Here at Empire we have been tracking many domestic and global indicators that we feel affect the odds of a recession, many of these are unknown to the general public and if they know about them they don’t fully understand how this all fits together. We must go beyond the traditional GDP numbers, PE ratios, market cap and unemployment numbers which all are looking ok right now, and look deeper. The topic on everyone’s mind is if we will see this 2020 recession or not, lets dive into some data and share our list of hidden recession indicators.
Yield Curve Inversion
This is one recession indicator you have seen mentioned all over the media, especially this last week as MSM continues the narrative that the sky is falling down. Since the first 3mo/10 yr inversion back in June, we saw the 2yr cross the 10yr earlier in August, and since then the spread between those has increased, meaning its spread between the 3mo/10yr and 2yr/10yr has gotten worse. This is seen as negative because the longer term treasuries should always pay more than the short term, when these cross it historically has led to recession X amount of months/years later.
Here is 3mo/10yr that first crossed in June 2019…
Here is the 2yr/10yr that recently happened….
Since then here is how much worse its gotten for both…
The 2yr/10yr spread is much more significant in terms of indicators vs the 3mo/10yr.
According to Credit Suisse, 22 months after this occurs there is recession- this is from data going back to 1978.
- The last five 2-10 inversions have eventually led to recessions.
- A recession occurs, on average, 22 months following a 2-10 inversion.
- The S&P 500 is up, on average, 12% one year after a 2-10 inversion.
- It’s not until about 18 months after an inversion when the stock market usually turns and posts negative returns.
The 10-year Treasury note is so important because banks tend to use that when setting mortgage rates and other lending vehicles. Currently the search term volume on Google Trends is hitting breakout volume in many states (DC, NYC, Massachusetts, Connecticut, North Dakota) with other breakout search terms being inverted yield curve 2019, yield curve inversion recession, current yield curve 2019 and what is a yield curve inversion.
Now if you were to just look at this indicator by itself, it would give you a pretty bleak picture of the future and what it holds, and this indicator by itself doesn’t automatically equal a recession. Recently Paul Hickey of Bespoke and JP Morgans Fund manager Gabriela Santos took to CNBC to make that message loud and clear as well which is good because we want to encourage people to look and get better at research, not just blindly believe or take one piece as the whole.
Credit Suisse actually created what it calls a “recession dashboard” and here is how we are stacking up so far against every single recession since 1973.
The 1% Are Saving- Not Spending
This is one of those hidden indicators that I have been mentioning a lot in recent video and email but most people aren’t hearing about. This actually start back earlier this year when I reported on the slow down of Mega mansion sales in the Hollywood hills, currently there is over 100 $20M + homes for sale on the MLS and 30 of those could be considered custom spec homes, not to mention the current estimated 50 new spec homes in development. Its not just the hollywood hills seeing a piling up of inventory, according to Redfin, sales of homes priced at $1.5M or more fell 5% in Q2. Not to mention there is a 3-year supply of luxury listings in Aspen, Colorado and the Hamptons in New York.
Recently there was the annual Pebble Beach car auctions which is usually massive! This is the car show that fetches Million dollar price tags for exotic and rare cars all day long, but this year not even half the million dollar and over cars sold, while the $75k and under cars all did very well, some fetches multiples higher than they deserved. This combined with art sales being down for first 2 quarters of 2019 for the first time in years signal that the top 1% are saving not spending. Sales at Sotherby’s dropped 10% and Christie’s auction sales were down 22% from just a year ago.
I reported earlier this week on Warren Buffett sitting on $122B of cash, other household names like Robert Kiyosaki and Gary V have also made mention that they are sitting on a lot of cash waiting to see what sort of fallout happens.
Retailers are feeling the pain as well, Barneys recently filed for bankruptcy and Nordstrom posting three consecutive quarterly declines in revenue. Meanwhile Walmart and Target which cater more towards the everyday Joe are up in traffic and growth.
Now all of this is still ok because it appears the slack is being picked up by the middle earners, all it would take though for that to slip is for unemployment numbers to go up and GDP slip, that would affect confidence in that spending class.
USD Reserve Status At Risk
I tell you what, 5 years ago talking about the USD Reserve Status at Risk would of been conspiracy talk, but now there is more and more evidence mounting each day that for starters there is a serious riff between the White House and the FED, and that they are seeking alternates to global reserve currency currently. Recently things got so bad between the FED and White House that Jerome Powell ordered all FED chairs to cancel any public appearances and speaking engagements and not to speak with the press until further notice.
Now, most people think the FED is part of the government or that we should be nice to them or that we need them in some way, and that is the furthest thing from the truth, If this is a new topic for you I would suggest to give a read or listen to Nomi Prins book “All the Presidents Bankers” for an amazing introduction to how the FED was created by the heads of the richest 13 families back in 1913 on Jekyll Island. Then once you done with that, a great follow up would be Collusion by same author.
