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4 Years Until The Next Recession? Not Likely!
Submitted by Lance Roberts of STA Wealth Management,
David Rosenberg, in one of his recent missives, wrote:
"Historically, when we are within six months of a recession, the year-over-year trend in the LEI turns negative while the diffusion index falls below 30%. At three-months away, the LEI is down 1% YoY and the diffusion index nears 25%. By the time the recession has hit, the LEI is down 4% year-over-year and the diffusion index is at 20%. Alternatively, based on the current trend in the LEI and the level of the diffusion index, history suggests that the next recession is at LEAST four years away."
This is pretty interesting coming from an economist/strategist who was formally considered a perma-bear now turned perma-bull by the media. While the charts above are certainly compelling, it is also important that some historical context be provided.
First, the current economic recovery is already the fifth longest on record as shown in the chart below at almost 63 months. If the current expansion did indeed last "at least" another four years; it would make it the second longest expansion in history at 111 months. The only expansion that lasted longer was the period between March of 1991 to March of 2001 which totaled 120 months.
Secondly, the economic environment today is vastly different than it was in the 90's. The chart below shows a comparison between some of the major economic variables of the 90's and today.
One of the major drivers of the economic expansion in the 90's was the decline in interest rates and inflation during that period. During the 90's interest rates fell by almost 3% as compared to just 0.7% currently. However, the yield on lending was also significantly higher and averaged over 6% during that period. The combination of a decline in rates but rates still high enough to generate a reasonable return over inflation made it extremely lucrative for both borrowers and savers. This is not the case currently which is why economic growth has continued to run at sub-par rates.
Moreover, in an economy that is 70% driven by consumption, employment, wages and expenditures are the backbone of a sustained recovery. Since the financial crisis wages have remained weak, real employment elusive and the annual growth rate of PCE has been on the decline. During the 90's the labor force participation rate was increasing versus falling 2.9% over the last five years; wages grew twice as much as today along with the rate of personal consumption expenditures.
Lastly, the key to all of this, particularly in the 90's, was the ability for consumers to finance their standard of living. As I have discussed many times previously, the ever decreasing rate of interest fostered cheaper financing and higher rates of consumption:
"From 1980 through 2000 total inflation-adjusted household debt grew from $3.8 Trillion to $8.95 Trillion. At the same time, PCE as a percentage of real GDP grew from 62% to 65.17%. In other words, it took $5.054 Trillion in debt to generate 3.17% increase in the PCE/GDP ratio.
However, from 2000 through 2007, the PCE/GDP ratio expanded from 65.17% to 67.84%. This 2.67% increase required an expansion of $6.46 Trillion in debt. Not surprisingly, the diminishing rate of return on debt growth is clearly shown."
During the 90's consumers increased their debt by almost $3.7 Trillion. That additional purchasing power sustained the economic cycle for much longer than would have been expected. Today, debt has decreased by $548 Billion as consumers, still overleveraged from their spending surge from 2000-2008, continue to struggle to make ends meet in an environment where access to credit remains tight post the financial crisis.
With this background, I can now better address David's point about the Leading Economic Indicators and the prediction for at least four more years of economic growth. The chart below is the LEI index from 2000 to present. The red dot denotes the latest reporting period.
When looking at year-over-year growth rates, it is important to remember that when the current period is being compared to a very weak period in the cycle the index will rise sharply. However, at some point, as where we are currently, the comparative growth rates will equalize, and the index will begin to decline. The dashed red line in the chart below shows what happens when I normalize the current growth rate in the index and project it forward. Even if the LEI grows by 0.5 in every reading through the end of 2014, the index will begin to decline.
From current levels, with the exception of the secular bull market period of the 90's which was fostered by ever declining rates of inflation and interest rates, when the index has begun to decline the length of time to the next recession has not been all that long. It is likely, without the artificial interventions of the Federal Reserve, that the economy would have likely slipped back into a recession in 2012.
