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US Recession Watch: The Inventory Liquidation Looms
Submitted by Eugen von Bohm-Bawerk via Bawerk.net,
In The Coming US Recession Charted (June 20, 2015) we argued that the US economy is heading toward recession, not escape velocity as the sell-side and Fed officials have been telling us. Today we will revisit the possibility of the US entering a recession in 2016 and by extension substantiate our argument for NIRP, and not lift-off, as the most likely next move by FOMC.
One of the most reliable predictors for the business cycle is the yield curve. Unfortunately, due to Federal Reserve manipulation, whereby the short end of the curve have been permanently pegged to zero, an inverted yield curve is more or less impossible. However, if we look at the relative change from trend we can construct an equally good predictor. The blue line in the chart below depicts difference in the 10/5 term spread vs. its underlying trend. Historically, a breach of 50 basis points have indicated an upcoming recession. While the current trend deviation is not giving a clear signal yet, it is close enough to suggest we are heading straight into another recession.
Source: Federal Reserve Bank of St. Louis, Bawek.net
The growth rate in real GDP for 2015 goes a long way to validate what we see in the picture above. Sup-par performance, even by a lacklustre post-crisis standard, is the most likely outcome for the year. Recent data point to a very weak third quarter, with growth probably coming in less than 1 per cent SAAR; supported by the prescient Atlanta nowcast model. The annual run rate for GDP suggest growth below 2 per cent, thus entering 2016 on slowing momentum.
Source: Federal Reserve Bank of Atlanta, Federal Reserve Bank of St. Louis, Bawerk.net
Why do we believe the second half will weaken from an already dismal first half? One reason stems directly from the outcome of the so-called residual seasonality debate that raged after the catastrophically poor first quarter. In what, by now, have become a sell-side embarrassing ritual, first quarter GDP ruin all preceding year-end forecast of impending escape velocity.
This year they had enough of it and demanded from the BEA to remove any residual seasonality that had to still be left in the data. The BEA complied and revised the first quarter as requested. The problem with such myopic thinking is that it obviously comes back to bite you when you least need it. We are sure the Atlanta Fed model does not account for the fact that GDP “given” to the first quarter must be “taken”, most likely from second and third quarter, since seasonal adjustment cannot (or should not) change the average growth rate for the year as a whole. If BEA shifted GDP units into the first quarter, they must revise down second and third quarter correspondingly as shown by our “second round” seasonal adjustment in the chart below. In other words, there should be downside in the already downbeat Atlanta Fed nowcast.
The FOMCs lift-off debate will thus do a one-eighty quicker than most people think possible.
Source: Bureau of Economic Analysis (BEA), Bawerk.net
In addition, as we pointed out in our update from June 20, time is getting ripe for another down cycle. Historically the trough to peak last around 40 months, while the current expansion has been ongoing for 75 and is by that the fourth longest on record (actually third, as the second world war was not a time of prosperity in the US, but the statistics measure it as such).
Source: National Bureau of Economic Research, Bawerk.net
As we should expect in a mature expansion, business sales stalls and have actually started to fall; this is not something that just tend to happen now and then. The chart below clearly shows what falling business sales means – recession.
Source: Federal Reserve Bank of St. Louis, Bawerk.net
Inventories, as witnessed in the latest wholesale sale report, are rising fast with the inventory to sales ratio clearly in recessionary territory. As ZeroHedge recently pointed out, the dollar value of inventories over sales have never been higher.
Source: Census Bureau, Bawerk.net
In this environment, we should expect imports to slow down, but due to a strong dollar, it makes more sense for Americans to import goods than buy from local suppliers. We calculate the non-oil trade deficit to be at a record while the overall deficit is flattered by increased domestic oil production and oil product exports. As the shale-gale settles down, domestic oil production will fall; probably 400 – 600kb/d in 2016. Imports will obviously rise accordingly. The total deficit will converge with the non-oil deficit, creating another GDP headwind.
Source: Census Bureau, Federal Reserve Bank of St. Louis, Bawerk.net
As a side-note regarding the strong dollar and how the Fed has become the global central bank. In times of QE, dollar liquidity has improved, which includes the all-important Eurodollar market. With increased confidence that actual dollars will be there if needed, money flows back out pulling the dollar value down. However, as soon as the Fed stops the flow of fresh dollars, the dollar value spikes wreaking havoc to global dollar liquidity. What is interesting to note is how QE3 completely failed to lift confidence in the global dollar market and the mere taper crushed the remaining confidence leading to a scramble for actual dollars, thus bringing the EM down with it. 
