US Recession Dead Ahead?

 
Hedgeye.com

Hedgeye.com

Shorter: Absolutely, without a doubt.

Longer: Absolutely, without a doubt. But when?

As a business advocate, my firm and network is on the front lines of the economy with Americas largest employer: small and mid-sized businesses (SMBs). Our clients represent most business categories throughout North America and what we are hearing can be summed up in one word: uncertainty.

But don’t take my word for it. The National Federation of Independent Business (NFIB) recently conducted a survey of small-business owners.)* It found them in an uneasy mood:

Sixty-three percent of small business owners think the country is on the wrong track. Sixty-seven percent rate the business climate fair or poor. And nearly two thirds are very concerned about the size and growth of the federal deficit. …

67 percent of small business owners think their taxes are too high.  Only six percent believe they don’t pay enough.  A large plurality of small business owners think the personal income tax inhibits growth compared to other federal taxes. And a plurality of small business owners think that Washington’s top economic priority should be getting the federal budget under control.

“Compare what’s important to small business owners with what official Washington is doing and there isn’t much overlap,” said [NFIB research director Holly] Wade.

*Note: NFIB was the plaintiff in the landmark case, NFIB v. Sebelius, in which the Supreme Court upheld Congress’s power to enact most of the provisions of Obamacare.

But the concerns are not held just by SMBs:

On The Macro Show earlier on Thursday, Hedgeye Financials analyst Josh Steiner joined CEO Keith McCullough who responded to a subscriber’s question during the interactive Q&A portion of the show regarding how far along the U.S. is in the current economic cycle.

“[The U.S. expansion] is long-in-the-tooth and slowing,” Keith said. “It’s already showing up in the cyclical and industrial sectors…You don’t have a consumption recession, yet, but the employment and consumption pieces [of the economy] are clearly rolling over as they do at the end of every cycle.”

To prove his point, Keith pulled up a thought-provoking slide from our macro team’s recent 73-page presentation of our top 3 Q4 2015 Macro Themes.

As you can see in the slide below, it shows the past 85 years of economic cycles. Our current expansion stands at 77-months. To put that in perspective, the median expansion typically lasts around 50-months.

Datasource: Bloomberg BEA HRM

Datasource: Bloomberg BEA HRM

In other words, we’re in the twilight of U.S. economic expansion. Hence, our new macro theme, #SuperLateCycle.

“What comes after the SuperLateCycle?” Keith asked rhetorically.

A recession.

Geologists talk this way about the San Andreas fault. The Big One is long overdue.

The Federal Reserve delayed raising interest rates due to concern over US deflationary indicators and slowing economies worldwide, specifically China, the emerging markets, and Europe. This means they are aware of dark clouds. Free money may be good for equities, but not the overall economy.

“Europe is almost certainly heading into recession with “unequivocally red” data out of Germany”.

And then there’s this: Leading statistical indicators are pointing to some deeply concerning numbers. These suggest that Black Swan risks have risen to the highest level ever. If you reread that last sentence, it’s enough to ensure your generators and freeze dried food stocks are current. As John Melloy of CNBC reports,

“Players are pricing in the highest chance of an outlying black swan event in the next 30 days,” wrote Roberto Friedlander, head of equity trading at Brean Capital. …

There’s tremendous uncertainty as to whether the Federal Reserve will raise interest rates this year or not and whether this a rate hike will scuttle the economy. The central bank will decide on this at its two-day meeting beginning Oct. 27, within the 30-day window investors are fearing a market collapse.

On the geopolitical front, traders are growing increasingly worried about Russia’s emerging presence in the Middle East.

And, of course, October is known for market crashes like the “black Monday” collapse 28 years ago this month. But that’s true every year.

Politicians are self serving animals, some more than others. We can no longer expect to get raw economic data from any White House, Congress or even so-called non-partisan government analysts such as the CBO. Numbers are cooked for political expediency, primarily in the way reports and survey questions are asked. If not, the CBO would have shown the true impact of Obamacare costs when the act was debated in 2009, which would have looked more like a hockey stick. But, hey “Let’s just take out that pesky Medicare cost explosion and all is good.”

So what can we do? Hope for a rate increase.

My discussions with SMB clients revolve around restructuring, debt mediation, and capital acquisition. Cash is king. Credit, while very inexpensive, is still not easy to qualify. Banks are less eager to lend when the risk-to-reward ratio benefits the borrower. If the Fed finally raises interest rates, this could actually benefit small businesses, because the banks will be more inclined to lend. Borrowers will borrow, which could be a boon for small business expansion, hiring, and start-ups. Banks would lend and make money. Win-win.

