The Great Disconnect Is Palpable

Tyler Durden's picture

Submitted by Jeffrey Snider via Alhambra Investment Partners,

The Fed’s industrial production series also includes estimates on total motor vehicle assemblies. Auto sales in general have been one of the only bright spots in the economy, especially since the 2012 slowdown (even though it has been boosted artificially via credit far, far more than income gains). Given that trend, it is still difficult to assess whether activity in recent months is meaningful. After surging in July, auto activity in terms of industrial production has slumped – now pushed into a fourth month.

Auto production is quite volatile, even where the Fed has attempted to “smooth out” that tendency via its seasonal adjustment factors, so more analysis is needed to establish some confidence about interpretation. Still, at the very least, it raises concerns expressed in the growing (surging) inventory of autos counted in manufacturer’s numbers but stuffed (unsold to end users) on dealer lots and in wholesale limbo.

ABOOK Dec 2015 Risks MV Assemblies USABOOK Dec 2015 Wholesale InvtoSales Autos Oct

Furthering those concerns, economic reports out of Canada today showed not just broad-based wholesale sales declines but also a four-month slide also in auto sales at that wholesale level. Canada being a primary exporter of autos to the US, the coincidence of further weakening is not likely to be random and yet another negative commentary on the state of US “demand.”

The agency also released October data for wholesale trade, which fell 0.6 per cent to $54.7 billion — its fourth-straight monthly drop.

It said lower trade figures were recorded in four areas that, when combined, represent 64 per cent of all sales.

Sales fell by three per cent to $10.5 billion in the food, beverage and tobacco category — its third decrease in four months. The category of motor vehicle and parts registered a 2.1 per cent drop to $9.5 billion, its fourth-straight tumble. [emphasis added]

Taken together with the rather steep drop in US industrial production, the risks of a full-blown and perhaps severe recession have undoubtedly grown. Unlike what the FOMC is trying to project via the federal funds rate, a rate that isn’t being fully complemented, either, at this point, visible economic risk is not just rising it is exploding. Nowhere is that more evident than in junk bonds and high yield. The collapse in those markets and tiers has been produced not through actual defaults, which, though slightly rising, remain historically low, but rather through greatly shifting perceptions of defaults that increasingly look likely and in bulk.

That is as much economic commentary as anything that the FOMC might produce. The credit cycle in that respect is not so much monetary policy as a direct component of the foundation of the economy. In other words, if the Fed were truly correct in its economic assessments, that the economy isn’t now overheating but is about to, junk bonds would trade more so with that theme given that it would more than imply continued historically low default rates. There would be no such explosion, as there is now, in the perception of that animating risk factor.

ABOOK Dec 2015 Risks BofAML CCCABOOK Dec 2015 Risks BofAML Master II

Even so, estimates for default rates next year are conspicuously nowhere near keeping up with price behavior, almost assuredly because the models ratings agencies and selling firms use to project such things depend upon the same economic expectations and modeled forecasts as those which Janet Yellen uses to assure herself there is nothing to fear, economically and financially speaking. So the great disconnect is palpable even here:

So far in the month of December, three companies in the energy sector have combined to add $1.8 billion in default volume to the year-to-date total in institutional leveraged loan defaults. The three defaults will push the default rate even higher than the current 11-month rate of 1.7%.

The data come from the latest report on leveraged loan defaults from Fitch Ratings. The firm also forecasts that the leveraged loan default rate in 2016 will rise to 2.5%, or $24 billion.

The incongruity is obvious; the default rate in just leveraged loans is only to rise to 2.5% (from 1.7% the 11 months so far cataloged of 2015) yet leveraged loan prices, and only those of the most liquid and highly traded names, have sunk in the past week to levels last seen (on the way down) in the days just prior to Lehman Brother’s collapse!

ABOOK Dec 2015 Risks SPLSTA Lev Loan LongerABOOK Dec 2015 Risks SPLSTA Lev Loan

That complements the price behavior from CCC’s which have already bled above the Lehman threshold for comparison. There is some great disconnect where junk bond prices are collapsing so far, with no end in sight, but the mainline estimates for defaults and the economy that is supposed to keep them low has hardly budged. Something is greatly out of line and increasingly it looks like that complacency is hugely misplaced.

Default rate estimates and mainstream commentary about the economy that conditions them continue to mark the favored track but that is nothing like what these junk bond prices are saying – same market, different worlds. The economic risks have heavily shifted and just in the past few months, a recession perception that is gaining a much wider audience. The industrial production figure was, in that respect, a major indication that that is the right insight.

Even the NBER will consider IP as a recession marker on its own if it is blatant enough, which it certainly was, given more mixed signals in other economy-wide indications (such as unstable GDP and the BLS’s unemployment rate and Establishment Survey that never seem to produce spending or even wage growth?).

The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Those last three are already in the recession category, as wholesale sales have persistently contracted this year while retail sales continue to underperform the dot-com recession experience.

The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP). The Committee’s use of these indicators in conjunction with the broad measures recognizes the issue of double-counting of sectors included in both those indicators and the broad measures. Still, a well-defined peak or trough in real sales or IP might help to determine the overall peak or trough dates, particularly if the economy-wide indicators are in conflict or do not have well-defined peaks or troughs.

