This page has been archived and commenting is disabled.

3 Things: Recession, Retail-less, Stupidity

Tyler Durden's picture




 

Submitted by Lance Roberts via RealInvestmentAdvice.com,

The Rising Risk Of A Recession

It is often said that one should never discuss religion or politics as you are going to wind up offending someone. In the financial world it is mentioning the “R” word.

The reason, of course, is that it is the onset of a recession that typically ends the “bull market” party. As the legendary Bob Farrell once stated:

“Bull markets are more fun than bear markets.”

Yet, recessions are part of a normal and healthy economy that purges the excesses built up during the first half of the cycle.

economic_cycle-2

Since “recessions” are painful, as investors, we would rather not think about the “good times” coming to an end. However, by ignoring the reality of recessionary cycles in the economy, investors are repeatedly crushed by the inevitable completion of the full economic cycle.

The table below details the impact to the financial markets throughout U.S. history during recessionary periods in the economy.

SP500-Recessions-Returns-121015

As shown, the markets tend to decline by 30% on average historically but, as witnessed since the turn of this century, some recessionary declines can be far worse. The resulting destruction of investor capital leaves many unable to reach their financial goals longer term as they repeatedly spend years trying to “get back to even.”

While much of the financial media and Wall Street analysts continue to ignore the risks of a recession, there are some important warning signs that suggest this might be a bad idea.

1) Peaks in “real” profit margins have always preceded the onset of an economic recession.

SP500-ProfitMargins-Valuations-121015

2) Earnings growth has also turned negative which has also been a leading indicator of both weaker economic growth and market returns.

SP500-Earnings-Economy-121015

3) Sharp declines in imports suggest that domestic consumption (almost 70% of GDP) is declining.  Declines in exports, which comprises more the 40% of corporate profits, suggests global growth is weak as well. Historically, this combination has suggested a recessionary economic environment.

Trade-Deficit-121015

The point is that while it may not be fashionable, or polite, to discuss the rising risk of a recessionary environment, the warning signs are becoming more pronounced that such is the case.

The problem, as always, is the timing. The danger is adopting “hope” as an investment discipline.


Retail Sales Flash A Warning

Rich Duprey recently wrote:

“Total Black Friday sales fell 10% this year to $10.4 billion. Retailers who opened their doors on Thanksgiving failed to make up for that shortfall, as the $1.8 billion in sales that day were 10% lower as well…it looks like this holiday season may be shaping up to be a disappointment for the retail industry.

 

But maybe not.  First, Black Friday has seen its influence diminished over the years as retailers begin promoting the holiday shopping frenzy earlier in the season.

 

But the most important change reducing Black Friday’s dominance is the switch to online shopping.”

As discussed above, the importance of consumption with respect to the overall economy cannot be overlooked.  As such, retail sales, which comprises roughly 40% of personal consumption expenditures, is a good indicator of the overall health of consumer activity within the economy.

Therefore, let’s look as some of the data in this respect.

First, the annual rate of change of retail sales has been on the decline since 2012 which is supports the lackluster rate of economic growth within the economy.

Retail-Sales-12th-Avg-NSA-121015

Secondly, hiring of retail sales workers has also been on the decline suggesting that retail stores already had a strong suspicion that activity would be weaker than last year. As Challenger, Gray & Christmas recently reported:

“In addition to the November slowdown, retail hiring in October was adjusted downward from 214,500 to 210,400.  That still represents a record high for October retail hiring, but it suggests that overall seasonal hiring may very well shrink from 2014 levels…”

Lastly, despite hopes that retail sales have simply switched from “brick and mortar” to “clicks,” credit and debit card data suggests that online sales have been weak as well.  As reported by BofA:

“Retail sales ex-autos are down 0.2% yoy. However, part of this weakness owes to a decline in prices. After controlling for deflation, real retail sales ex-autos are up 1.3% yoy in November, revealing a slowing trend but not an outright decline.”

