It is amusing how the most pertinent question circling most sell-side research pieces on Wednesday is whether a recession will come to pass in the U.S., and if so, when it is expected. These musings sound oddly similar to when children in the back seat of the car keep pestering their parents "are we there yet, are we there yet?"
The fact is we are currently in the midst of one. Indicators demonstrate this: inverted yield curve is extended for more than 6 months, dollar market liquidity operations are showing significant stress -- as seen by elevated repo rates -- and global Purchasing Manufacturing indices are showing numbers below 50 (signs of contraction). But this still seems to be an unanswered question in many minds.
It is only because the darling S&P 500 is trading close to all-time highs near 3000. When will investors learn, the market is NOT the economy? And 2008 was case in point -- even Fed members were stating "we see no signs of a recession," a month before Lehman Brothers collapsed. Now that is just visionary thinking to a whole new level.
There is no doubt the economic data has been slowing, but it continues to be shrugged off because the "Fed shall save us all" mantra keeps being chanted in the background.
Let's look at the facts. Yesterday we got a horrendous splurge of September Manufacturing PMI surveys from South Korea, Indonesia, South Africa, Italy and the UK all printing below 50 -- confirming global weakness. U.S. Manufacturing PMI printed 51.1 vs. 51 expected -- a slight beat, which got everyone thinking all is certainly well in the U.S. But they were entirely ignoring the ISM that printed at 47.8 vs expectations of 50 and a reading of 49.1 in August -- the weakest print since June 2009 with new orders lowest since March 2009. This is the second straight reading below 50. If that is not a confirmation of a slowdown, I'm not sure what is.
Spare capacity is starting build up and will force companies to start curb hiring as they become cautious about their cost and spending. We cannot see this in the data now, but soon the weakness will start to filter into the key manufacturing "employment" data over the next few months. Things do not happen immediately, the warning signs are seen in the first three months, but by the time actual decisions take place, it shows up in the data six to nine months later.
But one asks, why has the U.S. Manufacturing data or general Economic Surprise Index been so resilient in the third quarter of 2019 towards end of summer? There is often a surge in government spending as agencies scramble to spend all the money they have before the September 30 deadline (fiscal year end) so that they can receive the same budgets for the following year. Of course they cannot show unused budget allocations. This may mask the "true" state of the U.S. economy.
Chinese exports to the United States are down 9.4% year over year through August, as the Trade War is clearly having an impact on the Chinese Manufacturing sector, which has been contracting for the last five months. August Industrial Production rose just 4.4% on a year over year basis -- the slowest monthly growth rate in over 17 years.
This has affected economies of Singapore and Australia too, as the former's economy grew by just 0.1% year over year in the second quarter and latter's growth slowed down over the past 4 quarters. The same thing is evident in India and Hong Kong. It is quite clear that the global trending rate of growth has been slowing down, and if things stay as is, it will get even worse.
What can save the world? The same cure that is used each time: The U.S. Fed agreeing to start Quantitative Easing (QE4) or increasing the size of their balance sheet to pump yet more money in the economy, as it knows no other way than to inflate the problem even more. This is yet to be seen at the end of October when the Fed deliberates its October FOMC meeting.
China is in pain, there is no doubt. But if anyone knows anything about China or understands its true culture and mindset, they will know that they will never appear weak nor be bullied -- and given the large size of their state-controlled economy, they have far more tools to delude the public of their own asset bubble. Going into the October 18 round of talks with U.S., as they consider banning U.S. flows to China, that is not going to make the talks any more amicable. China knows that it is only a matter of time before the U.S. economy too shall converge with rest of the world in slowing. It is a matter of when, not if.
The precious stock market and economy are so important for Trump going into his re-election campaign next year that he can ill afford to show unemployment gains and crashing markets. China will do what it takes to wait it out, as they are in it for the long haul. Trump will fumble around and probably be forced to come to some sort of deal closer to election time to show how great he is -- "best president ever."
If it just took the stock market to show who should preside, why not enlist a Goldman Sachs banker at the helm of the U.S. economy? Why bother with the Primary debates and elections?
The Fed wants any excuse to embark on QE4. But dare I say it? It probably cannot unless the market crashes like it did in Q4 2018. The S&P 500 has been trying to break above 3000 to new highs, but has failed around four times. Bulls are running out of steam. Buybacks are getting close to finishing as companies go into blackout period. Oil has now broken below $60/bbl Brent, erasing all of the Saudi attack gains. Well done for the fabulous sell side oil research analysts that called oil going to $75 or even $100 after it rallied 21% that day.
No one bothers doing their homework and taking a firm view, they just keeps chasing headlines. Copper has been in a bear market all year. Today it is trading lower than even Q4 2018 levels, signalling growth is weak and something is not right.
October is a tricky month. Stocks are still too expensive for what lies ahead. People that are hoping the Fed will save the day need to realize that even in past downturns, by the time they started anything, things had already gotten out of hand. After an unwind of some consensual trades at the end of Q3 2019, Gold is looking terribly cheap $ (GLD) and commodity-based oil equities and miners still are not cheap. Even technology will not be spared, especially names geared towards China, like Alibaba $ (BABA) .