Guest Post by John Mauldin
This month, the Federal Reserve joined its global peers by turning decisively dovish. Jerome Powell and friends haven’t just stopped tightening. Soon they will begin actively easing by reinvesting the Fed’s maturing mortgage bonds into Treasury securities. It’s not exactly “Quantitative Easing I, II, and III,” but it will have some of the same effects.
Why are they doing this? One theory, which I admit possibly plausible, was that Powell simply caved to Wall Street pressure. The rate hikes and QT were hitting asset prices and liquidity, much to the detriment of bankers and others to whom the Fed pays keen attention. But that doesn’t truly square with his 2018 speeches and actions. The Fed’s March 20 announcement suggests more is happening.
I think two other factors are driving the Fed’s thinking. One is increasing recognition of the same slowing global growth that made other central banks turn dovish in recent months. The other is the Fed’s realization that its previous course risked inverting the yield curve, which was violently turning against its fourth-quarter expectations and possibly toward recession (see chart below, courtesy of WSJ’s “Daily Shot”). That would not have looked good in the history books, hence the backtracking.
On the second point… too late. The yield curve inverted, and recession forecasts became suddenly de rigueur among the same financial punditry that was wildly bullish just weeks ago.
My own position has been consistent: Recession is approaching but not just yet. Yet like the Fed, I am data-dependent and the latest data are not encouraging. Today, we’ll examine this and consider what may have changed.
Cracks Appearing
Let’s start with a step back. The global economy clearly hasn’t recovered from the last recession like it did in previous cycles. Yes, the stock market performed well. So has real estate. We’ve seen some economic growth, which in a few places you might even call a “boom,” but for the most part it’s been pretty mild. Unemployment is low, but wage growth has been sluggish at best. Rising asset prices, fueled by almost a decade of easy monetary policy, also contributed to wealth and income inequality, which fueled populist and now semi-socialist movements around the world.
This slow recovery began fading in the last few quarters. The first cracks appeared overseas, leaving the US as an island of stability. Not coincidentally, we also had (slightly) positive interest rates and thus attracted capital from elsewhere. This let our growth continue longer. But now, signs of weakness are mounting here, too.
Recall, this follows years of astonishing, amazing, unprecedented, and astronomically huge monetary stimulus by the Federal Reserve, Bank of Japan, European Central Bank, and others. In various and sundry ways, they opened the spigots and left them running full speed for almost a decade. And all it produced was the above-mentioned weak recovery. (Chart below from my friend Jim Bianco, again via “The Daily Shot”)
That, alone, should tell you that putting your faith in central bankers is probably a mistake. We can’t know how much worse the last decade would have been without their “help,” but does this feel like success?
Yet here we are, with millions still in the hole from the last recession and another one possibly looming. We also can’t rely on historical precedent to identify where, when, or why it will start. But we can make some educated guesses.
First Domino
Earlier, I called the US an “island of stability.” Other such islands exist, too, and Australia is high on the list. The last Down Under recession was 27—yes, 27—years ago in 1991. No other developed economy can say the same.
The long streak has a lot to do with being one of China’s top raw material suppliers during that country’s historic boom. But Australia has done other things right, too. Alas, all good things come to an end. While not officially in recession yet, Australia’s growth is slowing. University of New South Wales professor Richard Holden says it is in “effective recession” with per-capita GDP having declined in both Q3 and Q4 of 2018.
(By the way, Italy is similarly in a “technical recession.” Expect more such euphemisms as governments try to avoid uttering the “R-word.”)
As often happens, real estate is involved. Australia’s housing boom/bubble could unravel badly. Last week, Grant Williams highlighted a video by economist John Adams, Digital Finance Analytics founder Martin North, and Irish financial adviser Eddie Hobbs, who say Australia’s economy looks increasingly like Ireland’s just before the 2007 housing collapse.
The parallels are a bit spooky.
Australia’s household debt to GDP was 120.5 per cent as of September last year, according to the Bank for International Settlements, one of the highest in the world. In 2007, Ireland was sitting at around 100 per cent.
At the same time, the RBA puts Australia’s household debt to disposable income at 188.6 per cent. Ireland was 200 per cent in 2007, while the US was only 116.3 per cent at the start of 2008.
