Warning signals of a recession have been nonstop since the early spring of 2022 and have matured despite Goldilocks talk by analysts and financial rags that feed narratives to the general population. If you are of the same ilk as most Americans who are experiencing the depreciation of income due to inflation with an inflexible budget, you’re acutely aware of how the Bidenomics bullhorn that’s blaring success for the economy is nothing but a huge pile of stinking manure. Feel free to peruse the bread and circus finale since the Federal Reserve began raising interest rates:
- Growing Risk of Recession as Bread and Circuses Distract the Plebeians – Part 1, 2, 3
- Welcome to the Most Anticipated Recession in History – Part 1, 2, 3
- The Recession Arrived With Wardogs and Goldilocks’ Hopium in 2023 – Part 1, 2, 3
- Surge of “Little Green Men,” and Metal is Poised to Strike – Part XVI: Checkmate
Why a US Recession Is Still Likely — and Coming Soon… “The bottom line: history, and data, suggest the consensus has gotten a little too complacent — just as it did before every US downturn of the past four decades.” – Bloomberg, Oct. 1
Meanwhile, the soft landing the Fed hoped for is at risk after it enticed a spike in long-term interest rates that are currently at the highest level seen since the Great Financial Crisis (GFC) dawned in 2007. Slowing the economy and taming inflation are what the Fed set out to accomplish, but too much is never a good thing when there’s no control over Capitol Hill’s fiscal policy or a monetary policy silver bullet that automated financial markets are unable to agree with. Jay Powell’s hawkish tone on “higher for longer” rates at his Sep. 20 FOMC presser added fuel to a fire that was already burning hot in bond markets and the dark corners of economic indicators that scream a hard landing is in the cards. It’s not a surprise that U.S. stock market indices were breaking support lines after I offered a warning in the “Dow, Nasdaq, S&P, and Russell for Late Summer 2023 – Technical Analysis” published in late August. Here’s an excerpt from the Associated Press today that sums up the basic fundamental situation:
Fed’s Bid to Avoid Recession Tested by Yields Nearing 20-Year Highs… “Surging interest rates are threatening to derail the Federal Reserve’s drive to tame inflation without causing a deep recession. Since mid-summer, the yield on the 10-year Treasury note, a benchmark for many loans, has steadily climbed, causing a spillover rise in other borrowing costs. The costs of mortgages, auto loans, and credit card debt have all risen in response. The collective impact of higher rates across the economy could also weaken the government’s own finances. The jump in longer-term rates coincides with other threats, from higher gas prices and this week’s resumption of student loan payments to autoworkers’ ongoing strike and the risk of a government shutdown next month, all of which could leave consumers with less money to spend to power the economy. The strike by the United Auto Workers, now in its third week with no resolution in sight, could reduce vehicle sales in coming months. And the threat of a government shutdown, narrowly averted this past weekend, looms large, especially given the chaos over the leadership of the House of Representatives. Far-right Republican House members deposed their leader, Rep. Kevin McCarthy, on Tuesday for working with Democrats to temporarily avoid a shutdown.” – AP, Oct. 5
Two elephants in the room are wandering around under the radar and threaten to insert a nasty monkey wrench in the works. One is that “deflation in size is coming,” and there’s another credit rating downgrade for the U.S. in the pipeline that I noted in “A Revolution is Afoot and Masquerading as Civil War – Part 2” published on Sep. 14 (Twitter thread). Here’s the excerpt:
“In early August, Fitch downgraded the U.S. credit rating. It cited rising debt at the federal, state, and local levels and a ‘steady deterioration in standards of governance’ over the past two decades. Due to the continuation of unlimited debt accumulation (National Debt Clock) and political chaos in D.C., I suspect that more downgrades are in the cards as another government shutdown threat is brewing. House Speaker McCarthy is facing a GOP mutiny to remove him and reportedly dared a caucus to ‘move the f*cking motion.’ There’s $7.6 trillion of publicly held U.S. government debt that matures in next 12 months.” – TraderStef
A bullseye report is circulating in the financial press today:
Wall Street worries the U.S. could lose its last batch of AAA ratings… “Wall Street is bracing for the potential demise of an old regime: The U.S. government’s coveted AAA credit ratings. Earlier controversies on Capitol Hill over the U.S. debt limit prompted downgrades by S&P Global in 2011 and Fitch Ratings in August to AA+ from AAA, leaving Moody’s Investors Service as the only major credit-rating firm applying its top credit ratings to the U.S… The dramatic end on Tuesday of Republican Rep. Kevin McCarthy’s short-lived run as House Speaker has Wall Street on edge about the threat of yet another government shutdown. That casts doubt on the ability of the U.S. to retain its last batch of unblemished credit ratings, a go-to gauge of its trustworthiness on the global stage. It also could further rattle the roughly $25 trillion U.S. Treasury market, where yields recently surged to a 16-year high… The rating firm also said ‘intensifying political polarization’ was a concern, as well as fiscal policymaking that’s ‘less robust’ in the U.S. than in many of its AAA-rated peers, including Germany and Canada.” – MarketWatch, Oct. 5
If the U.S. loses its AAA rating, which appears inevitable if congress critters don’t have the chutzpah to rip a Band-Aid off the continuing resolution game that promotes out-of-control national debt with annual interest set to breach $1 trillion by 2024, the dung is really going to hit the fan from an economic standpoint. Then, there’s truth in the following statement:
“When all else fails they take you to war.” – Gerald Celente, Jan. 2023
Now that you’re depressed over a seemingly hopeless situation and today’s jobs report was a bust, let’s take a peek at some recent economic indicators with charts before closing up shop today with two short interviews. Before continuing, review the Richmond Fed chartbook of national economic indicators that was published on Tuesday of this week.