Source: Federal Reserve Bank of St. Louis, Bawek.net
But we digress, with higher inventories and more goods flowing in from foreign markets US industrial production growth has fallen (to a large extent tied into reduced activities in shale oil development) and will soon cross the zero line as production need to be realigned with demand.
Source: Federal Reserve, Bawerk.net
The factory order report confirms our view. Both “core” and headline factory orders are pointing to tougher times for US manufacturing.
Source: Census Bureau, Federal Reserve Bank of St. Louis, Bawerk.net
Excess capacity leads to another round of deflationary pressure; exacerbated by the dramatic change in EMs FX reserve accumulation. We showed yesterday that even Norway is on the brink of becoming a net seller of financial securities. Bond markets agree with that assessment witnessed in the rapidly falling 5Y/5Y, in both Europe and the US.
We end with an update to our cumulative goods sales vs. cumulative inventories chart derived from the GDP report.
There can be little doubt that the massive, unprecedented surge in inventory accumulation (which counts positively to GDP) will eventually be liquidated. When it does the US enter recession, global dollar liquidity crashes, the value of dollar surges even higher, pulling EM further down and a world recession will be upon us again. In this scenario central banks panic; NIRP, QE4 and helicopter money is the only thing they know and they will stick to it.
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How long to liquidation of inventories and the start of a recession. You think the author would give an estimate based on previous experience. Anyone have an idea here?
It's a great time to start a career in farming!
http://naturecoastpermaculture.com/2014/12/unemployed-try-wwoofing-work/
Weithged is bullish~!
Here comes 20$+- WTI.
RIPS
The article starts by whining about problems of dividing by zero. Instead, use a discount rate and divide by 1 plus zero or 1 plus yield, and then write an article without an introductory whine.
That's where Jim Rogers is investing a lot of his money.
A great idea that most of us support. The unfortunate reality is that if the soil is even remotely good, you will not make enough from your crop sales to pay the property TAX!
Anyone see the real problem yet?
We are already in a recession.
A good sign of recession/depression is consumer spending on retial and most stores are getting a bloodbath. I am surprised Sears has held on this long. My neighbor is in retial and she said sales way down but ever scarier is profit margins are near zero. As an aside, she said theft has skyrocketed.
Actually, no.
Just look to the increase in online sales which is explosive right now.
The main problem with retail these days is that they suck in their marketing efforts and that they don't adapt to the changes in e-commerce.
The average store is dying. Half of what I buy myself is online. The price is better, service is better and communication is better. And I don't have to spend 4 hours to go to a store.
Old people can't get their head arround that but for me it's a time management system as I simply don't want to spend most of my free time shopping.
And that's where their inventory buildup comes from. What is added to their inventory is about the same as the increase in online sales.
So if you want to short something according to these charts, it's retailers.
But don't link it to the entire economy because otherwise you'll be squeezed out.
Alot of online stuff is pure junk though. However, I did grab a brand new "authentic" Armani blazer for $6.98 + Free Shipping on FleaBay from some place called Shenzhen. I think that's in North Carolina.
Genuine ... "Handmade" ... I sure it's going to be a Bute!
I'm not too Bullish on retail physical or online:
http://blogs.wsj.com/bankruptcy/2015/05/07/simply-fashion-dots-stores-kick-off-going-out-of-business-sales/
http://blogs.wsj.com/bankruptcy/2015/03/04/cache-stores-to-start-going-out-of-business-sales/
http://www.nytimes.com/2015/10/06/business/american-apparel-files-for-bankruptcy.html?_r=0
http://247wallst.com/special-report/2015/03/12/10-retailers-closing-the-most-stores/
With the stuff from China flooding the market I only see things getting worse for USA retail. Good for consumers maybe if they avoid the stuff that falls apart or is seriously misrepresented online but bad for stores and bad for the economy. Every store closure means more job losses. Unemployed peeples are not great consumers.
Have you guys noticed inventory problems at retail stores? Like they only have a few of anything in stock at any given time, and it's slow to be replenished?
Yes, Vlad, I have seen that also. Plus, sizes seem to be messed up. QC (quality control) has deteriorated somewhat.