RBA figures also show more than two thirds of the country’s net household wealth is invested in real estate. In 2008, that figure was 83 per cent in Ireland and 48 per cent in the US. Meanwhile, 60 per cent of all lending by Australian financial institutions is in the property sector.
In 2007, the International Monetary Fund gave the Irish economy and banking system a clean bill of health and suggested that a “soft landing” was the most likely outcome. Last month, the IMF said Australia’s property market was heading for a “soft landing”.
House prices in Sydney and Melbourne have fallen nearly 14 per cent and 10 per cent from their respective peaks in July and November 2017, coinciding with sharp drop-off in credit flowing into the housing sector both for owner-occupiers and investors.
Real estate is, by nature, credit-driven. Few people pay cash for land, homes, or commercial properties. So when credit dries up, so does demand for those assets. Falling demand means lower prices, which is bad when you are highly leveraged. It gets worse from there as the banking system gets dragged into the fray. Losses can quickly spread as defaults affect lenders far from the source.
This is not only an Australian problem. Similar slowdowns are unfolding in New Zealand, Canada, Europe, and China. It’s a global problem, and one company reveals the impact.
Constrained Hiring
Shipping and transport stocks are kind of a “canary in the coal mine” because they are among the first to signal slowing growth. Last week, FedEx reported its international shipping revenue was down and cut its full-year earnings guidance. Its CFO blamed the economy, reported CNBC.
Slowing international macroeconomic conditions and weaker global trade growth trends continue, as seen in the year-over-year decline in our FedEx Express international revenue,” Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer, said in statement.
Despite a strong U.S. economy, FedEx said its international business weakened during the second quarter, especially in Europe. FedEx Express international was down due primarily to higher growth in lower-yielding services and lower weights per shipment, Graf said.
To compensate for lower revenue, Graf said FedEx began a voluntary employee buyout program and constrained hiring. It is also “limiting discretionary spending” and is reviewing additional actions.
FedEx shares have dropped roughly 27 percent in the past year, lagging the XLI industrial ETF’s 1 percent decline.
This little snippet overflows with implications. Let’s unpack some of them.
Revenue fell due to “higher growth in lower-yielding services.” So those who ship international packages have decided lower costs outweigh speed. Likewise, “lower weights per shipment” signals they are shipping only what they must, when they must.
FedEx is responding with an employee buyout program and “constrained hiring.” The company is overstaffed for its present requirements. This might also reflect increased automation of work once done by humans. In any case, it won’t help the employment stats.
In addition, FedEx is “limiting discretionary spending.” I’m not sure what that means. Every business always limits discretionary spending, or it doesn’t stay in business long. If FedEx is taking additional steps, then whoever would have received that spending will also see lower revenues. They might have to “constrain hiring,” too.
Obviously, FedEx is just one company, although a large and critically positioned one. But statements like this add up to recession if they grow more common… and they are.
Tariff Trouble
One reason FedEx is in the vanguard is that it’s uniquely exposed to world trade, the growth of which is diminishing for multiple reasons.
Part of it is technology. The things we “ship” internationally are increasingly digital, and they travel via wires and satellite links instead of ships and planes. These sorts of goods aren’t easily valued for inclusion in the trade stats.
Energy is another factor. Between US shale production and renewable energy sources, we don’t import as much oil and gas from across the seas as we otherwise would. That shows up in both trade and currency values. The US dollar is stronger now, in part because we send fewer dollars to OPEC.
Note the massive (and stealthy!) growth in LNG (liquified natural gas) exports in the past few years. Think what this will look like in a few years, with not one but four LNG export terminals on the US coasts. Natural gas is also the basis for much of the chemical and fertilizer industry. Abundant US supplies (and prices less than half the cost of Russian gas in Germany) help many US industries compete.
Those are just signs of normal progress and change. The economy can adapt to them. The greater threat is artificially constrained international trade, which is what the Trump administration’s trade war is creating.
Last year, I explained how trade wars can spark recession and trade deficits are nothing to fear. I won’t repeat all that here. But we have since seen several market swoons/rallies as harsher trade restrictions looked more/less likely. Whether you like it or not, asset values depend on the (relatively) free flow of goods and services across international borders. Interfere with that and all kinds of assets become less valuable.
