Guest Post by Sven Henrich
Read this paragraph carefully:
Since last year real GDP growth has been slowing. The chair of the Federal Reserve has been signaling that, while growth is slowing, there is no recession risk and the Fed is forecasting continued positive growth. Warning signs in the economy, including an inverted yield curve, have been ignored and stock markets continued to make new highs in July. In August a correction took a place and subsequently a rally ensued into early September. On September 18 the Fed is expected to cut rates.
What’s so special about this? This is hardly news. Except that this paragraph would be as true for the U.S. economy and stock market in September 2007 as it is today. Consider that 12 years ago the yield curve was inverted and U.S. economic growth was markedly slower than it had been in 2006. Yet the Standard & Poor’s 500 SPX, +0.26% made a new high in July 2007 (same as 2019), there was an August correction (same as 2019), and then the Fed cut rates on September 18 (ditto — same day even).
U.S. stocks proceeded to make another marginal high that October — and that was it. Lights out. We all know what happened next.
It seems we are at a curious moment in time. Parallels to late 2007 are running through the markets now. This doesn’t mean the market’s fate will play out as it did then, but the ingredients are there and all that’s needed is a trigger. Perhaps the trigger was the attack on Saudi oil installations last weekend. It’s too early to tell, but clearly this is something to keep in mind.
Markets topped in October 2007 following the Fed’s September rate cut. That November, Ben Bernanke, then Fed chair, said there wouldn’t be a recession. According to a November 2007 Reuters report, Bernanke told a congressional committee: “Our assessment is for slower growth, but positive growth, going into next year.” The U.S. economy entered recession in December 2007.
Bernanke November 2007:
"Federal Reserve Chairman Ben Bernanke told lawmakers on Thursday the U.S. economy did not appear headed for recession.
Our assessment is for slower growth, but positive growth, going into next year”Recession starts December 2007https://t.co/icu7dY0XW3
— Sven Henrich (@NorthmanTrader) September 16, 2019
Does this not sound eerily similar to what Fed Chairman Jay Powell has been saying? Here’s Powell on September 6: “We’re not forecasting or expecting a recession,” he said. “The most likely outlook is still moderate growth, a strong labor market and inflation continuing to move back up.Our main expectation is not at all that there will be a recession.”
Powell September 6:
“We’re not forecasting or expecting a recession,” he said. “The most likely outlook is still moderate growth”
“Our main expectation is not at all that there will be a recession,” Powell said.”https://t.co/y9qq1jczvq— Sven Henrich (@NorthmanTrader) September 16, 2019
Sure, there are differences between now and 2007, and of course no two time periods are alike, but the confluence of circumstances is impressive. Markets now are behaving in highly correlated ways with 2007, and the Federal Reserve seems to be behaving similarly as well.
What does all of this suggest?
For starters, the Fed will not tell you when a recession starts. They can and will be in total denial until after the fact. The 2007 recession began one month after Bernanke stated in front of Congress that there wouldn’t be a recession. So when Powell makes the same declaration as the Fed cuts rates again, know that such a statement has absolutely no meaning. “Not forecasting or expecting a recession” he stated on September 6. Is this Powell’s Bernanke moment?
To avoid the same fate, markets now need to make sustained new highs or risk seeing similar circumstances to 2007 play out in similar ways.
Sven Henrich is founder and the lead market strategist of NorthmanTrader.com. He’s known for technical, directional, and macro analysis of global equity markets. Follow him on Twitter at @NorthmanTrader.
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It’s all going sideways on them: perhaps purposefully on behalf of the Fed/Deep State/PTB. Trump sees this and is squirming feverishly to escape the trap (crashing markets for re-election). Maybe. I expect the tug-of-war (whether it is real or theater) to continue and rates to be lowered in fits and starts to near zero a year from now … maybe 0.5/0.25; who knows.
One thing for certain, the Fed knows exactly what it is doing.
Can somebody explain liquidity crisis and Repo market?
Whether due to ignorance, arrogance or any combination of the two don’t ever expect the government to be honest and tell the truth about anything unless they believe it somehow benefits them.
Such a cynical, but absolutely true statement.
TN… after your kind praise, I returned to my files and discovered a few other essays from that Diplomatic History class from longagofaraway… I plan to submit my essay on the Roaring 20s which I may subtitle Decade(nt) of Prosperity. So many opportunities thrown away during that decade… why the hell all the energy devoted to prohibition? Was it really about the evils of liquor?
No. Just like the war on drugs has never been about drugs.
Ditto with guns.
But one has to read through a lot of lines of history to see what is between the lines.
I have not read the updated edition, but this book by Paul Johnson was, to me, one of the most interesting analyses of a short period of history I’ve ever read. I actually READ it, not just forced myself to read it.
That means something to people who know how I scan for information instead of read, usually.
I will submit Summarizing the Twenties: Decade(nt) Prosperity? … not sure that is the title I want. Also, not sure it matters.
Haha… have a great day.
Look forward to seeing your essays. It is obvious you have a gift for writing and the ability to see through the BS. I will also check out the book. I spend a lot of time reading when the ground is too wet to work and it is colder than I care to endure.
You, too, have a good one.
The Stock Market of today bears little resemblance to the Stock Market then. We now have the ‘plunge protection team’ that steps in when things get a tad rocky. All economic collapses are engineered. Repeat: ALL ECONOMIC COLLAPSES ARE ENGINEERED.
It is the central banks that have created this mess, and what’s more they have created this mess in the full knowledge that their actions would lead to disaster. And now, one can be sure, the same central bankers and their political puppet mouthpieces will use this crisis to continue the construction of the “New World Order” that they called for in the wake of the 2008 collapse.
Anyone who can’t see the endgame now–global government by the bankers, of the bankers and for the bankers–is either blind or wilfully ignorant.
has the Fed EVER predicted a recession? that would be like a man telling his wife he expects to have an affair in the next 6 months. he hasn’t done it yet, but he sees an increasing likelihood.
they only tell the insiders when to sell. everybody else is left holding an empty bag.
Here is my leading indicator. When people of my means are bombarded with offers of free credit cards and loans. BEWARE!!!! Iv’e had to retreat to my storm shelter to avoid being shredded by flying plastic.
Mean Reversion! Simple enough for the king to not need his spectacles to understand. NEVER to be seen on any MSM working for the sell side.
https://realinvestmentadvice.com/caution-mean-reversion-ahead/
What parallels?
2007 the bubble was in private debt. MBS’s.
Now the bubble is government debt.
Hey Rocky, watch me pull a rabbit out of my hat.!
Overnight repo market liquidity seizure that the FED had to step in and fix explained.