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The Recession And Bear Market Of 2016, In Two Charts

Good friend Michael Pollaro just sent a couple of charts that show the US economy heading for a brick wall. The first illustrates what happens when business sales (the green line) turn negative. In the previous two boom/bust cycles, when sales started falling the economy either tipped into recession shortly thereafter or (it was discovered in retrospect) was already well into a contraction.

Meanwhile, junk bond yields (the blue line) start rising before recession hits and then spike during the contraction, as falling sales hit the weakest borrowers hardest, causing a wave of defaults.

Now compare the previous two busts with today (far right of the chart). Business sales turned negative a year ago and are now heading south fast. Junk yields bottomed in 2014 and are now spiking. If history is a reliable guide, the US is either in recession right now or will be within a quarter or two.

There is one difference, however. Heading into both previous financial crises short-term interest rates (represented here by the Fed Funds rate, red line) were above 5%, giving the central bank some leeway to cut rates and thus stimulate new borrowing. But not this time. Instead, short-term rates are zero or thereabouts and the Fed has just begun a tightening cycle.

Business sales junk yields
Here’s Michael’s take:

What is Junk Market getting that broad equities are not getting? Oh yeah, the economy is decelerating and liquidity is being withdrawn. Basic starting point, learned from my years on the sell side: Pay attention to the junk market. That market is much smarter than the equity market.

The next chart shows the causal relationship between new factory orders and industrial production, i.e., the amount of real things being produced by US factories. Again, the trend is ominous.

Factory orders industrial production

Michael’s take:

Note how ISM New Orders leads Industrial Production. Janet, where is your accelerating economy? I guess in Health Care spending. My insurance is going up 10% next year and is up 50% in 6 years. How about yours?

No doubt autos are big part of what strength there is in manufacturing. I wonder what the recent rise in rates/credit spreads might do to auto sales, then auto production? Car Max numbers may be a hint?

Speaking of CarMax:

CarMax Hits the Brakes as Used-Car Comps and Net Income Fall

(Fool.com) – The auto industry has been extremely strong in 2015, with automakers on track to report what might be their best sales figures ever. Yet coming into its fiscal third-quarter report on Friday, used-car specialist CarMax (NYSE:KMX) hadn’t enjoyed the same success that the new-car segment had shown, and investors wondered whether the company’s high-growth phase might have come to an end. Even as new-car nationwide chain counterpart AutoNation (NYSE:AN) struggles with its own internal challenges, CarMax’s latest quarterly report showed signs of further deterioration in the used-car arena. Let’s look more closely at how CarMax did this quarter and what some shareholders are more nervous than ever about the company’s future prospects.

CarMax’s fiscal third-quarter results were unexpectedly weak. Revenue climbed just 4.1% to $3.54 billion, falling well short of the 6% growth rate that most investors had hoped to see from the car seller. Net income fell 1.4% to $128.2 million, and that worked out to earnings of $0.63 per share, which was a nickel per share less than the consensus forecast among investors.

Looking more closely at what CarMax said about the quarter, the slowdown that investors have seen during much of 2015 continued. Total used-vehicle unit sales rose 3.2%, but comparable-store sales of used cars fell 0.8%. The company said that store traffic fell during the quarter, and the improvement in getting sales completed wasn’t enough to offset that downward pressure. Wholesale vehicle sales were up nearly 7%, but CarMax’s tiny new-car sales figures fell by more than a fifth, showing some of the same trends that AutoNation has seen pop up recently.

Car sales have joined student loans as the credit bubble du jour and will have to pop soon, given the combination of record-high sales and soaring subprime lending. If used car sales are an indicator of the future of new car sales, then overall business sales and industrial production will “surprise analysts” by plunging next year.

12 thoughts on "The Recession And Bear Market Of 2016, In Two Charts"

  1. TRADERS !!!
    Never Sleep through another Pump or Dump Again! –
    Equities / Forex / Commodities / Crypto

    pricealarmclock.com

  2. John Rubino has been someone I’ve paid attention to since the late 1970’s as he impressed the late and great Lucia Ringler enough to make me certain to keep track of his laser beam watch on the slow destruction of a paper economy. His latest concerns echo my own and bring me to wonder just how exciting times will soon become. John Rubino has long been a stacker as am I. They can’t screw with the “stack” as long as they can’t get their hands on it.

  3. According to Jim Rickards, the U.S. has been in a depression since 08 using statistical methodologies in the 90s. Government manipulates CPI, employment and GDP numbers to paint false rosy economic pictures. Jim Willie says real GDP is in the Negative 4% range.

    1. Helps explain Fed’s zero-interest fixation for so many years. Can’t raise rates. Don’t make the zombie angry.

  4. The canaries in the coal mine are dropping like donors to Jeb Bush! We are already in recession, Pilgrims. The D.C. stats are so fudged that one has to question whether we have had positive GDP growth since the summer of 2007. Janet knows that by nudging rates higher into 2016, at least she will be giving the fastest growing segment of the aging U.S. population, Senior Savers, something for the use of their money, payments that are long overdue due to prior theft of same. Whether these Gray Foxes spend said income or not depends on how bad things get and how quick. I say they will buy Gold and Silver with their long-overdue interest income, and boycott the retail stores for sure; autos and homes are off the Xmas list also. Boycotting of Wall Street starts next week.

    1. Funny line Sage. Hey, just more money for donations to the Nixon library … or hookers and blow … or whatever. What can I say? Anything would be more useful and wholesome than donating to sociopathic politicians..

      Unfortunately, I’m not so sure about the part where seniors get something for the use of their money. The criminal enterprise masquerading as a commercial bank, Wells Fargo, IMMEDIATELY raise the prime rate when the Fed boosted rates. So, some reporter called them and asked if they were raising the rate paid on deposits too. You’d expect that to be pretty automatic, right?

      Their answer … wait for it … wait for it … would be … uh … no.

      So, the rate hike is good for the banks and savers get screwed.

      Hmmmm. Haven’t we seen this movie before? Like over and over for the last 100 years?

    2. HGF< Bull markets do not last forever, but while they are in progress, they make good opportunities for investors to make money. There are various tools that may be used for rising stock markets including long positions, i.e. buying a stock or other asset in anticipation that its price will rise, hence you would buy the stock at a low price and sell it for more than you paid.

      open your free account »

  5. No government ever eliminated the business cycle. Central planning never works. Just ask the much hated Russians. Yet somehow we think we’re just ‘above it all’.

    Nope.

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