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3 Things: Freight, Deflation, No Hike

Tyler Durden's picture




 

Submitted by Lance Roberts via STA Wealth Management,

Freight Volumes Suggest Weak Growth

We often look at broad measures of the economy to determine its current state. However, we can often receive clues about where the economy may be headed by looking at data that feeds into the broader measures. Exports, imports, wage growth, commodity prices, etc. all have very important ties to the health of the consumer which is critical to an economy that is nearly 70% driven by their consumption.

While I have discussed the importance those issue in the past, there are other indicators that can also provide valuable clues. One such example is the Cass Freight Index. From the Cass website:

"Data within the Index includes all domestic freight modes and is derived from $26 billion in freight transactions processed by Cass annually on behalf of its client base of hundreds of large shippers. These companies represent a broad sampling of industries including consumer packaged goods, food, automotive, chemical, OEM, retail and heavy equipment. Annual freight volume per organization ranges from $1 million to over $1 billion. The diversity of shippers and aggregate volume provide a statistically valid representation of North American shipping activity."

The chart below is the annual change in both the shipments and expenditures on freight shipments since 1999.

Cass-Freight-Index-081215

While there is much hope that the current economic recovery will somehow magically obtain 3% annualized growth in the quarters ahead, freight shipments are suggesting weakness.

This is not surprising given the weakness in commodities, exports and wage growth in recent months which all confirm the same. While this does not mean that the economy is about to slip into an immediate recession, it does suggest that the economy is far weaker than headlines currently suggest.

 

Deflationary Pressures On The Rise

Speaking of exports and imports, imports are currently suggesting that deflationary pressures are once again on the march globally. Deflationary pressures abroad ultimately force down import prices into the US economy which aggravates the deflationary cycle. With the strong dollar dragging on exports, a decline in import prices further deteriorates corporate profitability.

Albert Edwards at Societe General recently noted:

"We expect the acceleration of EM devaluations to send waves of deflation to the west to overwhelm already struggling corporate profitability and take us back into outright recession. As investors realize yet another recession beckons, without any normalization of either interest rates or fiscal imbalances in this cycle, expect a financial market rout every bit as large as 2008."

There are a couple of important points that Mr. Edwards is making. The first is that in an already weak economic environment, further deflationary pressures will continue to detract from corporate profitability and further slow already slow economic growth. Secondly, and more critically, with interest rate policy still near the zero bound there are few policy tools available to combat an economic recession.

The chart below shows the annual change in imports and exports. Imports are driven by domestic demand. As consumers demand more goods or services, imports increase to fulfill that demand. Exports are an indication of global demand. Therefore, if the economy is expected to grow more strongly in the quarters ahead, should not imports and exports be on the rise?

Imports-Exports-Recessions-081215

 

"To Hike, Or Not To Hike?"

That is indeed the question that perplexes the Federal Reserve currently. As I recently penned in "The Fed's Window For Hiking Rates Continues To Close;"

"The Federal Reserve has a very difficult challenge ahead of them with very few options. While increasing interest rates may not "initially" impact asset prices or the economy, it is a far different story to suggest that they won't. In fact, there have been absolutely ZERO times in history that the Federal Reserve has began an interest-rate hiking campaign that has not eventually led to a negative outcome.

 

While the Federal Reserve clearly should not raise rates in the current environment, there is a possibility they will anyway.

 

The Fed understands that economic cycles do not last forever, and we are closer to the next recession than not. While raising rates would likely accelerate a potential recession and a significant market correction, from the Fed's perspective it might be the 'lesser of two evils. Being caught at the "zero bound" at the onset of a recession leaves few options for the Federal Reserve to stabilize an economic decline."

The Federal Reserve as of late have issued repeated statements that rates are set to rise at the September meeting. However, with China's financial and economic troubles on the rise, the negative impact of the surging US dollar, rising deflationary forces globally and falling asset prices; there is a rising probability they will push off the rate hike until the end of the year.

The problem for the Fed is they are now likely "behind the curve" and will be caught with interest rates too low when the next recessionary cycle sets in. 

Importantly, as stated above, I am not suggesting that the economy is about to slip into an immediate recession. However, I am stating that all economic cycles do eventually end. When the current economic growth cycle begins to contract, if the Fed is still stuck at the zero bound it leaves them few policy options available to offset the risk to the financial markets. This is why I tend to agree with Mr. Edwards point that such a combination of events could lead to a mean-reverting event on par with the past two recessionary periods.

The combination of these data points continues to support my long-held thesis that the "Bond Bull Market"  is still far from over. Despite the majority of analysts continuing to be wrong about rates rising, the reality is the persistent wave of global deflationary pressures will continue to support bond prices in the future.