 

Moreover, there are disinflationary pressures elsewhere, presumably reflecting pass-through from the stronger dollar, which could continue.”

nominal-retail-sales-card_0

The problem is the TREND of the data more than the actual level of the data itself.  While it is widely hoped that the Christmas holiday shopping season will be an economic boon, the trend of the data suggests such will likely not be the case.

Of course, with retail sales weak, imports and exports plunging, and “deflationary pressures” impacting the economy – one should probably question what data is Janet Yellen actually looking at to justify hiking interest rates now?


The Apex Of Stupidity

Just recent John Mauldin posted a fantastic article by Charles Gave entitled the “The Apex Of Market Stupidity” The entire article is worth reading but here is the important point:

“In the last week, we have reached what is surely the apex of this stupidity. A bunch of algo traders programmed their computers expecting “Derivative Draghi” to be extremely dovish, as any proper Italian central banker should be. I am not sure I understand why, but some traders obviously decided that he had not been dovish enough. European stock markets plunged by -4%, while the euro went up by roughly the same amount in the space of a few minutes. What that means is simple: value in the financial markets is no longer a function of the discounted cash flow of future income, but instead is determined by the amount of money the central bank is printing, and especially by how much it intends to print in the coming months. So we are in a world where I can postulate the following economic and financial law: variations in the value of assets are a function of the expected changes in the quantity of money printed by the central bank. To put it in a format that today’s economists understand:

 

? (VA) = x * ? (M),

 

where VA is the value of assets and M is the monetary increase.

 

What we are seeing is in fact in one of the stupidest possible applications of the Cantillon effect, whereby those who are closest to the money-printing, i.e. the financial markets, are the biggest beneficiaries of that printing. This is exactly what happened in 1720 in France during the Mississippi Bubble inflated by John Law. The end results were not pretty.

 

What I find most hilarious is that some serious commentators have been pontificating at considerable length about what the market’s participants think. These days, some 70% of market orders are generated by computers, and many of the rest by indexers. And computers do not think. They simply calculate at light speed, which allows them to react to short term movements in market prices as they were programmed to do. And since they are all programmed the same way, the result is some big short term market moves. In essence, these computers act as machines that allow market participants to stop thinking. As a result, I cannot remember a time when less thinking has ever been done in the financial markets, which is why I find today’s financial markets infinitely boring.

 

We are swimming in an ocean of ignorance, just like France in 1720. It seems all the painful economics lessons learned over the last 300 years have been forgotten. I suppose that means we will just have to wait for another Adam Smith to appear. La vie est un éternel recommencement…”

Just something to think about.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 12/10/2015 - 17:40 | 6906786 TeamDepends
TeamDepends's picture

That chart looks like what emerged from our bowels after the Chipotle coli-rito.

Thu, 12/10/2015 - 20:56 | 6907581 Lets Buy The Dip
Lets Buy The Dip's picture

What I do not understand is that people keep saying since 2009 a recession is here. But it never came. 

spx chart here ==> http://www.bit.ly/1fMcakI  WHOA! = ASCENDING TRIANGLE PATTERN! 

Probably some big moves on the stock market coming to a town near you! :-)

Fri, 12/11/2015 - 08:38 | 6909436 Bobbyrib
Bobbyrib's picture

You know to study Million Dollar Bonus, because you're trolling skills are way beneath his.

Thu, 12/10/2015 - 17:42 | 6906792 falak pema
falak pema's picture

How can American "exceptionalism" swim in the sea of ignorance?

Hey WORLD! How can we be the apex of Stupidity ?

We invented "exorbitant privilege"; we invented "our money your problem"; we invented "petrodollar"; we invented " the derivative market"; we invented "supply side Reaganomics, no holds barred"; we invented "junk bonds"; we invented " NWO/WTO/outsourcing; we invented ZIRP/QE; we invented "shadow banking"; we invented Glass Steagall repeal; we invented Internet; we invented dot.com scam; we invented "subprimes"; we invented Helicopter Ben... We INVENTED FINANCIAL WORLD!

