In my last piece I provided a technical analysis that signaled we are entering the first stage of a bursting bubble that we’ll call the Fed Bubble. Now while I do believe technicals provide good insight to the economic landscape I see them as a necessary rather sufficient qualifier. In order to be truly confident that our technicals are providing an accurate story we need to understand the fundamentals behind the charts, as we often find the engine light comes on due to a loose wire rather than a problem with the engine.
The final Q1 GDP revision was just released and we saw that GDP has again missed expectations by such a large margin that 2015 is another write off for a 3% growth year. Almost comically we heard the same excuses we got last year. “Weather was wintery and next year is going to be the turnaround year”. So in order to explain to these supposed economic and market ‘experts’ who seem wholly incapable of understanding economic and market forces with any sense of accuracy, let’s run through a few fundamentals.
I want to hone in on the category of consumer spending that is first to go away so that we may capture the first signals of a consumer spending pull back. A good proxy for this is the Johnson Redbook Chain Store yoy sales. This captures the consumer spending taking place at large department stores (Macy’s, Kohls, Walmart, Kmart, etc). This is going to be where the real discretionary retail spending takes place, as in do I have enough space on my credit card for that sassy blue dress and groceries or just groceries? And don’t think that is just a theatrical example. I remember the days of asking myself those very same questions (ok maybe not the blue dress but you get the idea). That is just real life here in the US (and Canada for that matter).
So this category does well to target the true discretionary spending. Now if the chart trend appears strong or even flat then we can be confident consumers have not yet pulled back on even the most discretionary of items and so any variations in the overall spending patterns are likely not worrisome. However, if we see a sharp pull back here it is indicative that a downturn in the overall spending trend is likely substantive rather than nuance. Let’s have a look.
What we find is that over the past 6 months we had a tremendous drop in true discretionary consumer spending. Within the overall downtrend we do see a bit of a rally in February but quite ominously that rally failed and the bottom absolutely fell out. Again the importance is it confirms the fundamental theory that consumer spending is showing the initial signs of a severe pull back. A worrying signal to be certain as we would expect this pull back to begin impacting other areas of consumer spending. The reason is that American consumers typically do not voluntarily pull back like that on spending but do so because they have run out of credit. And if credit is running thin it will surely be felt in all spending.
But one chart doesn’t a story tell, and so we must continue in our quest to determine whether or not we are on the precipice of another crisis. Another early indicator I like to look at is wholesale trade. If any sector has its finger on the pulse of the consumer it’s the wholesale/distribution sector. These guys are constantly talking to retailers to gauge where the consumer is at any given time. So let’s have a look to see if wholesale trade is giving out any clues.
Currently we find ourselves on the bottom of the latest peak to trough draw down which has given up more than $100B in wholesale trade. Interestingly we should note that the last time we saw a $100B peak to trough draw down was between June 2008 and January 2009. However, while it took 7 months to give up $100B in wholesale trade during the Credit Crisis, we’ve just done it in only 4 months. What this means is that the wholesale trade sector has recognized what the chain store yoy sales chart above depicts, namely that the US consumer has begun to max out. This is further supported by the inventory levels as per the latest GDP print, which made up 1.24% of the .2% print (wait doesn’t that mean then…. yes you get it).
If I haven’t convinced you yet that we are entering the final phase before the Fed Crash well let’s carry on. Again, we’re looking for early indications as to what we can expect in output (economic activity) going forward. So why don’t we have a look at manufacturing new orders to gauge what’s going in the pipeline because that should tell us how much output to expect over the rest of this year.
The above chart depicts an ugly story if we’re hoping for an increase in output with just 1 of the past 7 months having had positive growth in new orders for US manufacturing. That is something we simply have not seen before, not even during the second half of ’08 and all of 09 in the darkest of period of the Credit Crisis. That fact alone should send a shiver down your spine.