The chart below is the diffusion index as shown by David above smoothed with a 12-month average. By smoothing the data, we can get a little better idea of what it is telling us.
Importantly, what we notice is that the diffusion index is already on the decline which has been historically prevalent 18-24 months prior to the onset of a recession. Even during the go-go economy of the 90's, the smoothed diffusion index peaked in 1998 and the economy entered into a recession roughly 36-months later.
All of this analysis continues to support that the next recession is likely within that 18-24 month window as I addressed in "The Coming Market Meltup And 2016 Recession:"
"The statistical data suggests that the next economic recession will likely begin in 2016 with a negative market shock occurring late that year, or in 2017. This would also correspond with the historical precedent of when recessions tend to begin during the decennial cycle. As shown in the chart below the 3rd, 7th and 10th years of the cycle have the highest occurrence of recession starts."
With the Fed's artificial interventions suppressing interest rates and inflation, it is likely that the bullish mania could continue into 2015 as the "herd mentality" is sucked into the bullish vortex. This is already underway as shown recently in "Charts All Market Bulls Should Consider" which showed individuals are once again piling into stocks and depleting cash reserves in the hopes of "getting rich quick."
While anything is certainly possible, it is highly unlikely that the current economic environment is supportive of another four years of a "struggle along" economy. With the Eurozone on the brink of a recession, Japan likely already in one and China heading for trouble; it is highly likely the global deflationary pressures will impact the already weak growth rates of the domestic economy. When considering that 40% of corporate profitability is generated from exports, and the bulk of recent profits per share over the last two years generated primarily by share repurchases, there is little "slack" available to offset a global drag.
For investors, the most important reason to be aware of the onset of a recessionary spat in the economy is because of the related repricing of assets during these periods. While recessions tend to be fairly short in length, drawdowns have averaged roughly 30%.
Given the artificial supports during recent years, the extreme extension in assets prices, record levels of margin debt and the chase for yield in "junk credits," it is highly possible that the next recessionary decline could be much larger than the historical average.
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We're DONE Having Recessions..
Europe will fall into severe recession, again. Article here.
The article is wrong, it makes the unacceptable mistake of assuming that the economy is a stationary system, when making comparisons. The extraordinary liquidity injections by the FED have made that a HUGE mistake.
The only reason for the current stock prices is way too much money chasing after way too few valuable liquid, reliable assets. Henceforth the crowding even in the unreliable asset category.
yep.. No More RECESSIONS.... just a Continuing DEPRESSION. it should end sometime in the next.. ah, what 15 Years? (Maybe)
That is a very astute observation.
Much like Panics later became Depressions, and Depressions later became Recessions.
I would presume the next buzz word will simply be "negative growth" or, it will simply not be talked about at all.
Yep, 'Ol Hopey Changey & the Fed fixed that one fer good. From now on, we will only have depressions.
My sales aredown 20% YOY and last year was a 6% YOY drop. Sure hope we don't have a recession. I have strictly discretionary income product
If "they" accurately reported inflation (and unemployment) it would be obvious we are still in a depression.
John Williams (www.shadowstats.com) provides inflation estimates based on previous official methodology when the Consumer Price Index still represented the cost of a constant standard of living. The 1.26% inflation measure used to deflate first quarter nominal GDP is unrealistic, as Americans who make purchases are aware.
A reasonable correction to the understated deflator gives a much higher first quarter contraction. The two main causes of inflation’s understatement are the substitution principle introduced during the Clinton regime and the hedonic adjustments ongoing since the 1980s that redefine price rises as quality improvements. Correcting for excessive hedonic adjustments gives a first quarter real GDP contraction of 5%. Correcting for hedonic and substitution adjustments gives a first quarter real GDP contraction of 8.5%.
Realistic economic analysis is a rarity. The financial press echoes Wall Street, and Wall Street economists are paid to help sell financial instruments. Gloomy analysis is frowned upon. Even negative quarters are given a positive spin.