So what could be wrong???

Jesus this is our own song...we wrote it!

Thu, 12/10/2015 - 18:14 | 6906929 I-am-not-one-of-them
I-am-not-one-of-them's picture

no trickle down? their justification for making the rich richer

some people are still waiting, still expecting after 30 years

Thu, 12/10/2015 - 20:02 | 6907354 Jstanley011
Jstanley011's picture

Every hood rat in the ghetto has a cell phone, a flat screen and bling. Whadda ya want?

Thu, 12/10/2015 - 17:48 | 6906807 Seer
Seer's picture

Lance, Lance, Lance... You see, there's this underlying theme that you're conveniently overlooking.  "Growth Line."  ALL your notions of "Economic Cycle" are based on this implausible premise of perpetual growth.  Sure, you sprinkle in a bit of "recession" cleansings, but NEVER is it suggested that there can be anything other than that "up and to the right" underlying "Growth Line."

I wish to thank Usurious for unearthing this posting by Mako (http://www.zerohedge.com/news/2015-12-08/what-happens-when-yellen-raises...):

 

'As long as you guys continue to use compounding interest you will get a balloon payment at the end, last one cost 100+ million lives this one will well north of a billion or two.

Why let this one collapse when the function of the system is to expanded as far as you can?  The markets will work and liquidate the unfunded liabilities, no need to worry there. 

The whole system is a fraud and has been since the beginning, now as it is starting to collapse you see the fraud, what do the stupid humans want to do .... well start a new system just like the old system.

Unless you have unlimited power this system and any other system you build on compounding interest will end the same way... liqudation of the unfunded liabilities (humans).

And no PEs will not stop at 6 or 8 this time, a full on liquidation this time folks, last time it was Europe and parts of Africa and Asia, this one will be the whole enchilada and we have become very effective at liquidating since the last one.'

Thu, 12/10/2015 - 17:49 | 6906819 El Viejo
El Viejo's picture

It's an election year. The markets will go up up up cause politicians are busy doing other things.

Thu, 12/10/2015 - 17:51 | 6906828 Goldbugger
Goldbugger's picture

Ok lets just look at commodities.

 

         OIL                         Copper                 Gold                      Silver

2011                       110                         4                     1900                       45

 

Today                            38                                 2                            1074                               14

 

Thu, 12/10/2015 - 18:25 | 6906971 Seer
Seer's picture

Sure glad I invested in Farcebook and fiat! </sarc>

Yup, anyone who says that we "recovered" ought to be smacked right upside the head with those figures!

I'm still holding out for a drop.  As the idiocy in the non-commodities markets and the currency markets shakes/wears off there'll be one last fire sale on commodities before everyone realizes that the emperors have been swimming naked.

Thu, 12/10/2015 - 17:56 | 6906856 fowlerja
fowlerja's picture

Looks like it is time for me to go back to the farm...slap a coat of paint on the old tractor...fire her up and start planting. Since I am not going to make money in the stock market...well I need a cash crop...let me think about it for a second...yep..going to plant some weed...not going to use any chemicals like "Roundup"...going to be organic ...all the way...

Thu, 12/10/2015 - 17:58 | 6906864 Bioscale
Bioscale's picture

The first chart is a joke. The output grow is in inflation numbers, in fact it's a decline.

Thu, 12/10/2015 - 18:02 | 6906874 poor fella
poor fella's picture

A guy on Bloomberg says his brother was running his company from his iPhone while they were skiing. Between sending emails and running his business, his daughter wanted to play Angry Birds. The guest continues, saying that the iPhone shows up as a retail/consumer expense vs. a capital expense and that there is A LOT of capital spending not being caught in the numbers...   

yeah right.. 

In the same vein - I posit that when somebody purchases gold, silver, fencing, water storage, bullets, spam, batteries, and beans - what little optimism the MSM tries to show in retail spending has A LOT of these one-off purchases that in no way indicate normal demand and consumer confidence.

i wonder if yellen will acquire a taste for cat food? 

