3 Charts That Point Toward Recession
by Jason Simpkins, Outsider Club I honestly don’t know how people expected this to end… For six years now, we’ve been relying on the Fed’s generosity to prop up the economy. And now, people are surprised that with QE gone and rate hikes on the horizon, growth is starting to stall. Well, I’ve got some news for you: This is just the beginning. Because if the Fed follows through with tighter monetary policy, we’re heading back into a recession. I don’t think it will be terribly sharp, but I’m confident it will be long. And the stock market? It’s going to suffer… The Three Bearish Charts Have you ever ridden a roller coaster? Do you know that feeling when you get to the very top, and then your stomach drops as you start to head down? That’s pretty much where we’re at right now. After a steady, six-year climb, we’ve topped out.
Take a look at the last three quarters of GDP growth…
Where do you see that trend taking us?
The advanced estimate from the Bureau of Economic Analysis suggests the U.S. economy grew just 0.2% in the first quarter.
And given some more recent data, I’d be willing to bet that figure will be revised down.
The chief reason is the trade deficit, which in March experienced its biggest increase in a decade.
The trade gap surged 43.1% to $51.4 billion. That’s the highest jump since December 1996.
And when adjusted for inflation, the gap widened to $67.2 billion for the month — the largest in eight years.
Obviously, those figures are far larger than the $45.2 billion deficit the government assumed in its advanced GDP estimate. And even with the BEA lowballing the trade figure by $6.2 billion, the deficit still managed to shave 1.25% off the GDP estimate.
This is going to be a persistent problem — especially if the Fed does raise rates and the dollar continues to strengthen.
Indeed, the key reason the deficit is expanding is that the greenback has risen about 12% against the currencies of our biggest trade partners over the past year. In fact, until a recent stumble, the dollar had climbed 25% higher.
The reason for this surge is well known. Every other major economy from Europe to China to Japan has announced some form of QE over the past year. The U.S., on the other hand, is tightening policy.
As a result, our exports have become more expensive for the rest of the world, while imports have become much cheaper.
Imports posted a record 7.7% increase in March, compared to a 0.9% rise for exports. Imports from China alone were up 32% compared with March 2014.
Again, this headwind is unavoidable. Without the Fed flooding the market with greenbacks, the dollar will continue to strengthen and our trade imbalance will grow.
And that’s not all…
With their export market contracting, U.S. multinationals are seeing their earnings evaporate.
- GM said currency fluctuations shaved $1.8 billion off its first-quarter revenue. The decline was related to the euro, British pound, Brazilian real, South Korean won, and Venezuelan bolivar.
- Procter & Gamble expects full-year net sales to fall 5% or 6%, due to exchange rates.
- McDonald’s, which is facing a myriad of problems, said currency moves reduced its first-quarter earnings per share by $0.09.
- And Kellogg Co. saw its revenue drop a staggering 44%.
As with the trade deficit, this is just the beginning.
Consumer spending will be the next pillar to fall, as higher rates mean higher borrowing costs for Americans. They will make home and auto loans more expensive, and they will boost interest payments on bank deposits, encouraging more saving.
I think it goes without saying that if earnings aren’t sustainable, then the stock market has a very limited upside.
The bull born back in March 2009 is the third longest in U.S. history. It’s doubled and re-doubled in value.
But it’s clear fatigue is starting to set in.
It’s hit some new records, but the market as a whole has been generally flat for six months now…
The bottom line is that now is the time to start taking precautions if you haven’t already.
I’m buying gold and shorting the market.
If the Fed bails out on its interest plan, gold will shoot higher. If it follows through, the market will tank.
Either way, I win.