Years of understatement of inflation has resulted in years of overstatement of GDP growth. Thinking about the many years of misstatement, we realized that the typical computation in nominal terms of the ratio of debt to GDP is seriously misleading.
http://www.paulcraigroberts.org/2014/07/08/deteriorating-economic-outloo...
1.4% deflator, folks ! That should be criminal fraud
That is criminal fraud. Of course the criminals have no incentive to prosecute the criminals so...........
<No harm (to fellow criminals) no foul. And if there is a benefit? Well.......>
That is always the problem with those blow up sex dolls. After you use them you gotta deflate'er.
Late 2016, near the end of Obama's presidency, is the next most likely time the wheels will fall off. Then you'll see Obama is just another banker bitch-boy, and the bail-outs will begin anew.
dammit so I have to survive another 2 years of doldrums sales that sucks I want it now so we can rebuild this monster!! but I guess can wait untill they can tell the truth your normall middle class person is depressed and the free loaders are free loading how can they be unhappy and the crooks just keep on stealing and printing.
Oh, no, you misunderstand. It's not going to get better after that happens. It's going to be a year of terror followed by something a lot like the last 5 years all over again, except with more graft, corruption, cronyism and money printing than we have now.
The one thing you WON'T get is anyone having a sudden moment of clarity and "telling the truth to the middle class." If you live to be 100, you will never see that happen. A giant asteroid could be hitting the planet tomorrow morning and they'd tell you everything is fine and things are looking up.
Ha, ha. Cute. MF's in charge (Washington & Wall St.) WILL be held accountable---going all the way back to August 1971. Think you can hide? Think again!
So the depression we've been in for the last seven or so years should be ending before then?
Recession within the larger depression. Think 1937.
Agreed. Stooges point is that there never was a recovery in the real economy so all this predicting of a next recession overlooks the real depression we are already in.
What we have seen is the consolidation of wealth into the hands of a small elite who are then misusing the capital to bid up the stock market.
The confusion is all about the decoupling of real business operations and consumer activity from perceived values by the investor-gambler class. It seems that a lack of any business success fails to influence or connect to stock price while perceptions of stock price can immediately collapse a business. It is all very dangerous and perverse.
Meanwhile...
Others here talk of a liquidity trap situation and I think that this is the key problem (lack of real confidence) along with the worsening of wealth inequality which is directly connected here. The world needs a total reset.
Marginal utility of debt has gone pppphhhhhhhhhttttttt. Game over for this go-round of historical predatory human behavior.
The real kicker here is that the run-up, fueled by cheap energy and technology, was spectacular. When the ugly lights come on, the hangover is going to be a bitch.
Its pointless looking at historical charts for guidance when policy interventions (ZIRP/QE) are unprecedented.Central Banks have created a Keynsian liquidity trap, they're out of ideas and running out of time.
To be fair, they only ever had one idea to begin with: Print money and hand it to the banks. Plans B, C and D are just slightly tweaked versions of plan A.
I'll bet he's stacking gold and paying for it with his muppet juicer set on LIQUIDATE.
Man, there's a plethora of interesting threads up today and unfortunately I can't really take the time to read or comment much; there are too many other things I've got to get done; but here's a quick gloss on the subject matter above.
We should all keep in mind that the folks who are actually rigging the market (central bankers, TBTFers, prop desks, etc.) understand the historical econometric patterns just as well as anybody else, and are probably not to be outdone by asset managers with a writing bug (much as I prefer the latter). They studied all the same textbooks and attended the same classes with the same professors, and they look at the same data. It isn't that the riggers lack the proper market understanding; on the contrary, it is on the basis of this very understanding that the rigging proceeds. They receive and interpret the signals the market is sending, they know what "ought" to happen, then they intervene in just such a way so that what ought to happen doesn't, meanwhile arbitraging the spread between what causality dictates and what diktat causes. This is classic Nashian "fuck-your-buddy" game theory: whatever rules someone else is following, break them to your advantage if you have the power to do so.