So why doesn’t the Fed just let off the ZIRP pedal? Because there’s a risk to raising rates. If not done carefully, it may cause a teetering economy to fall into a tailspin. Fed Chair Janet Yellen is not a politician, but she’s surrounded by them. No politician, especially this President, wants a recession on his watch. Therefore, consistent with the rest of this its policies, this Administration is figuring they’ll let the next folks deal with the repercussions of zero-interest-rate policy, quantitative easing, and the next recession.

The problem with this economic steering is that most economies are living, breathing entities. They contract and expand naturally. When fiscal policy aims to manipulate economic natural flow, we get bubbles that cause systemic problems. We saw that in 2008. Unfortunately, nothing much has changed.

Whether it happens now or after the election, it will most certainly happen. You don’t have to be an economist to know that no matter how one tilts the table, water always finds its own level.

Published in Domestic Policy, Economics, General
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  1. Judge Mental Member
    Judge Mental
    @JudgeMental

    There is also reluctance to raise rates due to our gigantic federal debt.  At a historically average rate, we would be in a debt crisis that would spiral quickly out of control.

    But I could seriously go for Gray’s Papaya right now.

    • #1
  2. David Sussman Member
    David Sussman
    @DaveSussman

    Judge Mental:There is also reluctance to raise rates due to our gigantic federal debt. At a historically average rate, we would be in a debt crisis that would spiral quickly out of control.

    But I could seriously go for Gray’s Papaya right now.

    Very good point JM. Cost of debt would explode. The goal by this admin was (after lowering sea levels) reduce that sword of damocles. Instead they have doubled it.

    BTW I was in NYC over the Summer and walked by GP’s. It had a “B” rating, which for NY cuisine is a no go.

    • #2
  3. Judge Mental Member
    Judge Mental
    @JudgeMental

    David Sussman: BTW I was in NYC over the Summer and walked by GP’s. It had a “B” rating, which for NY cuisine is a no go.

    “B”?  That’s just crazy talk.

    • #3
  4. Vance Richards Inactive
    Vance Richards
    @VanceRichards

    Judge Mental:

    David Sussman: BTW I was in NYC over the Summer and walked by GP’s. It had a “B” rating, which for NY cuisine is a no go.

    “B”? That’s just crazy talk.

    The hotdogs are great, but stay away from the papaya (don’t let the name fool you).

    Anyway, lots of good points in the post but the quote I, unfortunately, have to agree with is “The ‘Big One’ is long overdue.” With all of the different issues being discussed in the debates today I think “How are you going to fix the economy?” will be the most important question for candidates a year from now.

    • #4
  5. David Sussman Member
    David Sussman
    @DaveSussman

    Vance Richards:

    Judge Mental:

    David Sussman: BTW I was in NYC over the Summer and walked by GP’s. It had a “B” rating, which for NY cuisine is a no go.

    “B”? That’s just crazy talk.

    The hotdogs are great, but stay away from the papaya (don’t let the name fool you).

    Anyway, lots of good points in the post but the quote I, unfortunately, have to agree with is “The ‘Big One’ is long overdue.” With all of the different issues being discussed in the debates today I think “How are you going to fix the economy?” will be the most important question for candidates a year from now.

    Both GOP and the Dem debate didn’t discuss this at any minor level. I understand why the Dems wont touch it beside their “Bush’s recession” talk but why wont the GOP educate people on the thin ice America is on?

    • #5
  6. RightAngles Member
    RightAngles
    @RightAngles

    David Sussman:

    Vance Richards:

    Anyway, lots of good points in the post but the quote I, unfortunately, have to agree with is “The ‘Big One’ is long overdue.” With all of the different issues being discussed in the debates today I think “How are you going to fix the economy?” will be the most important question for candidates a year from now.

    Both GOP and the Dem debate didn’t discuss this at any minor level. I understand why the Dems wont touch it beside their “Bush’s recession” talk but why wont the GOP educate people on the thin ice America is on?

    As I recall, didn’t Paul Ryan try in 2012? Anyway, we have to do a much better job of counteracting the stupidity coming from the left. Have you seen the Bernie Sanders memes going around Facebook? They “explain” why the Republicans are lying when they say his programs will cost too much. And people would rather believe that. We’re turning into a nation of children.

