The Drip, Drip, Drip of Recession

News of significant recessionary drops in the US became as relentless this past week as the ping, ping, pang of drips from a leaking ceiling hitting pans in the New York Stock Exchange. I’ve been saying you would hear the sounds of recession everywhere as soon as the second-quarter earnings reporting season began this summer. Here we are, and here’s a list of the week’s downbeat economic news that quickly terminated the S&P 500’s rally … right where I said it would end … slightly above its previous summit.

The Cass Freight Index remained negative for the seventh month in a row.

Shipping reflects the whole manufacturing economy, and it has been sinking into the South China Sea like this all year:

Bellwether Dow Transports continued to lead the Dow down.

Rail freight company CSXWealth Strength IndexAAPL is Extremely Up and trending Up stocks plunged more than 11% late Tuesday and into Wednesday when its corporate report came out with earnings below expectations and with forward guidance for continued decline. CSXWealth Strength IndexAAPL is Extremely Up and trending Up CEO, James Foote, said,

The present economic backdrop is one of the most puzzling I have experienced in my career…. Industrial customers’ volumes (are) continuing to show weakness with no concrete signs of these trends changing…. We are not necessarily being pessimistic about the second half of the year. But in as much as we need to adjust guidance, we’re just setting out the obvious.


Two small-to-mid-size trucking companies joined four others that have gone out of business this year, probably not due entirely to shipping declines, but certainly not helped any by the suddenly tough freight world. For the past few years, trucking companies couldn’t find enough drivers or buy enough trucks. As recently as last year, manufacturing companies were having a hard time shipping their goods. Suddenly trucking companies are laying off hundreds of drivers.

US manufacturing has been on that same down trend as the Dow Transports all year

US manufacturing moved back to hovering right on the line of contraction:

In fact, according to Chinese government television, the Federal Reserve has stated the US entered “a manufacturing recession” in the second quarter:

I haven’t seen it reported quite that starkly here, but then economic reporting about the US economy here usually seems as rosy as Chinese reporting on China in China.

Even though manufacturing is in broad decline, manufacturing stocks did great:

… continuing to prove stocks have nothing to do with how business is doing but simply turn businesses into gambling chips in a casino. Still, stocks are going to find it harder and harder to rise against the drip, drip, drip of a declining economy; so, it is no surprise they did exactly as I said they would once earnings season started and began to fall away from their new highs.

Fed overreaction sends multiple markets for a loop

Given how the market is now trading on nothing but the Fed, it’s also no surprise that it leaped up instantly in the middle of weak when the European Central Bank announced it may be raising its long-time inflation target of “just below 2%” up to 3%, and New York Fed President John Williams (a voting FOMC member) said the Fed should respond quickly to the economy with its own rate cuts. Obviously, investors couldn’t care less about drilling into WHY the Fed should need to respond so quickly any deeper than Williams statement that it should do this because the Fed has limited resources left with which to do anything!

One might think that admission, too, would be alarming, especially after Williams estimated the new neutral rate for Fed funds would be somewhere around 0.5%, instead of the 2.25%-2.5% the Fed has currently targeted. In other words, setting interest one notch above zero in this reserve bank president’s view, would no longer even be stimulative. It would have no effect at all. So, the Fed needs to drop to the zero bound immediately in order to have any impact. Any drop to a rate higher than zero will provide no economic boost.

That means the Fed has only one bullet to fire. Williams sees a 0.5% Fed funds target as the new normal that is bound to linger a long time just to maintain the economy where it is. Rather than being alarmed by this massive revelation from one of the primary Fed movers and shakers, investors reacted as if saying, “Then recession be damned; free money forever is coming!” Stocks temporarily jolted upward as if nothing could be better news!

Williams’ comments certainly underscore my message about the Fed’s next more-extreme course of action in the video interview I posted earlier this week: “The Recession is Now.”

But, then, before the end of the day, the Fed scramble led to walk all of this back by saying Williams was only talking academically and not speaking about actual Fed policy. Uh huh. Sure. First, the New York Fed’s official press spokesperson contradicted its president because market’s got so excited over William’s statement that they immediately priced in an additional Fed rate cut, essentially demanding the Fed do what Williams just proclaimed.

Then another reserve bank president leaped in to say Williams didn’t really mean it. What? The Fed almost out of ammunition for fighting recessions? The Fed looked a bit like a three-ring circus of competing market jawboning acts. Plate spinners in each ring were running to the other rings to help keep the other guy’s plates in the air.