Now it’s not like any of the above just happened yesterday so why is it that month on month and quarter on quarter we continue to hear that “well we failed again to reach the highly touted expectations for economic growth but all the signals are there for next quarter”? Shouldn’t we be hearing that there has now been a real downward shift in what was already a flat lined economy at best? Yes of course but unfortunately the media refuses to do its job as challenger to the status quo and our policy making economists are frauds. They are nothing more than puppets for the global powers that be. And the longer they can keep us from the truth the more well positioned they can be for the inevitable collapse.
But that doesn’t excuse we the people for so readily accepting the Fed’s extreme view that the US plummeting economy equates to “transitory weakness”. Although in fairness, we are hearing the economic news with the backdrop of a scorching equities market and so we kind of just go along with the Fed’s extreme message because it seems harmless enough so long as the market is still roaring. The same thing happens in all bubble cycles. That is, the Fed denies there is a material problem up to the point that they are scrambling to convince everyone that either it was impossible to see it coming or that they actually had warned everyone but it went unnoticed.
Have a look at the following excerpt from the March 28, 2007 Bernanke Economic Outlook, before the Joint Economic Committee (US Congress) and tell me if it sounds familiar despite you likely never having read or heard this previously.
“Business spending has also slowed recently. Expenditures on capital equipment declined in the fourth quarter of 2006 and early this year. Much of the weakness in recent months has been in types of capital goods used heavily by the construction and motor vehicle industries, but we have seen some softening in the demand for other types of capital goods as well. Although some of this pullback can be explained by the recent moderation in the growth of output, the magnitude of the slowdown has been somewhat greater than would be expected given the normal evolution of the business cycle. In addition, inventory levels in some industries–again, most notably in industries linked to construction and motor vehicle production–rose over the course of last year, leading some firms to cut production to better align inventories with sales. Recent indicators suggest that the inventory adjustment process may have largely run its course in the motor vehicle sector, but remaining imbalances in some other industries may continue to impose some restraint on industrial production for a time.
Despite the recent weak readings, we expect business investment in equipment and software to grow at a moderate pace this year, supported by high rates of profitability, strong business balance sheets, relatively low interest rates and credit spreads, and continued expansion of output and sales.”
Sound familiar?? It sure as hell does! This is exactly what we are being told now. Inventories are up, business spending has slowed, Capex is down but despite all of this recent economic weakness the Fed (and all mainstream economists) expect moderate growth this year. Additionally that the economy will be supported by high profitability, strong corporate balance sheets and low interest rates. Absolutely mind blowing how similar the storyline was back in March 2007 to today’s storyline. Let’s see if we can’t find some other similarities.
Now remember 2007 was just a precursor for the real wealth transfer that took place in H2 08. But as you can see in the above chart while the two periods depict very similar market movements, 2015 has generated the same pattern in a much more accelerated time frame. From this chart and the excerpt above I have a couple points. First is that we cannot listen to the Fed or any mainstream economists because we know they will be the last ones to realize or at least to acknowledge that a severe problem exists. So please don’t ever think things are ok because you’ve heard it so from Stevel Liesman or some other clown pretending to be an economist on television. The second point is that according to the excerpt above from Bernanke’s 2007 Economic Outlook, the fundamental landscape directly ahead of the Credit Crash appeared almost identical to what we are experiencing here in 2015. I would caution you not to quickly write it off as just a coincidence.
If you take the technical piece I wrote a week ago in conjunction with this more fundamental analysis, the economic storyline describes a precarious environment for equities certainly, but for our general quality of life too. If things do breakdown as they did in 2008 the pain and suffering will be much worse this time around. The reason is that median net worth is down 40% from where it was just before the last collapse. U6 unemployment is already twice what it was prior to the last downturn. Debt levels, both individual and public are at record highs. All of that means a much worse bottom than last time.
But probably the most disheartening aspect of the coming reset is that almost every retiree or soon to be retired household has just about 100% of their nest egg currently in equities. This means a significant market crash will create the largest single wealth transfer in the history of the world. I cannot stress enough that this is the time to be exiting equities altogether. There is very little if anything that could push equity valuations higher right now and a strong likelihood for markets to revert back in line with the still very broken economy. Protect yourself and preserver your family’s interests.