    • #6
  7. David Sussman Member
    David Sussman
    @DaveSussman

    RightAngles:

    David Sussman:

    Vance Richards:

    Anyway, lots of good points in the post but the quote I, unfortunately, have to agree with is “The ‘Big One’ is long overdue.” With all of the different issues being discussed in the debates today I think “How are you going to fix the economy?” will be the most important question for candidates a year from now.

    Both GOP and the Dem debate didn’t discuss this at any minor level. I understand why the Dems wont touch it beside their “Bush’s recession” talk but why wont the GOP educate people on the thin ice America is on?

    As I recall, didn’t Paul Ryan try in 2012? Anyway, we have to do a much better job of counteracting the stupidity coming from the left. Have you seen the Bernie Sanders memes going around Facebook? They “explain” why the Republicans are lying when they say his programs will cost too much. And people would rather believe that. We’re turning into a nation of children.

    Ross Perot was the best at that. I wasn’t a fan but he was definitely the first ‘splainer campaigner’. (I’m gonna copyright that stat).

    No I haven’t seen them. Share?

    • #7
  8. 10 cents Member
    10 cents
    @

    test

    • #8
  9. Ryan M Inactive
    Ryan M
    @RyanM

    A recession under the next republican? Of course. Hillary said it during the debate: “our economy thrives when there is a democrat in the White House.”

    • #9
  10. David Sussman Member
    David Sussman
    @DaveSussman

    10 cents:test

    Ok, can you test the links now? Thanks Dime.

    • #10
  11. David Sussman Member
    David Sussman
    @DaveSussman

    Ryan M:A recession under the next republican? Of course. Hillary said it during the debate: “our economy thrives when there is a democrat in the White House.”

    It’s their plan. They know it’s coming but are rearranging deck chairs long enough before we sink.

    • #11
  12. Annefy Member
    Annefy
    @Annefy

    Any advice for us peons out there with 401ks who aren’t financial experts? I was literally paralyzed after the crash; did nothing and saw most of it come back.

    And my track record proves that any action I would have taken would have been ill-advised.

    So … what are you all doing to prepare? How are you rearranging your own deck chairs?

    • #12
  13. Concretevol Thatcher
    Concretevol
    @Concretevol

    Hey, thanks for the depressing read to go with my morning coffee! Of course how can politicians talk about the economy when we must deal with the impending threat of Climate Change!

    • #13
  14. Judge Mental Member
    Judge Mental
    @JudgeMental

    David Sussman:

    Ryan M:A recession under the next republican? Of course. Hillary said it during the debate: “our economy thrives when there is a democrat in the White House.”

    It’s their plan. They know it’s coming but are rearranging deck chairs long enough before we sink.

    They need to push back on this.  Hillary talks about it being more likely to have recession with R’s, when the ‘Bush’ recession clearly started while her husband was still president.  I see this as just one more opportunity to prove she is a pathological liar.

    • #14
  15. BrentB67 Inactive
    BrentB67
    @BrentB67

    Great article from the front lines. Well done David.

    From the macro perspective we are well positioned for the next recession.

    -The Inventory/Sales ratios continue to climb pressuring factory and durable goods orders.

    -ISM data is declining and on the border @ 50.

    -All regional Fed indexes I track are negative.

    Regarding interest rates, the spread between treasuries and their TIPs at same maturities are well below 2 and some at early 2008 levels. Raising short term rates introduces risk of inverting the yield curve and crushing the banks.

    Thanks for offering the first hand data. Huge value.

    • #15
  16. BrentB67 Inactive
    BrentB67
    @BrentB67

    Judge Mental:There is also reluctance to raise rates due to our gigantic federal debt. At a historically average rate, we would be in a debt crisis that would spiral quickly out of control.

    But I could seriously go for Gray’s Papaya right now.

    Our term structure is so short it would hurt tremendously. Good point.

    • #16
  17. BrentB67 Inactive
    BrentB67
    @BrentB67

    David Sussman:

    Vance Richards:

    Judge Mental:

    David Sussman: BTW I was in NYC over the Summer and walked by GP’s. It had a “B” rating, which for NY cuisine is a no go.

    “B”? That’s just crazy talk.

    The hotdogs are great, but stay away from the papaya (don’t let the name fool you).

    Anyway, lots of good points in the post but the quote I, unfortunately, have to agree with is “The ‘Big One’ is long overdue.” With all of the different issues being discussed in the debates today I think “How are you going to fix the economy?” will be the most important question for candidates a year from now.