Starting a trade war, at the same time growth is slowing for other reasons, is more than a little unwise. Agricultural tariffs have already ripped through US farm country to devastating effect, leaving losses some farmers may never recover.
The president’s tariff threats had other impact as well. Companies raced to import foreign-supplied components and inventory before the tariffs took effect. This jammed ports and highways last year, not with new demand but future demand shifted forward in time.
This is important, and I think we will see the impact soon (if we are not already). Transport and logistics companies geared up for last year’s surge, expanding their facilities and hiring new workers. Importers built up inventory in an effort to avoid tariffs that were supposed to take effect in January. The deadline was extended, but the threat is still alive.
At some point, all this has to stop. Carrying inventory is expensive and will eventually outweigh the benefit of avoiding tariffs. Then the boom will come to a screeching halt. Imports will fall as companies work down inventory. All those jobs and construction projects will disappear.
That, combined with the other cyclical factors and high debt loads everywhere, could easily add up to a recession. Exactly when is hard to say. Recessions usually get pronounced in hindsight, so there’s some possibility we are in one right now. But I still think we’ll avoid it this year. Getting into this box took a long time and so will getting out of it.
Regardless, we’ll have a recession at some point. I think the next subprime crisis will be in corporate debt. Next week, we’ll look deeper into the timing question, what the yield curve tells us, and why the next decade will bring little or no economic growth.
I realize this is not a happy conclusion, but I call them as I see them. I’ll leave you with one final but critically important thought: Prepare, don’t despair. Tough times are coming but we can handle them. You have a chance to get ready. I highly suggest you take it.
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The bill for 2008 is going to come due, it is inevitable. there are so many companies that should already be gone (like GE) but are still able to fool the regulators (who were part of the original 2008 crisis).
They will continue to kick the can, until the next guy takes the job, Powell will just step down, after this insane attempt to “fix” the economy by raising rates. He is toast, he knows it, the market knows it.
The system can not work without growth, and growth requires cheap energy and free markets.
we “imagine” the energy is cheap, because it is being produced on credit.
this is the fracking illusion.
The only reason we are not in a recession now, is that the FED is propping up the markets with cheap money (for them) allowing buybacks to continue. The FED is also the only one buying short term bonds, so, in effect, no one is buying US debt, it to is being put on the FED credit card.
The 2008 crisis will be revisited upon humanity, as these ASSHOLE Banksters continue to push debt (aka the same credit card used to Frack and buys US bonds) until the system freezes again.
This time, it will be DeutchBank or some other EU mega bank that fails, and causes another world wide panic.
And after that, it is the same rinse and repeat until the next crisis.
So, keep yer powder dry, don’t buy any GE or Boeing or any Banker stocks, or Tesla, or FANGs.
just find some good blue chip that goes on sale during the next crisis, and load up.
and forget about gold, that is a scam on the way in and on the way out, it is an insurance policy to keep the nukes from flying. it is for old men, and evil governments. They will steal it from you if they want to.
Anonymous,
1. “They will continue to kick the can, until the next guy takes the job, Powell will just step down, after this insane attempt to “fix” the economy by raising rates. He is toast, he knows it, the market knows it.”
• The FED will take their orders from the Lidless Eye…and no one else. When the time comes for the FED to activate their Suicide Vest they will…screaming…LUCIFER IS GREAT!
2. “The only reason we are not in a recession now, is that the FED is propping up the markets with cheap money (for them) allowing buybacks to continue. The FED is also the only one buying short term bonds, so, in effect, no one is buying US debt, it to is being put on the FED credit card.
The 2008 crisis will be revisited upon humanity, as these ASSHOLE Banksters continue to push debt (aka the same credit card used to Frack and buys US bonds) until the system freezes again.
This time, it will be DeutchBank or some other EU mega bank that fails, and causes another world wide panic.”
• YOU ARE CORRECT SIR!
3. “And after that, it is the same rinse and repeat until the next crisis. So, keep yer powder dry, don’t buy any GE or Boeing or any Banker stocks, or Tesla, or FANGs. Just find some good blue chip that goes on sale during the next crisis, and load up.”
• The only powder I would keep dry after the EVERYTHING BUBBLE pops…is the powder you will need to shoot the enemy in center mass…and it will be a target rich environment!