But regarding the above, I checked with some friends also at retail stores and they say it is true consumers are spending more and sales numbers are up but profit margins are nonexistent since they have to reduce 80-90% to move the stuff off the shelf.
So consumer spending is not the whole story. Must look at profit margins also. The two managers I talked to are very pessimistic about this coming holiday season. They are competitors with each other but both said the same; you will see 60-90% discounts plus all sorts of gimmicks to grab those few consumer dollars out there. One may go under after Christmas.
Both also said Barry's TPP is a disaster for brick and mortar stores as well as online stores here in the USA.
It's sad but all part of the Kenyan's legacy.
Good info thanks.
Just curious, what do you think Obama could have done differently? Besides rein in the Fed, which no President can seem to do. Please don't tell me supply side...
Who buys physical clothing anymore? What, are our bathrobes going to wear out?
O'Bama could have done what was done in the exact same widespread fraud situation back in the 1980s.
The AG indicted over 770 financial people. Fraud was against the law back then, even for the Big Wigs. No one was TBTJ.
They also let the 1980's housing bubble correct. Yes, RE prices dropped about 20-40% temporarily but over the next 4-5 years they corrected and the market was stronger then before. You also had to put 20% down so only people who could actually afford a house could buy one. Accountability was restored.
Also, immigration laws were enforced back then. Barry encourages them to be ignored now.
Barry could have capped CEO salaries/bonuses linked to the TARP money as Germany in fact did.
Barry's Obama Tax (commonly mis-labeled as a health bill), FATCA, and so on have further destroyed productivity and creativity in America's middle class.
Many other zh'ers have also posted excellent corrective methods so if you have time browse thru recent articles and comments.
Harbor Freight for tools and chinese knock off outdoor gear from amazon. deflation cause by chinese distributing directly to US customers at 50% off US name brands.
I buy most of shit on Aliexpress.com :)
Just bought a drone for 300 dollars to film a 7 day streetrace I subscfibed to :)
7 days, 5000 kilomters, 7 european countries :)
It's going to be awesome as you can only enter the race if you car has a minimum of 350 horsepower so all the other cars will also be fucking fantastic!
we've been in a depression for quite a while. it's just masked with all the government fsa giveaways, data manipulation, etc
Recessions often happen inside of depressions. This is a covered-up depression that we're about have a major recession in.
I'm confused. Does this mean we are all standing around yelling down in a hole or are we all standing around yelling up out of a hole?
Both
I see it like we're in the pitch black darkness right now. CB's have put up massive spotlights(QE) to make it seem like we're still in the day, but the spotlights are running out of batteries and it's about to get a lot darker.
Soon Yellen will get desperate and drop a nuke(NIRP and helicopter money) just to try to convince us that everything is still good and bright outside.
It's worse than that according to Doug Casey, whom I happen to agree with:
"I’d like to address some aspects of the Greater Depression in this essay.
I’m here to tell you that the inevitable became reality in 2008. We’ve had an interlude over the last few years financed by trillions of new currency units.
However, the economic clock on the wall is reading the same time as it was in 2007, and the Black Horsemen of your worst financial nightmares are about to again crash through the doors and end the party. And this time, they won’t be riding children’s ponies, but armored Percherons.
To refresh your memory, let me recount what a depression is.
The best general definition is: A period of time when most people’s standard of living drops significantly. By that definition, the Greater Depression started in 2008, although historians may someday say it began in 1971, when real wages started falling."
http://www.internationalman.com/articles/the-deep-state
It should have already begun at the start of this year.
ZIRP has distorted the tradtional response here as well. normally excess stock is dead money
costing you interest as well, so the normal desstcking rules don't apply anymore.
companies will stop increasing their stocks, but might just pray and wait on liquidating imo.
Let's not forget about the TPP, here people.
It is going to save the world, whatever it is.
Right, and I fart unicorn dust...
;-D
What happened to the unicorn?
It was assimilated...as we are all soon to be...
;-D
Depends on the market sector, but we are already seeing it to some extent in things like the auto market. Right now everybody is praying for a great Christmas, but if the present trends continue, expect a world of suck in January.....
Here comes that pesky winter weather. Won't that affect Christmas sales?
Liquidation is self destructive on capital as prices tumble. When will the Federal reserve get out of the way of the markets self correction? When will deflation get to the consumer? I think we're close.