    Both GOP and the Dem debate didn’t discuss this at any minor level. I understand why the Dems wont touch it beside their “Bush’s recession” talk but why wont the GOP educate people on the thin ice America is on?

    Because education would embolden the masses toward fiscal responsibility. That seriously crimps the intentions of the better managers of the welfare state.

    • #17
  18. Judge Mental Member
    Judge Mental
    @JudgeMental

    BrentB67:

    Judge Mental:There is also reluctance to raise rates due to our gigantic federal debt. At a historically average rate, we would be in a debt crisis that would spiral quickly out of control.

    But I could seriously go for Gray’s Papaya right now.

    Our term structure is so short it would hurt tremendously. Good point.

    Kevin D. Williamson has a post up at NR right now that covers this exact point.  He favors bankruptcy.

    And by the way, I never tried the papaya.  But the dogs are great.

    • #18
  19. Kozak Member
    Kozak
    @Kozak

    Judge Mental:There is also reluctance to raise rates due to our gigantic federal debt. At a historically average rate, we would be in a debt crisis that would spiral quickly out of control.

    But I could seriously go for Gray’s Papaya right now.

    On the other hand those who are saving money are getting raped by the fed. In 1982 a 1 year T bill returned 11%.

    • #19
  20. Judge Mental Member
    Judge Mental
    @JudgeMental

    Kozak:

    Judge Mental:There is also reluctance to raise rates due to our gigantic federal debt. At a historically average rate, we would be in a debt crisis that would spiral quickly out of control.

    But I could seriously go for Gray’s Papaya right now.

    On the other hand those who are saving money are getting raped by the fed. In 1982 a 1 year T bill returned 11%.

    Tell me about it.  I just retired… my assets include gold, real estate and cash equivalents.  The gold represents the savings from the first half of my career.  Every dollar of the rest I earned, since I got essentially zero interest for the second half.  The main question has been how to avoid losing ground.

    • #20
  21. John Penfold Member
    John Penfold
    @IWalton

    While we can’t know when a recession will begin if we just continue the current policy of sustainable stagnation, we can expect  that if Republicans stimulate the economy with regulatory and tax reform there will be strong growth of both large and small business and new entrepreneurial activity.  This will expand credit which will balloon the money supply turning the 500% increase in the money base into a several thousand percent increase in money.   The Fed will be compelled to tighten and interest rates will rise.   This will lead to a number of problems if our new president and his party panic, which the media and Democrats will try to induce.  However, if we manage to elect a person with back bone who cuts spending and leads so that the world believes he’s serious  we’ll pull out fine and enjoy strong growth.   The greatest threat is lack of backbone and the wrong advisors.   If he hires Keynesians or is over sensitive to media storms it will be a disaster for the Republicans.

    • #21
  22. Fricosis Guy Listener
    Fricosis Guy
    @FricosisGuy

    For our business, conditions are bearable, but no more. It’s a real mixed bag out there.

    In general, sales cycles are longer, deal sizes are smaller, and organizations are canceling more scheduled engagements. However, we’ve been able to build up our pipeline and expand our footprint in key accounts.

    Finally, we had a client or two who are in formerly-favored industries. It was easy money when subsidies made them flush, slow/no pay when the Uncle Sam spigot ran out…and the market turned on them.

    • #22
  23. David Sussman Member
    David Sussman
    @DaveSussman

    Annefy:Any advice for us peons out there with 401ks who aren’t financial experts? I was literally paralyzed after the crash; did nothing and saw most of it come back.

    And my track record proves that any action I would have taken would have been ill-advised.

    So … what are you all doing to prepare? How are you rearranging your own deck chairs?

    I’m not a wealth advisor… if you need one, one of my best friends is right down the road from you and has a very happy stable of clients.

    • #23
  24. David Sussman Member
    David Sussman
    @DaveSussman

    BrentB67:Great article from the front lines. Well done David.

    From the macro perspective we are well positioned for the next recession.

    -The Inventory/Sales ratios continue to climb pressuring factory and durable goods orders.

    -ISM data is declining and on the border @ 50.

    -All regional Fed indexes I track are negative.

    Regarding interest rates, the spread between treasuries and their TIPs at same maturities are well below 2 and some at early 2008 levels. Raising short term rates introduces risk of inverting the yield curve and crushing the banks.