Don’t worry about it, though. These are just the people in charge of global money supply. To me, it looked like Williams let slip the truth that the Fed has only one bullet left with a recession squarely in site, and the others jumped in to bury his slip. Many in the media commented on the peculiarity of the moment.

For example, Bloomberg’s Cameron Crise summed up the fiasco this way:

For NY Fed president Williams to talk about the need to ease early and hard in the event of a downturn — and with the Fed about to embark on an easing campaign in less than two weeks — was about as clear as policy signals get. It’s no wonder that the market- implied probability of a 50 basis-point cut this month jumped by 30% after the comments hit the tape. For the institution to then turn around and wave away the remarks as an academic exercise was as astonishing as it was inappropriate.

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People flounder about like that when times get desperate, but this Fed floundering puts its credibility at risk. When you only have one bullet, you can’t afford a misfire. The world could lose confidence in the whether Fed officials know what they are doing. You don’t dare risk losing confidence in a confidence game.

On all other banking fronts around the world, JPMorgan expects twelve central banks to move into full monetary easing mode within the next two months. Does that sound recessionary? Gee, and that just takes us to the end of summer, still within the time frame I gave of a summer recession, and central banks are not known typically for changing back to easing until after a recession begins. They are also not known for ever telling you one has begun until it is half over and too completely obvious to deny.

Bond yields plummet

Falling government bond yields is also typically associated with recessions. Having risen the week before, Williams’ comment sent yields back over the edge:

Bank floors get slippery when wet

The drippage of recession started to form puddles in the bank basements this week as corporate reports came in.

JPMorgan cut its forward guidance for net interest income because of the impending Fed rate cuts. Wells did worse in its major areas of business. The first major banks began reporting, including Citigroup. The areas most to miss expectations in Q2 were income from trading and investment banking, but it is interest income that was projected in forward guidance to decline in the 3rd quarter under Fed easing.

These banks didn’t take a big hit in EPS or total revenue, slightly beating drastically lowered expectations on their rising top-line numbers. Revenue gains, especially at Wells Fargo, mostly came from (surprise!) increased fees. Still, the drop in investment banking and many revenue lines kept their stock values from rising more than a brief bump. JPM’s commercial bank revenue dropped 5%. In all, not terrible reports, just milquetoast, except for …

Goldman Sachs. Who would have figured that the bank that made bank by helping us all crash into the Great Recession would be doing so again? Who would figure that the bank that runs all the financial offices at the White House would do better than others? Call me cynical, but I feel like I see a pattern here. Goldman did much better than expectations, initially lifting the Dow 22 points to a new intraday record as other major indices fell on the second day of reporting season.

In all, so long as you’re good with morbidly obese banks being able to barely clear much lower bars of expectation, what’s not to love about these rotund high-jumpers? It’s like cheering the “Olympics for Fat Slobs” — more funny than fun:

While all four banks were able to surpass much lowered expectations for second-quarter performance, “the broad theme we’re seeing is slowing loan growth, somewhat muted trading revenues and shrinking margins,” said Stephen Biggar, director of financial institution research at Argus Research in an interview. “Lower manufacturing activity, lower housing activity and business-investment slowing are all manifesting themselves” in bank performance, he said.


Sounds like the perfect bankers’ world to me. No wonder stocks were barely phased by those early reports.

Deutsche Bank experienced a run of sorts, according to Bloomberg, as counterparties in DB’s failing investment banking business — especially hedge funds — started pulling out a billion dollars a day.

The Retail Apocalypse caught a breath

Sort of. Overall retail sales went up … but not in malls (brick and mortar). The number of stores scheduled to shutter their shops this year is 12,000, busting the doors off 2017’s record of 8,129. While there was a lot of talk early in the week about the statistical spurt in overall retail sales, they were actually only up 1.8% YoY, which was less than inflation, meaning they were actually down since price inflation alone should have lifted them 2.1%, given that retail sales, measured in dollars, are 100% affected by inflation.

All stock indices lost their lift

Stocks gained from an armistice of sorts in the trade war over the previous couple of weeks but even more from the Fed bending over backward after its last FOMC meeting to assure markets of future free (or almost free) money. This is as I said would happen: investors would get the rate cuts they were demanding but would face increased gravity as soon as the earnings season hit, which would make it hard for them to get any traction beyond temporary lift from the Fed. So far, right on track.