1. Mark Carney’s comments at Jackson Hole Central Bankers Summit- He stated that interest rates and inflation has been too low in the US and that the USD would be stripped of its reserve currency status and given to another currency and went on to talk about the SDR, the Libra crypto project from Facebook and even the RMB. I cover this more in depth in my email: Central Banks Bailing On USD?
2. Silk Road- The silk road is the old trade routes from Asia throughout Europe and the middle east, most think this is harmless but in fact China is working on new agreements every single day, bringing on Russia and Italy recently and the stronger they make those trade routes, the closer they get to being a bigger force then they are now. Not to mention the PBOC is ready with its digital currency and already testing it.
3. BRICS attack on USD- Recently former Brazilian leader Luis Inacio Lula da Silva re-emerged for the first time after more than 500 days in jail and sent a clear message to the world that Brazil should be getting closer to China through the BRICS (Brazil, Russia, India, China, South Africa association) with the main intention to build up strength enough to break away from the USD.
4. BIS & IMF Support for Central Banks Digital Currency- The BIS has come out and openly supported central banks creating a digital currency pegged to fiat, and the IMF has been talking about the dual-currency system all this year, seeding the conversation in the public consciousness.
So the big question is, did Trump somehow find out about this game plan the bankers had and is trying to stop it by breaking away from the FED or is this just optics? I will say that senators now are starting to call into question the FEDs independence which I think is amazing!
US & China Trade Wars
The not so hidden and clearly obvious trade war that is going on right now is a major recession indicator in most analysts book, because not only has it already costs electronics companies $10B so far, its gonna get worse starting today! Today Sept. 1st Trump has issued 15% tariffs on another $112B of Chinese goods, in which China minutes later retaliated with with an additional 5% and 10% tariffs on roughly $75B worth of US goods, bringing total to 5.078 US products being affected by tariffs.
The big difference this round is its going to effect everyday grocery items and household staples (consumer goods including clothing, shoes, electronics) which will cost the average household $1,000 a year- JP Morgan estimates. Trump told reports Sunday morning they are still talking to China and the meetings for September haven’t changed. The issue with the trade war is its effect on the S&P amongst obviously the American consumer, there have been 22 trading sessions affected by China trade talks/tweets in August with the Index’s worst day being on Aug. 5th so far.
Morgan Stanley says that the global economy would fall into recession if the US raises tariffs on all imports from China to 25% and Beijing follows suit. “Some Wall Street strategists are even starting to warn their clients about elevated recession risks and market dangers”- duh thought this was their job!?
The tweets from the President demanding American companies to “immediately start looking for an alternative to China” and asked “who is our bigger enemy, Jay Powell or Chairman Xi?” sent the Dow down 623 points.
Here is a quick look at S&P…
The average American isn’t really going to understand what is going on with all of this and will of course blame the lowest common denominator which is this case is Trump- add it to the list I suppose. There is a much bigger game being played here and it requires patience and a little short term sacrifice which most people aren’t willing to do, thats why its a good thing, average Joe isn’t running the country. See we have never had a president like this who was meant to be the bull dog and go get us our money and make better deals, this doesn’t mean you have to like him at all, but if you set aside your personal bias, can’t help but respect the job and size of balls he has and that is The Art Of The Deal!
Other Recession Indicators
Besides the three recession indicators I shared above, there are others that maybe don’t need a full section that I have grouped together here for you, don’t think that just because I put them all together it means they aren’t as important or somehow weaker indicators than the others, its not- those were the ones I wanted to focus on the most in this piece.
Insider selling is classified as any C level staff selling off their stocks, which for the 5th month in a row now has been $10B, or $600M per day, this if you couldn’t already tell is a recession indicator, whenever we see large selling like this its considered bad. On top of this we did have some news on Apple CEO Tim Cook selling 265,160 shares of APPL which he got a total of 560,000 Apple shares on August 24th and decided to sell off that small portion. He still holds over 2M shares in total. Mark Zuckerberg recently sold off 500,000 FB shares, again he has a total of over 3M shares so this isn’t very much at all and in fact most would agree with me this isn’t really news worthy.
Right now we are seeing consistent negative treasury rates everywhere, almost every G country but the US is currently in negative treasuries!
Yes who would’ve thought that the recreational-vehicle industry would be an early recession indicator but it turns out it is. This is looked at by economists as a first sign of economic anxiety. Shipments of recreational vehicles to dealers has fallen about 20% so far this year, after a 4% drop last year according to RVIA. Multiyear drops in shipments have preceded the last three recessions.
“The RV industry is better at calling recessions than economists are,” said Michael Hicks, an economist at Ball State University, in Muncie, Ind. Hicks says softening consumer demand for RVs coupled with rising vehicle prices due to tariffs suggests the economy is either in a recession or soon headed for one.
About 65% of recreational vehicles in the US are made in Elkhart Indiana, so all you really gotta do is keep an eye on that and you will have a pretty complete pulse on that whole market.