    Thanks for offering the first hand data. Huge value.

    Thanks Brent. I guess it’s now a good time to buy commodities?

    • #24
  25. David Sussman Member
    David Sussman
    @DaveSussman

    Kozak:

    Judge Mental:There is also reluctance to raise rates due to our gigantic federal debt. At a historically average rate, we would be in a debt crisis that would spiral quickly out of control.

    But I could seriously go for Gray’s Papaya right now.

    On the other hand those who are saving money are getting raped by the fed. In 1982 a 1 year T bill returned 11%.

    It’s an important point which is underscored by the volatility in the equities markets. When older fixed income earners cannot earn money on savings they put it the only place you can earn a return and for the last several years that’s been stocks. Problem is, lambs to the slaughter if/when things get ugly. Younger investors have time to recoup, but seniors could find themselves greeting Walmart customers.

    A rate increase may shake out the more conservative investors as they can once again ensure returns on CD’s, treasuries, etc. Of course that could lower the equities markets to a more realistic level which is a good thing from a macro point of view.

    • #25
  26. David Sussman Member
    David Sussman
    @DaveSussman

    John Penfold:While we can’t know when a recession will begin if we just continue the current policy of sustainable stagnation, we can expect that if Republicans stimulate the economy with regulatory and tax reform there will be strong growth of both large and small business and new entrepreneurial activity. This will expand credit which will balloon the money supply turning the 500% increase in the money base into a several thousand percent increase in money. The Fed will be compelled to tighten and interest rates will rise. This will lead to a number of problems if our new president and his party panic, which the media and Democrats will try to induce. However, if we manage to elect a person with back bone who cuts spending and leads so that the world believes he’s serious we’ll pull out fine and enjoy strong growth. The greatest threat is lack of backbone and the wrong advisors. If he hires Keynesians or is over sensitive to media storms it will be a disaster for the Republicans.

    Agreed John. To us this is common sense… you are describing another Reagan. I don’t see one in the current batch… except possibly Carly. She gets it.

    • #26
  27. David Sussman Member
    David Sussman
    @DaveSussman

    Fricosis Guy:For our business, conditions are bearable, but no more. It’s a real mixed bag out there.

    In general, sales cycles are longer, deal sizes are smaller, and organizations are canceling more scheduled engagements. However, we’ve been able to build up our pipeline and expand our footprint in key accounts.

    Finally, we had a client or two who are in formerly-favored industries. It was easy money when subsidies made them flush, slow/no pay when the Uncle Sam spigot ran out…and the market turned on them.

    FG yup… hearing this a lot these day. “Doing more with less” is ubiquitous. If organizations can maximize their income from existing accounts and make up for lost revenue streams, that’s obviously a good thing and necessary. The danger of course is ‘eggs in one basket’. We have several clients that had a reduced number of accounts but maintained their balance sheet by increasing efficiencies, cutting COGS and improving client average revenue. In some of these cases they were fine until those fewer clients started renegotiating contracts or they themselves went bust.

    If you ever watched the show Mad Men, their advertising firm did very well with a 70% of their business coming from their biggest client Lucky Strike… until Lucky Strike moved to another agency. #Diversification.

    • #27
  28. RightAngles Member
    RightAngles
    @RightAngles

    David Sussman:

    . The danger of course is ‘eggs in one basket’ …
    If you ever watched the show Mad Men, their advertising firm did very well with a 70% of their business coming from their biggest client Lucky Strike… until Lucky Strike moved to another agency. #Diversification.

    My father was in advertising, and this is so true. I knew of one ad agency in Chicago who did have many clients, but they had concentrated an entire division with a lot of employees on one cigarette brand. Practically overnight, the whole division closed and a lot of people got fired.

    • #28
  29. RightAngles Member
    RightAngles
    @RightAngles

    David Sussman:

    RightAngles:

    … we have to do a much better job of counteracting the stupidity coming from the left. Have you seen the Bernie Sanders memes going around Facebook?

    No I haven’t seen them. Share?

    Sorry, I missed this- here are a few from my Facebook feed. The reason I don’t go on there anymore (sorry to make you feel ill):

    fb commFB

    bernie berni health berni soc

    • #29
  30. David Sussman Member
    David Sussman
    @DaveSussman

    RA: Ugh… i just threw up a little.

    what made you dig up this post?

    pm me your fb/twitter info if you would like to connect. I am not very active on fb, but keep need to start following more like minded people.

    • #30
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