Therefore, we should not be surprised that the market seems to hover forever in an unprecedented twilight zone of counterintuitive behavior. This is both the intended effect of the rigging and the evidence thereof. All this is quite destructive in the long run, but Keynes (who, like Nash, interned at the firm of Brokeback Capital Partners) has taught the current generation not to worry about that anymore. Fuck your buddy, indeed.
They and their offspring will be held accountable. NO ONE who perpetrated this human denegration will escape the wrath of JUSTICE---NO ONE!
Wow I dont even know where to begin how far off this article is..
First of all in the 1990s there was not job outsourcing on steroids like there is today. I recall in in 1998 opening up the newspaper and seeing dozens and dozens of good paying tech and manufacturing jobs. All of that is gone thanks to sellout politicians who cheerlead for free trade and globalization.
Second, there is no recovery currently going on. Its all fake. Its all QE and ZIRP driven. So you remove the stimulus and the stock market and the economy will crash.
Third, its amazing how many so called expert economists fail to see that we still have 40+ million people on food stamps and huge trade deficits. There is no recovery!!!
Well said.
I think the Tylers are likely just parading these guys around on a daily basis with the intent of exposing them as nothing more than what they are... snake oil salesmen. False prophets. And outright liars just talking their book.
FIRE sector = LIAR sector. Enabled by bought and paid for politicians, judges, etc.
The internet is truly dangerous and magical at the same time. Isn't it?
Yeah, I also think the Tylers have an axe to grind - and an angle. But, hey, bias is everywhere. As long as we think for ourselves and conduct our own due diligence... okay then.
But, I have to say that I am more cynical these days after the sudden slam on so many accounts a couple of years ago. Censorship of any type is a real concern of mine... especially for a place called Fight Club which now feels more like Hug Club.
No. ANYONE singing the Status Quo Song (There is a recovery) are AIDERS & ABETTORS. They WILL be held accountable for their WORDS & DEEDS...
Amen. $1 Trillion of QE = 5.82% of outstanding national debt. Tapering it, in an already debt deprived economy, ought to be the shock of the century. Go directly to jail, do not pass go.
Cog Diss: If "they" accurately reported inflation (and unemployment) it would be obvious we are still in a depression.
What did Yellen call it? "Noise"?
LOUD FUCKING NOISE.. (around here)
"What did Yellen call it? "Noise"?"
Noise is what comes out of Yellen's mouth.
Right on time! This piece marks the date of rosie's annual 180 degree turn in opinion/outlook. A better show and more reliable than the Perseid Meteor Shower.
Ford has a recovery special sales on all models for
0% for 72 months! Let me repeat that 0% for 72 months!
Recovery!
Why do I always have to think of "a permanent high plateau" when I read such articles?
as others have said previously, talking about the "next recession" is bullshit, because we've never gotten out of the last one.
welcome to Obamamerica.
" Deregulation was eventually a disappointment even to Greenspan, shocked at the bad behavior of financial leaders who, incomprehensibly to him, were not even attempting to maximize long-term risk-adjusted profits. Indeed, instead of the 'price discovery' so central to modern economic theory we had 'greed discovery."
Got a bridge in Brooklyn for you to buy. Deregulation was no disappointment to Greenspan, nor was Greenspan shocked by bad behavior of financial leaders which mimicked his own bad behavior.
In 2005, Greenspan praised bankers for getting people who otherwise would not have been able to have afforded a home, into one. The previous September, the FBI had warned congress of massive mortgage fraud. It was already obvious to Greenspan in 2005, how bankers were getting people whoo could not afford a home, into one. Massive banking fraud.
Greenspan pretended to lament that he thought bankers would have been more responsible, but Greenspan was warned within the FED in 2000, that he needed to tighten lending standards. Greenspan refused to do so. The bankers followed Greenspan's lead of recklessness and Greenspan praised their recklessness in 2005.
Greenspan lead the way.