• If you think the ‘market’ is going to come back after the EVERYTHING BUBBLE POPs like it did in 2008…after the TSHTF…After we turn the 4th Corner…you are not an optimist…you are either a blind naïve fool or a troll attempting to lead the good and honorable people of TBP down the trail to the L shaped ambush the Sons of Bitches and Daughters of Witches GLOBALISTS and BANKSTERS have been setting for too many generations.
4. “And forget about gold, that is a scam on the way in and on the way out, it is an insurance policy to keep the nukes from flying. It is for old men, and evil governments. They will steal it from you if they want to.”
• Here are a few ‘Old Men’ with a different view.
O Gold! I still prefer thee unto paper, which makes bank credit like a bark of vapour. — Lord Byron
The castle gates will always open for gold-laden donkeys. — Russian Proverb
If you are sick, think about your life; if you are better, think about your gold. — Mongolian Proverb
Pure gold does not rust. Only gold alloys do so. You may have golden dreams. But if you go in the company of toxic people, you become “a gold alloy” and what that means is that you can rust at any time! ― Israelmore Ayivor
The beauty about gold, though, is that in all states from uncertainty to conviction, it never for once gives up its luster. ― Ufuoma Apoki
Gold — what can it not do, and undo? — William Shakespeare
Gold opens all locks. No lock will hold against the power of gold. — George Herbert
Gold gives to the ugliest thing a certain charming air, for that without it were else a miserable affair. — Moliére
Truth, like gold, is to be obtained not by its growth, but by washing away from it all that is not gold. — Leo Tolstoy
Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked: “Account Overdrawn.” — Ayn Rand
You have to choose (as a voter) between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold. — George Bernard Shaw
Gold would have value if for no other reason than that it enables a citizen to fashion his financial escape from the state. — William F. Rickenbacker
Like Liberty, gold never stays where it is undervalued. — John S. Morrill
It is extraordinary how many emotional storms one may weather in safety if one is ballasted with ever so little gold. — William McFee
The desire of gold is not for gold. It is for the means of freedom and benefit. ― Ralph Waldo Emerson
Because silver and gold have their value from the matter itself, they have first this privilege, that the value of them cannot be altered by the power of one, nor of a few commonwealths, as being a common measure of the commodities of all places. But base money may easily be enhanced or abased. – Thomas Hobbes
Gold is a treasure, and he who possesses it does all he wishes to in this world, and succeeds in helping souls into paradise. – Christopher Columbus
Gold is not necessary. I have no interest in gold. We will build a solid state, without an ounce of gold behind it. Anyone who sells above the set prices, let him be marched off to a concentration camp. That’s the bastion of money. – Adolf Hitler
There can be no other criterion, no other standard than gold. Yes, gold which never changes, which can be shaped into ingots, bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence. – Charles de Gaulle
We have gold because we cannot trust governments. ― Herbert Hoover
It’s absolutely critical that we audit the Fed so the American people can see what’s going on over there. Do it from top to bottom so that we can have transparency in this entity called the Federal Reserve. Hopefully, the American people will see that we need to go back to the gold standard, which I’ve introduced, and get rid of the Fed. – Paul Broun
Gold is money. Everything else is credit. – J. P. Morgan
Never trust money more than gold. ― Toba Beta
In reality, there is no such thing as an inflation of prices, relatively to gold. There is such a thing as a depreciated paper currency. — Lysander Spooner
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. — Alan Greenspan
A gold standard doesn’t imply stability in the prices of the goods and services that people buy every day, it implies a stability in the price of gold itself. — Ben Bernanke
The desire for gold is the most universal and deeply rooted commercial instinct of the human race. — Gerald M. Loeb
When goods are exchanged between countries, they must be paid for by commodities or gold. They cannot be paid for by the notes, certificates, and checks of the purchaser’s country, since these are of value only in the country of issue. — Carroll Quigley
The gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion — policemen, customs guards, penal courts, prisons, in some countries even executioners — had to be put into action in order to destroy the gold standard. Solemn pledges were broken, retroactive laws were promulgated, provisions of constitutions and bills of rights were openly defied. And hosts of servile writers praised what the governments had done and hailed the dawn of the fiat-money millennium. — Ludwig von Mises