Thu, 12/10/2015 - 18:20 | 6906948 Seer
Seer's picture

Well, I can state that I'm trying to support "the economy!"  It's just another form of "investing," only it's not in support of the unsustainable System.  But, as with any investing, it's not necessarily all that easy: sure, folks can spout off some simplistic notions of what one ought to have, but when one is facing on liquidating all liquid assets it's a bit more difficult to feel confident in those decisions- when one is faced with a compromise one starts to feel the stickiness of it all... and when all the "liquid" is gone that's likely it, it'll be what you're going to the dance with.  Suppose this ain't so different than with the macro level, with nations and such.

 

Fri, 12/11/2015 - 13:02 | 6910799 poor fella
poor fella's picture

Yep, whole thing is scary as shit. Not only what to get, but when. And we're the lucky ones because there's still a 'how'. I see people slipping through the cracks more and more as everything ratchets down. I don't feel I'll have enough cash even unless I have maybe 5 years of expenses. It sounds excessive - but that's also the state of the world I think we're in. I have ZERO faith in the fucking assholes that run the System. There's an interesting sounding movie on Amazon about 'time-banking'... looking into that too. Community. 

Picture this - My 'pistol' disliking neighbors (a married couple), nice people besides - we, sitting around the fire-pit - they say, we'd like to get more sustainability and emergency-prep in our lives. Since you are doing it at your house, maybe we design some systems and come over and work on things. Interesting. And a seachange from the feeling I had that they always considered me an oddball prepper. Cheers man - good luck! 

Thu, 12/10/2015 - 18:07 | 6906901 CHoward
CHoward's picture

Retailers are stupid.  They start putting out the X-mas goodies in late August - and yet, they still expect everyone to jam their stores on that one single solitary day - Friday.  They notoriously jack up prices about 60-75% then give you a grand 25-50% off.  Wow - how grand of them.  I was in retail 35 years ago and nothing - NOTHING has changed.

Thu, 12/10/2015 - 18:50 | 6907077 ZombieHuntclub
ZombieHuntclub's picture

I'm long copper and lead with the occasional foray into steel and aluminum. So far, my investment let's me sleep easily. Tick tock gentlemen. Tick tock. 

Fri, 12/11/2015 - 05:11 | 6909126 I AM SULLY
I AM SULLY's picture

This is a cheap addition to your armory ...

https://www.youtube.com/watch?v=EC0sn7JmrY8

Thu, 12/10/2015 - 19:29 | 6907224 ajkreider
ajkreider's picture

BTW, the is the YoY real, ex-gas?

Thu, 12/10/2015 - 20:15 | 6907416 kelley805
kelley805's picture

J.P. Morgan analysts wrote that the three best leading indicators for recession have been credit spreads, the shape of the yield curve and profit margins.

Here are some signs of a coming recession.

1. Investors in high-yield bonds are expecting to see their first negative return since the start of the credit crisis in 2008.

http://www.marketwatch.com/story/deteriorating-junk-bonds-flash-warning-signs-for-stocks-2015-12-07?dist=afterbell

2. Factory orders continue to drop

http://www.zerohedge.com/news/2015-10-02/us-factory-orders-flash-recession-warning-drop-yoy-10th-month-row

3. Default risk spikes

http://www.zerohedge.com/news/2015-10-02/us-financials-default-risk-spikes-2-year-high

4.  M&A set record

http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/  

5. Iron ore prices tumble

http://www.marketwatch.com/story/iron-ore-prices-keep-crashing-adding-to-global-growth-fears-2015-11-30

6. Baltic dry shipping index tumbles

http://www.marketwatch.com/story/shipping-index-falls-to-all-time-low-stoking-fears-about-global-growth-2015-11-19

 

Here is how to prepare.

http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

 

Here is how to get your mind off this stuff.

http://michaelekelley.com/category/humor/

 

Good luck!

Do NOT follow this link or you will be banned from the site!