cause for the moment and simply track the effect – that’s what matters. This falling GDP indicator is just one more canary gasping for air in the global market coalmine.
Like Hurricane Dorian, the next recession could well spawn offshore, building to hurricane-force winds when it comes our way. That’s why Storm Tracker is so urgently important to you and your money.
Storm Tracker, with sustained winds of 47 knots as we head to a close for Q3 2019, has been unwavering in its path while building in intensity.
Components of Storm Tracker change every week. Lately, every time several of the almost 100 leading indicators tracked show some signs of life, others deteriorate. Take the Déjà Vu indicator, for example, which broadly measures interest rates against U.S. stock market performance.
Déjà Vu has been expanding lately to comfortable margins of spread, but it contracted last week for the first time in months because the spread it tracks actually began to narrow. That is, stocks rose on headline news that the Fed is likely to ease (further lower rates this Wednesday) as the U.S./China tariff conversation resumes.
You’d think that would widen the spread between stock and bond yield action.
It would have, had yields not suddenly risen faster in relative terms than stocks. The spread between yields and stocks thus narrowed. We will continue to report on this essential metric.
Here’s What Else is Happening Now
Emerging Market Debt…
To our point of the next recession coming ashore from offshore, take a look at this record withdrawal of almost $500 million from J.P. Morgan’s U.S. Emerging Market Debt ETF:
Back in 2008, emerging markets (below) did phenomenally well ahead of the Great Recession… and then they plunged. Canaries everywhere.
We’ll be telling you what TO DO as we get closer, but for now, just know that tumbling GDPs across developed and emerging markets alike are taking us in a recessionary direction. Investors are watching. The flows tell us so. When all the water is sucked out of an aboveground pool (like the Emerging Market ETF mentioned), the pool generally implodes, one wall at a time. In the meantime…
Prepare – Another Potential Fed Red Day this Wednesday
In our What’s Happening Now last Monday, we described the concept of a “Fed Red Day” (i.e. markets falling on supportive “good news”) and what it means for recession timing. In a nutshell, (1) Fed Red Days occur when the Fed lowers rates yet markets fall – both in the same day; and (2) Fed Red Days are a marker that we are already in a recession.
Thus, keep a sharp eye on the markets this Wednesday, for at 2:00 p.m. the Fed will release its decision whether to lower rates and by how much. Keep an especially close eye on how stocks react if we get another rate break.
If we get another Fed Red Day on Wednesday, whether for all the reasons we’ve mentioned or even for last weekend’s oil shock, that would be two Fed Red Days in a row – and that would not be good. Not good at all. It’s not about why it occurred. The fact that it did occur is what counts.
If, on the other hand, stocks salute in a major way, then optimism over a prospective trade deal and a continuingly dovish Fed could push these markets higher, never mind that:
- Manufacturing is cutting back;
- Residential investment has been negative for six quarters now (despite lower rates);
- The U.S. yield curve is sustaining its inversion;
- U.S. factory orders are tumbling;
- And non-financial corporate profit margins have been steadily slipping since 2015.
Global GDPs, of course, are also tumbling. We know that now. Central Banks responding with low and negative interest rates have completely distorted the landscape, providing artificial hope that stimulus alone can do the trick.
Now it seems that the very central bank strategies that have kept us whole since the Great Recession are slowly running out of both credibility and steam.
Think about it. If negative interest rates were working, the Eurozone and Japan would not be ailing. Desperate central banks are borrowing time, not solving systemic flaws.
To drive the point home here in the U.S., if low interest rates were working, then we wouldn’t be seeing the falling Cass Shipments Index data. The Cass Index, which measures rail, trucking, and airfreight volume, is considered a vital sign of the U.S. economy.
Sadly, the Index is in its ninth consecutive month of decline and suggests we could see negative growth here in the U.S. by year-end.
This week, the Central Banks of Japan, England, Indonesia, Brazil, Switzerland, South Africa, and Norway all revisit rates. Now we know what’s going on offshore when it comes to growth – namely, it’s not happening. Expect continuing cuts and balance sheet stimulus, like the ECB did last week… more canaries.
As we pen this note this Monday morning, markets globally are opening in some disarray following airstrikes over the weekend on Saudi Arabian oil facilities, although equities are reacting calmly with a willing Fed just two days away. As countries globally edge toward recession, higher oil prices (should they persist) is not what the world needs right now. Heightened global risk is a negative.
Stay tuned. More on oil in this Wednesday’s column!
Your questions just poured in last week.
In our piece on pension funds, David H., who teaches statistics, asked about using our “median” vs. “average” data regarding household net wealth for his own students and asked where we sourced the same. David, we took that data from ex-Goldman Sachs macroeconomist Raoul Pal, whose pension fund analytics can be found online.
Responding to the second piece of our two-part series on Pension Fund risks, Mike S. noted that we might be part of something akin to “project fear.”
We get this. Although we like to think of ourselves as merely blunt, our data on declining GDP, inverted yield curves, declining PMI, contracting industrial production, tanking Cass Freight trends, empirically overvalued stock markets alongside a corporate bond market which even Morgan Stanley analysts confess is 44% “junk” (based upon leverage ratios) is indeed, well… “fearful.”
But we are not seeking to spread fear in some kind of bearish feedback loop, but simply to display the data and share its implications. Again, they are fearful, but sadly, they are true.
In the past, and even in this very e-letter, we’ve made numerous cases for melt-ups and/or temporarily bullish moves in the market. For example, if we see a resolution of the trade war any time soon, we humbly concede that such a headline-event would be a powerful catalyst for further new market highs.
Yet despite such potential and bullish catalysts, the overwhelming weight of evidence and probability metrics confirm that risk far outweighs reward in the market backdrop we’ve elsewhere described as rigged to fail.
Finally, we have received so many questions as to WHEN we anticipate the next recession and market sell-off that we’ve decided to write a special piece exclusively addressing this issue. You should see in your inbox later this week.
In the meantime, stay informed and stay prepared. We’re here to guide you. The market’s reaction to this week’s Fed rate moves will be a critical signal to watch.
6 responses to “It’s Not Just the U.S. You Should be Worried About”
September 16 2019