Here’s why stocks were rallying hard this year:

Yeah, that makes sense: net income for S&P 500 companies falling hard into an income recessionsince the beginning of the year and estimated to be worse in the second quarter than the first. That should support a rise in stocks, right? Why not in an economic world that is entirely make-believe? We’ve forgotten completely what investing in businesses was originally all about! This is Wonderland where everything is upside down. One invests in businesses in hopes that they will decline badly enough that the Fed will have to bail the economy out, and polite society all accepts that this is perfectly normal as they enjoin the Mad Hatter’s tea party. You see, it rains upward in Wonderland.

Corporate profits have declined back to where they were in 2014, but stocks are 60% higher! And, yet, you cannot convince stock-market bulls that things might be getting a tad overpriced. No euphoria there, right? They even think I’m foolish to think a market like that is rickety and is in risk of falling (like I was foolish to feel the same way last summer).

It’s an earnings recession in addition to being a manufacturing recession

After a declining first quarter in reported earnings, the consensus for second-quarter earnings now that they have been coming in is that the mid-and-large size stocks of the Russell 1000 will average a 2.6% decline in earnings per share. And that’s with stock buybackacks running strong. It should be even worse in small stocks. FactSet estimates a 3% decline for EPS in the S&P 500, and says this will be the second quarter of YoY declines. That means we’re in an earnings recession.

So, stock index gains have been coming in, regardless of declining revenues, declining earnings, falling transportation stocks and manufacturing stocks, only because of delusional hope about global trade settlements changing the economic lay of the land and the promise of practically free Fed funds. But the drip, drip, drip seemed to be catching up with them this week.

Citi strategists pointed out the earnings recession is likely to continue into 2020. I’ll just note that stock market behaved the same way in the run-up to the dot-com crash, rising quarter after quarter as earnings fell quarter after quarter. Of course, it will be different this time because today’s people are never as stupid as yesterday’s people!

With practically free Fed funds being just about the only hot air that is keeping the market aloft this month, the Fed dare not not come through with a rate cut at the end of the month, or the market will blow away like a house of cards in a windstorm.

That said, planetary retardation reached new lows. Financial reporting like the following by CNBC raises no concerns about stupidity or what’s in the water:

Investors will welcome the strong start to the earnings season, but the outlook for corporate profits remains bleak. Analysts expect S&P 500 earnings to have fallen by 3% in the second quarteraccording to FactSet data.


We now live in a day when a 3% decline is considered a strong start! No one sees a problem with the thinking there? Let’s hope whatever is in the water decreases human fertility as much as it does intelligence.

Trump announces trade war with China has “a long way to go”

Big surprise! And, so the airhead market that had bumped up a little on mediocre banking news tumbled on Trump trade news this week. Once again, Lucy snatched the football away from Charlie-Brown investors, and the market fell on its butt in a little trade tirade.

Yet another consecutive month of draining news for housing

US housing starts and permits both dropped further with permits hitting their lowest level in two years (significant given that the start of summer is when the most permits should be applied for). And this in spite of much lower mortgage rates.

The Fed’s most reliable recession indicator rises again

I pointed this out in a comment to my last article, but I’ll add it here so it is not missed:

The last time I reported on this particularly reliable recession indicator, it was just below 30. With another month now having passed, it is above the 30 level. As you can see, only one time in the last half century has this reliable indicator passed the 30 level when the US was not already in recession. Since the Fed says this is its most reliable indicator, you can see why Powell has promised rate cuts. By their best measure, we are probably already in recession.

The Leading Economic Index declines its most in almost four years

Following a completely dead April and May, the index took a dive. We haven’t seen a drop like this since the end of 2015 when the Fed first began raising interest rates.

The components that make up this index are … average weekly hours in manufacturing, average weekly initial claims for unemployment insurance, manufacturers’ new orders for consumer goods and materials and for non–defense capital goods, excluding aircrafts, the ISM® Index of New Orders, building permits for new private housing, stock prices of 500 common stocks, the Leading Credit Index™, interest rate spread on 10-year Treasury bonds less federal funds, and the average consumer expectations for business conditions.

Those are a lot of dripping leaks in the ceiling for just one week. It’s going to take a lot of pans on the New York Stock Exchange floor to keep up with them. It was such a great recession, we’re headed back for more.