Not buying it. Not one bit. I am talking about the subtle, sub rosa talk about how we might see a recession later this year.
How did this downbeat theory get on the table?
First I have always said that the bond market can never be ignored. Right now we have a Treasury yield curve that's flashing bright red because the 10-Year Treasury is remarkably similar to short rates. That usually means there is both a level of fear/flight quality to Treasurys as well as a lack of demand for money.
Second, we are seeing a worldwide slowdown that, in the end, has to engulf our country -- even though so far that's not been the case.
Third, the trade war with China is terrible for business and the president seems willing to put tariffs on any country that doesn't play fair even if it means risking a recession.
Fourth, the decline in commodities, particularly oil, makes students of the market wonder isn't that a signal that a recession is right around the corner?
Okay, let's take these one by one.
Normally I would be smack in the middle of the conventional wisdom camp when it comes to a yield curve inversion. But we are not in normal times. Nearly every central bank in the world is trying to keep interests rates low to spark growth. We tend to forget that money knows no barriers. Big institutional money managers from around the globe are always searching for a safe yield and the U.S. has the best, most liquid market in the world with dramatically higher rates that many countries with huge repositories of cash. Moreover, the dollar is incredibly strong, again a function that we have better growth than most countries around the world. So why not buy our bonds. I think these foreign buyers are responsible for a lot of the inversion. You have abdicated your responsibility if you are buying Japanese or German treasuries with dramatically lower yields to ours.
There is an undeniable worldwide slowdown but we have to recognize that so much of that slowdown is tied up in a dramatically slowing China, something that's happening because of the trade war in China as China is a huge consumer of product from around the globe, especially Europe. If President Xi accedes to what I think are very reasonable demands from our country -- is stealing intellectual property okay your in your book? -- we will have a pick-up in world growth.
In the meantime the German government seems totally averse to spending money to grow its economy. The Italian recession is more of a function of a totally dysfunctional government and ridiculous amount of interference into commerce by pretty much every authority in the country.
Plus Brexit keeps lingering as a drag on the growth of both the continent and Britain because it's created a level of uncertainty that is staggering.
Commodities? The Baltic Bulk freight numbers show a dramatic decline in Chinese imports that's not ending. However, I totally balk at the idea that the recent decline in oil has anything to do with a slowdown of world trade. I know the big hedge funds routinely short stocks when they see oil go down because of the possibility that a recession lurks. But they seem oblivious to the extraordinary oil flow out of the Permian, one that is depressing the world's prices. The Permian is the its own worst enemy.
Ultimately I am less perturbed than most because we are no longer fighting the Fed, which seemed woefully out of touch with the slowing economy. No longer. Fed Chief Jay Powell has figured it out. He's not going to tighten if all the data gets soft and we still have rising job growth.That alone is enough to keep the recession at bay.
I am worried about many things: one more government shutdown, a dramatic increase in tariffs, a dollar that can hurt our exports. But I am not going into the recession camp. We just don't have enough data to confirm that prospective decline. If you are selling based on a coming recession, I say re-think your doomsday thoughts. They aren't going to happen.