Fed Overkill? Economic Outlook Index Plunges To Record Low – IBD, Oct. 3
If you believe the Biden administration can pull the wool over your eyes again and continue to draw down the Strategic Petroleum Reserve (SPR) that artificially lowers the price of gasoline and diesel, don’t kid yourself. There’s only 17 days of supply left in the SPR, and the price per barrel is about 30% above the target price that Biden initially set for refilling it. Buyers of oil are experiencing a worldwide “acute supply shortage” with the highest premiums in months. Russia and Saudi Arabia have no plans to increase market supply and are holding firm on production cuts. With U.S. SPR inventory at the lowest level since 1983, it’s the biggest strategic weakness while having spent billions in aid for Ukraine to keep NATO’s proxy war against Russia afloat. Expect prices at the pump to remain elevated or rise despite a significant drop in demand by U.S. consumers because they’re broke after a summer splurge.
The banking crisis in the U.S. is not over since the commercial real estate (CRE) market is slated for an implosion in 2024 and Chapter 11 bankruptcy filings by businesses have soared 61% thus far in 2023. You can get up to date on that situation here: “Implosion of Commercial Office Space Has Begun – Part 3: Fire Sale,” published on Jul. 21 (Twitter thread). Additionally, Deutsche Bank reports that the growing reluctance of U.S. banks to lend to consumers is in recessionary territory amid the growing credit crisis.
CITI’s latest data revealed a significant drop of 10.8% (-10.9% excluding food) in credit card spending for September, which is the weakest print in 2023 and the fifth straight month of deceleration. Layaway spending is slated to hit a record this holiday season as consumer spending is constrained. There’s also $1.6T in student loan payments that restart in October and will cause a significant drop in discretionary spending that will slow the economy. I’m sure you’ve noticed the wave of job strikes and layoffs in the news that will impact consumer spending into the holiday season and beyond. According to The Challenger Report, job cuts were up 58% YoY in August, and 3Q23 cuts were up 92% from 3Q22.
The fall in credit card purchases coincides with a big drop in buying condition sentiment. Personal consumption collapsed within the latest GDP revisions.
“Rather big drop in sentiment re: buying conditions for vehicles (blue), houses (orange), and large household durables (white) in September per UMich consumer sentiment update.” – Liz Ann Sonders, Sep. 18
Meanwhile, consumer savings is now in contraction:
“Savings as a % of national income has entered contraction territory. It has ONLY happened 3 times since 1947.” – Game of Trades, Oct. 4
Loan defaults were the highest for August on a monthly basis since 2009:
Existing home sales are at their lowest level since 1995 and approaching levels not seen since the GFC. Substantial declines usually precede recessions as spending for all the durable goods and services purchased to move in and/or remodel dry up.
“Existing home sales typically decline before recessions” – Game of Trades, Sep. 19
- Pending home sales plummet with high mortgage rates – Fox Business, Sep. 28
- Homes “unaffordable” in 99% of nation for average American – CBS News, Sep. 28
- How the Fed Destroyed the Housing Market and Created Inflation – Mish, Oct. 5
“Yields on junk bonds surged to 9.25%, still below March highs but still ticking up. Credit spreads aren’t insulating corporate bonds from rates-induced pain. Higher borrowing costs a fundamental risk, and spreads are rising too as a result.” – Lisa Abramowicz, Oct. 4
“Jeff Gundlach recently presented a 2-10 Yield Curve chart with a 30 SMA week overlay. His argument is that once the Yield Curve crosses the 30-week SMA, a recession follows. The following chart is a rendition with 62 and 233 EMA weeks.” – Sunil Beri, Oct. 5
ISM Manufacturing data shows mild improvements but is still in contraction.
“September ISM Manufacturing at 49 vs. 47.9 est. & 47.6 in prior month… new orders up to 49.2, prices paid down to 43.8, and production up to 52.5 (highest since July 2022)… employment edged back up into expansion at 51.2.” – Liz Ann Sonders, Oct. 2
“August durable goods orders (blue) +0.2% m/m vs. -0.5% est. & -5.6% prior (rev down from -5.2%) … core orders (orange) +0.4% vs. +0.2% est. & +0.1% prior (rev down from +0.4%).” – Liz Ann Sonders, Sep. 27
The Chicago Fed National Activity Index improved but remains in contraction.
“Money supply contraction is biggest since the Great Depression. From peak to trough, it’s the worst since at least the 1860’s.” – Peter St Onge, Ph.D., Aug. 13
Steve Weiss: Going into a recession, won’t be a soft landing – CNBC, Sep. 22
Barry Sternlicht: The Fed should stop hiking interest rates – CNBC, Sep. 29
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