I have no idea whether IP is enough for the NBER to consider a recession already (probably not), nor is it at all clear that such “official” determinations actually matter (they likely don’t). What is important and relevant is that even the NBER, the same economists who didn’t declare the Great Recession until December 1, 2008, long after the full panic and devastation had begun, considers IP a major factor. In other words, as you can plainly see from junk debt, we have been handed a major point of escalation in a startlingly broad fashion (maybe including Canada); that junk bonds are on to something that the “rest” of markets (outside the “dollar”, of course) will not yet consider.

If certain high yield segments, especially leveraged loans, are already priced to the collapse point of 2008, then that suggests something potentially awful about the future course. Industrial production already at -1.2% without any inventory correction yet tells the same worry. It is nowhere near what Janet Yellen had in mind when in her first press conference hinted at March 2015, the six-month point after QE’s end, as the first rate hike. It is, however, the same fears that kept her at bay for three-quarters of the year thereafter. Unfortunately for her, as these prices and data points increasingly survey, it is that progression that should have mattered most rather than blindly depending upon an economic trend that is forced more and more remote, a truly nasty downside gaining increasing visibility instead.

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Borrow Owl's picture

 "...risks of a full-blown and perhaps severe recession have undoubtedly grown."


Dude. That is sooooo 20th Century.


The Pope's picture

Where's my goddamned FLYING CAR!?

Osmium's picture

Can you imagine the carnage if the average driver had a flying car?  Most people on the road today have their head firmly planted in their ass.  Twisted flaming metal falling from the sky everywhere. 

DontFollowMyAdviceImaDummy's picture

i'm not buying a car til those self-driving jobbers are made (and I'm putting it to work immediately as an Uber)

ebworthen's picture

7 year bubble debt cycle in action; sure glad the FED is printing money to the moon and the rule-of-law is dead.

Now all we need is to start construction on the Death Star.  All hail the Empire!

Glass Seagull's picture



Could you please start auto scaling them charts?



Timothy Geithner

THE DORK OF CORK's picture

Did people notice the increase in propaganda activity over in Naked Capitalism land... 

They try to make fun of debt free money guys but also ban them from discourse.


I prefer the term equity money but no matter.


That fake  liberal New York / London concern for the people really pisses me off


Give me Larry Summers total and open disdain for the human spirit over the back stabbing hair pulling bitch that is Yves Smith.

The poor girl is a total bankinginsider

MMTers have been exposed as super capitalists engaged in Constant and massive mobilizations 


The second American liberal materialist revolution has now totally destroyed what remained of civilization in Europe.


The gaff is in a terrible state of convulsion.




Omen IV's picture

NC is captured!

she must have sold out - the MSM is consolidating not only ownership but editorial and blogger opinion - they dont want the sheeple to knowanything - NYT  censors everything

we are in a vast end game to control the information access

THE DORK OF CORK's picture

Nope , I am a little midget prick that can go off at a tangent at any time but a great many of the equity money crowd if not all has been banned over the years I suspect. For example the moment I found social credit I was off. But others I have not seen for a long while. F. Beard was the most honorable character for sure. A man of true dignity (unlike myself)

Perimetr's picture

Risk of a recession?

There is also a risk that the Pope is Catholic and that a bear shits in the woods.

CHX's picture

I remember B.S. the Bernank saying something like "back then (during the last crisis) we did not have the "right tools" in place yet"... I wonder, if they do now??? I have my doubts. This ship is sinking...

THE DORK OF CORK's picture

Yves SmithDecember 20, 2015 at 8:41 pm


I hate to be blunt, but the fact that you don’t like Wray’s show of his frustration does not make him wrong.

And Wray is methodologically sound, and you are incorrect. If you can’t explain financial transactions in terms of the balance sheet impacts on the participants, you don’t have even the most basic grasp of what is happening. The fact that MMT can show how money works through this mechanism and the “debt free money” crowd won’t try because they are too intellectually lazy or know they can’t should tell you all you need to know about their intellectual honesty.

You are basically criticizing an expert in his domain of expertise when you haven’t even made an effort to understand what he is talking about. Would you similarly treat a tax expert this way? Tax is so arcane and often counterintuitive that attorneys in other specialities of law find dealing with tax attorneys to be frustrating"

THE DORK OF CORK's picture

Well I am but a Dork but on MMT sites I asked these guys to engage in a debate with Oliver Heydorn.Now I do not know this man from Adam but what he says makes perfect sense to me. Heydorn is no simple hick Greenbacker. He has a sophisticated view of a very simple problem. On Billy Blogs site these posts were not published. And when I stated I completely rejected his "growth" thesis I was off. This inorganic growth we witness today is a deep characteristic of usury based systems. To kick start growth those MMTers typical want to engage in mobilizations



The Job guarantee etc.

Social creditors immediately recognize this as a deep characteristic of the war economy.


silverer's picture

Introducing the permanent auto loan.  No, you never pay off your car, it's part of the permanent debt plan.  When you turn in your car, the 30% outstanding simply rolls into your loan renewal.  Hell, they can take that out to 12 year, 14 year, whatever it takes to make a monthly payment affordable.  They attach your home or pension to the loan to secure any difference on the residual value of the car. There is always going to be a f'inancial instrument to fix the issue, as long as central banks can print money, and they don't give a damn how much you owe, as long as you owe.