The Fed can't get out of the way without admitting they fucked up big time, so expect the charge of the light brigade to continue right over the cliff....
Dont Worry, the Fed is monitoring the situation. After the 2008 there were bound to be some fluctuations in the economy. The experts at the Fed were able to moderate these fluctuations with their application of monetary theory. Things would have bee MUCH WORSE without central bank interventions. There will still be some mild fluctuations and pockets of inflation and deflation, but rest assured that the experts at the Fed have it well in hand. Invest with confidence and don't worry.
Janet Yellen loves me so,
for Mad Max told me so,
Little ones to her belong,
they are weak but she is strong!
Amen!
God Bless America!
"Dont Worry, the Fed is monitoring the situation."
Just like Bernanke's we are monitoring the housing market and subprime is contained"
https://www.youtube.com/watch?v=INmqvibv4UU
Whew. Thanks for that. What a relief.
so does that mean Dow will be up 300 points on monday ?
How can you Dow't it ?
We're still way off recession levels. Q3 wasn't that bad actually and compaired to 2007, it doesn't compaire at all.
Also, inventory? That's a very raw picture. What sectors?
Oil is included but what people fail to understand is that energy demand is actually up and not down. It's just the source that changed and oil inventories will make a hughe part of that picture.
I'm sorry but that's a BS picture.
Mr. Debt,
Maybe you spend some time to look at the actual
data before you embarrass yourself. Oil and oil products constitute around 3
per cent of total wholesale inventories.
Kind regards
Bawerk
Way cool, can I have some helicopter money?
Here, take the whole helicopter.
I take me a shit ton of good inventory over fiat anyday o dah week.
same reason house prices go up so fast! must get rid oF fiat quickly else you know what's going to happen just not when.
ISM, Durable Goods, CPI, and Retail Sales. All plots to justify raising the debt limit.
http://mam.econoday.com/mobile/mobileeventdefs.aspx?cust=mam
I see no evidence of a channel stuffing.
OK, so over at MW the top headline is NIRP as of this moment. Just exactly how would you do that? In the story it says the fed will take 2% of cash in banks "after a certain amount of time". It also says that to "get a big impact out of negative rates, a country would have to cut rates on paper currency". I don't understand what that means. The article also says "with negative rates, aggregate demand is no longer scarce". What are they talking about?
NIRP means that instead of awarding you say, 2% interest to keep your money in the bank, they *charge* you interest to keep your money in the bank. Aggregate demand is no longer scarce, as everyone rushes all at once to buy durable goods, cars, appliances, etc., that will last for a substantial period of time vs. having their checking and savings assessed monthly. A slow confiscation, really. At least at first; until the desired results are not achieved, then the NIRP is ratcheted up.
A 'beatings will continue until morale improves' scenario.
What does it all mean? It means we're all ______d.
That means the TV I bought last year, will be cheaper and have better decals this year. In non-GAAP, double seasonally adjusted, nominal terms. ;-)
Election year - no chance of a crash/recession/depression until after November 8th 2016, sorry.
Election year - no chance of a crash/recession/depression until after November 8th 2016, sorry.
Lagging Indicator:
Lincoln Inventory of Presidential Library and other Museum Pieces get sold off.
- Presidential Library Inventory Sell Off = things bad
The fact that just a few corporations going bust in 2008-2009 caused the so called global economic collapse is a testament to how much of what we perceive as economic activity is really just bullshit.
No one really got hurt in 2008, probably less than 100,000 people world wide were even impacted, all that happened was those 100,000 people got knocked down to the level that everyone else was operating on since the inception of the federal reserve.
The class just above the middle class got knocked down into the middle class, and the billionaires lost a few hundred million zim dollars, thats about all that happened.
The recession that is coming will mean nothing for day to day americans, corn puffs will go up 25 cents a box , will drop a few oz of cerial and the box will remain the same size on the outside.
Nothing will change till people go hungry.
But honestly a little hunger around here probably wouldnt be a bad thing, we could learn to do more with less these days.
Pre 2008 The curve leads the economy.
Post 2008 The economy leads the curve.
Lower.
Buy Gold er, Steal Gold.
The US war material machine, the last vestage of US manufacturing strength, is being priced out of the market by competion from EU, Russian and Chinese munition makers.
The US is broke and the taxpayer can no longer afford to subsidize US foreign policy.