Interest-Rates-GDP-Inflation-081215

Given that interest rates are ultimately tied to economic growth and inflation, it is highly likely we will see interest rates on the 10-year Treasury below 1% during the next recessionary cycle. 

The Fed is rapidly coming to realize they are caught in a "liquidity trap." The problem is they have been betting on a "one trick pony" that by increasing the "wealth effect" it will ultimately lead to a return of consumer confidence and a fostering of economic growth?

Currently, there is little real evidence of success.

 

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Thu, 08/13/2015 - 15:31 | 6423293 Closet Boy
Thu, 08/13/2015 - 15:39 | 6423311 buzzsaw99
buzzsaw99's picture

...expect a financial market rout every bit as large as 2008.

dude, put down the crack pipe.

Secondly, and more critically, with interest rate policy still near the zero bound there are few policy tools available to combat an economic recession...

QEinfinity is the ultimate tool.

Thu, 08/13/2015 - 15:39 | 6423321 ajkreider
ajkreider's picture

Except the both freight and import drops are attributable to the drop in oil. But is nothing one way or the other about the underlying economy - especially since we're a big net importer from what are exporters now in deflation.

Thu, 08/13/2015 - 15:40 | 6423326 buzzsaw99
buzzsaw99's picture

Given that interest rates are ultimately tied to economic growth and inflation...

seriously dude, lay off the bath salts.

Thu, 08/13/2015 - 15:40 | 6423329 KnuckleDragger-X
KnuckleDragger-X's picture

The FED is working hard to figure out what the worst thing they could do, but it's a moving target with China out fucking them at every turn.....

Thu, 08/13/2015 - 15:46 | 6423335 buzzsaw99
buzzsaw99's picture

While raising rates would likely accelerate a potential recession and a significant market correction, from the Fed's perspective it might be the 'lesser of two evils...

the fuck if they would. yellen ain't got no ballz at all. the maggots are all they care about. the stock market is all they have to show for trillions of qe.

Thu, 08/13/2015 - 15:45 | 6423346 Kaiser Sousa
Kaiser Sousa's picture

"Currently, there is little real evidence of success...."

now that's hilarious....

Thu, 08/13/2015 - 15:49 | 6423361 Make_Mine_A_Double
Make_Mine_A_Double's picture

I can only speak to international container freight rates. They have crashed on the Asia-Euro trade, USEC to Asia trade and Asia USEC/WC trade. In other words the ones that matter.

And that was BEFORE China's devaluation.

In terms of even a mild 25 BP hike it will have zero effect internally to USSA fundamentals (because they are already shit), but could be a sledgehammer to the temple on the EM econs.

Thu, 08/13/2015 - 18:19 | 6423945 PlayMoney
PlayMoney's picture

Raising rates will definitely effect the interest rate based derivatives and not in a good way. Raising rates make these derivatives go boom.

 

EMs taking it in the shorts from China devaluing, add a rate hike from us, well ...........sledgehammer indeed.

Thu, 08/13/2015 - 15:55 | 6423387 AbbeBrel
AbbeBrel's picture

Humm the Freshwater economist gang says that:

"They consider that economic crisis and fluctuations cannot stem from a monetary shock, only from an external shock, such as an innovation."

Seems like we are experiencing a PILE of innovation lately...

Thu, 08/13/2015 - 15:57 | 6423396 847328_3527
847328_3527's picture

The economy is just fine.....

 

Discount Tire orders giant recall due to tread separation

 

The Discount Tire and America's Tire chains are recalling nearly 80,000 light truck and SUV replacement tires because the tread can separate.

 

http://www.usatoday.com/story/money/cars/2015/08/12/discount-tire-recall...

Thu, 08/13/2015 - 16:00 | 6423409 Debugas
Debugas's picture

interest rates do not matter because consumer is in huge debt already and will not borrow more

Thu, 08/13/2015 - 17:07 | 6423647 daveO
daveO's picture

So, financial bubble inflation to infinity...

Thu, 08/13/2015 - 16:01 | 6423417 quasi_verbatim
quasi_verbatim's picture

The problem for the Fed is they are now likely "behind the curve" and will be caught with interest rates too low when the next recessionary cycle sets in.

Such blinding revelation! Where have you been these past ten years? Can I get some?

Thu, 08/13/2015 - 16:02 | 6423419 Seasmoke
Seasmoke's picture

It sure seems to me that Little Boy Yellen has cried wolf too many times and everyone else has moved on and not waiting for the next cry out.

Thu, 08/13/2015 - 16:03 | 6423422 B2u
B2u's picture

The problem is due to low rates.  Money is being wasted on stock buy-backs.  Raise rates to end this crap.