With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people. — Friedrich August von Hayek
Monetary policy today is guided by little more than government fiat — by the calculations, often-mistaken economic theories and whims of central bankers or, even worse, politicians. Under such a regime, inflation of three or four percent annually has come to be viewed as a stellar monetary performance. However, under a more sound monetary system — i.e., a gold standard — such increases in the general price level would be seen as wildly inflationary. — Raymond J. Keating
Although gold and silver are not by nature money, money is by nature gold and silver. — Karl Marx
Governments lie; bankers lie; even auditors sometimes lie. Gold tells the truth. — Lord Rees Mogg
Until government administrators can so identify the interests of government with those of the people and refrain from defrauding the masses through the device of currency depreciation for the sake of remaining in office, the wiser ones will prefer to keep as much of their wealth in the most stable and marketable forms possible — forms which only the precious metals provide. — Elgin Groseclose
If you don’t trust gold, do you trust the logic of taking a beautiful pine tree, worth about $4,000-$5,000, cutting it up, turning it into pulp and then paper, putting some ink on it and then calling it one billion dollars? — Kenneth J. Gerbino
The great merit of gold is precisely that it is scarce; that its quantity is limited by nature; that it is costly to discover, to mine and to process; and that it cannot be created by political fiat or caprice. — Henry Hazlitt
Gold will be around, gold will be money when the dollar and the euro and the yuan and the ringgit are mere memories. — Richard Russell
Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood. For these few gold has been the asset of last resort. — Antony C. Sutton
The modern mind dislikes gold because it blurts out unpleasant truths. — Joseph Schumpeter
They don’t give you gold medals for beating somebody. They give you gold medals for beating everybody. — Michael Johnson
My advice to you, my violent friend, is to seek out gold and sit on it. ― John Gardner
Because gold is honest money, it is disliked by dishonest men. — Ron Paul
Commodities such as gold and silver have a world market that transcends national borders, politics, religions and race. A person may not like someone else’s religion, but he’ll accept his gold. — Robert Kiyosaki
Gold has intrinsic value. The problem with the dollar is it has no intrinsic value. And if the Federal Reserve is going to spend trillions of them to buy up all these bad mortgages and all other kinds of bad debt, the dollar is going to lose all of its value. Gold will store its value, and you’ll always be able to buy more food with your gold. — Peter Schiff
If the world does well, gold will be fine. If the world doesn’t do well, gold will also do fine…but a lot of other things could collapse. — Thomas Kaplan
If you want an alternative currency, check out gold. It has stood the test of thousands of years as a store of value and medium of exchange. — Paul Singer
The world’s central banks and the International Monetary Fund still have vaults full of bullion, even though currencies are no longer backed by gold. Governments hold on to it as a kind of magic symbol, a way of reassuring people that their money is real. — James Surowiecki
If you trade in paper, the notion of many who trade gold…if the financial world comes to an end, they’re going to have the gold. If you’re playing in ETFs, you’re going to have a piece of paper. — Rick Santelli
Gold is still the ultimate store of wealth. It’s the world’s only true money. And there isn’t much of it to go around. All of it ever mined would fit into a small building — a 56-foot cube. The annual world production would fit into a 14-foot cube, roughly the size of an ordinary living room. If each Chinese citizen were to buy just one ounce, it would take up the annual supply for the next 200 years. — Mark Nestmann
If ever there was an area in which to do the exact opposite of that which government and the media urge you to do, that area is the purchasing of gold. — Robert Ringer
Regardless of the dollar price involved, one ounce of gold would purchase a good-quality man’s suit at the conclusion of the Revolutionary War, the Civil War, the presidency of Franklin Roosevelt and today. — Peter A. Burshre
I like gold because it is a stabilizer; it is an insurance policy. — Kevin O’Leary
Last…my favorite:
Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants; but debt is the money of slaves. — Norm Franz
mark
I’m with you all the way, except for the last paragraph on gold. I don’t consider it a scam when it’s been true for 5000 years. It’s hard to describe the weight of a $20 gold eagle from 1900 in your hand, and if “they” want to steal it, they better bring their fucking lunch!
DS shill.
https://www.youtube.com/watch?v=p2yKyC8wVt8