Thu, 08/13/2015 - 16:18 | 6423473 InsanityIsWinning
InsanityIsWinning's picture

There's only 2 ways to keep improving earnings, 1. Sell more widgets 2. decrease the float.  Earnings being calculated by net earnings divided by shares outstanding make earning look better.  So, to them (guys that get the bonuses) it's not wasted money . . . after all, it's not their money anyway, they don't care, they'll still be paid.  Financial engineering has been the name of the game since top line (revenue) has been flat for years.  

Thu, 08/13/2015 - 17:10 | 6423669 daveO
daveO's picture

Who does the FED serve? It ain't John Q. Public.

Quotation: "If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

Thu, 08/13/2015 - 16:05 | 6423431 you enjoy myself
you enjoy myself's picture

The most infuriating part of the current Fed conundrum is that even laymen like myself could have told you this was coming at least two years ago. By not raising rates sooner they've painted themselves into one of the most obvious, forseeable corners ever.  All so stocks would be spared even a slight correction over the course of 6 years.  

If SPX were at 1500 and rates at 1.5% it would of course not have been 6 years of endless hookers and blow for Wall Street, but as an economy we'd be in a much more stable position.  Now, there's nowhere to run: we're either getting serious deflation or the early stages of hyperinflation. 

Thu, 08/13/2015 - 17:15 | 6423692 daveO
daveO's picture

Look at the looming, temporary deflation as the train slowing down at the station. Hop on, to metals, while you can. They are gonna turn the town into Dresden with the Bernanke Choppers.

Thu, 08/13/2015 - 16:07 | 6423436 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

The FED is lining all the pockets of their colleagues in Investment Banking & the Stock Markets ntil the whole house of cards collapses in on itself like the World Trade Center towers #1 & #2. In brief, they are moving the bullion out of public coffers into private Oligarchy member banks for their benefit at World's end.

 

Cha-ching

Thu, 08/13/2015 - 16:12 | 6423457 InsanityIsWinning
InsanityIsWinning's picture

Mr. market is getting angry and we all know how fast Yellen will blink and not cut rates.  We're only down a few percent off the highs, wait til we're down seven percent.  The fed will be all over the airwave "no rate increase! We promise!" That will bring a relief rally to grind all the shorts into the ground. Then Mr. Market gets angry again prompting more QE . . . when this game finally blows it'll be a doozy.  

Thu, 08/13/2015 - 16:20 | 6423483 tribune
tribune's picture

Elliot wave showed that the fed follows the bond market. if the bond market rates go up the fed will hike. even Alan greenspan admitted this.

Thu, 08/13/2015 - 17:19 | 6423711 daveO
daveO's picture

They bought up debt(mortgage and US) to suppress rates, starting in March 2009. S&P bottomed at 666, just to remind us who's in charge.

Thu, 08/13/2015 - 16:44 | 6423558 Baby Eating Dingo22
Baby Eating Dingo22's picture

The wealth effect worked out perfectly for the wealthy

Not so great for those who could barely pay their rent or mortgage, let alone speculate in the market Ponzi scheme crafted by the Fed

Thu, 08/13/2015 - 17:21 | 6423722 NihilistZero
NihilistZero's picture

The Fed understands that economic cycles do not last forever, and we are closer to the next recession than not.

Maybe they won't raise rates and we'll cross the Rubicon and there will NEVER be another recession.  Books will be cooked.  Bubbles will pop.  But somehow the data will continue to show just enough growth, but not enough to raise rates.  Capitalism is dead.  Long live Central Planning.

Thu, 08/13/2015 - 17:31 | 6423775 pitz
pitz's picture

Demand is dead, the Fed is way behind the curve in lowering rates at this point.  The economy isn't even growing fast enough to preserve savers' cash savings, nevermind grow them.  This rate hike nonsense is classic jawboning at its best, and the fools are those who really believe it.

Thu, 08/13/2015 - 19:46 | 6424233 Chalan
Chalan's picture

Lets assume that Granny Y. Doesn't hike the rate this year going into a recession, the markets go parabolic like the German DAX or the Chinese Shanghai earlier this year.

Once that stock bubble exhausts and collapses, that will turn an ugly recession into an outright depression with the Fed out of bullets.

I suspect that scenario could easily play out, and for that reason she will hike the rate at least once this Sept. to cool off the markets some. IMO.

The Fed is cornered and there won't be happy endings for the majority.

Thu, 08/13/2015 - 22:51 | 6424848 pitz
pitz's picture

Failing to hike the rate might precipitate a crash as well.  As it would be a prima facie acknowledgement that the US economy isn't anywhere near as strong as the propoganda has claimed. 

I think they're trapped.  Damned if they do, and damned if they don't. 

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