First, a report from CNBC:
‘Jobs in the US grew by 177,000 in June, the report said, while economists polled by Thomson Reuters expected a gain of 190,000. June also marked the fourth straight month of jobs growth below 200,000. Jobs growth for the previous month, however, was revised up by 11,000 to 189,000.’
Meanwhile, February retail sales suggest the same thing: that the tax cut led to a brief and ill-advised fling with spending. But it’s over.
Retail sales began a sharp drop in December 2018 and now, adjusted for inflation, are back to their level of December 2017 — before the tax cut and consumers met.
Retail sales are good indicators of how much money consumers have to spend. And the numbers are raw — not seasonally or otherwise ‘adjusted.’
But the daily data, even combined with our hunches, is unreliable.
Every so often, over the last five years, we’ve been convinced that a crash was imminent. So, we raised our black-and-blue Crash Alert flag over our Baltimore headquarters.
But when the crash didn’t come, we had to take it down again, slightly embarrassed. And the flag was getting so much wear and tear, we decided to try a different, more scientific approach. So, we turned to our research department, headed by Joe Withrow.
‘Crunch some numbers,’ we asked. ‘Crunch them good and hard, so that even their own mothers wouldn’t recognise them.’
‘How about preparing a Doom Index, in a methodical, orderly way,’ we explained.
In a matter of hours, Joe was on the case.
And here’s his latest report:
‘Bill — just a heads up…The Doom Index is speeding towards an “8” reading — our crash alert level.
‘As you know, we hit “7” in our last reading very quickly as data started to come back to us. I don’t think we shared this with readers, but we were on edge behind the scenes, as we waited for the monthly report on building permits to come out. That report was the difference between an “extreme caution” reading and raising the crash flag.
‘When it finally came, the buildings permit report showed surprisingly robust activity. That kept the crash flag in the closet for another quarter.
‘But it may be time to dust her off…
‘We won’t have final numbers for our next Doom Index reading for a few more weeks, but we are seeing some troubling trends.
‘Looking at the “real” economy, the ISM Manufacturing Index has plummeted 18% over the last 14 months…Including a 4% drop since the start of 2019. That tells us manufacturing is slowing dramatically. And railcar utilization has fallen 12% since Q3 2018, confirming the slowdown.
‘What’s more, total nonfarm payrolls dropped more this quarter than in any other quarter on record going back to 1998…which is when we started our back-tests for the Doom Index.
‘In other words, real economic activity is slipping.’
‘Shifting to the credit markets, we have seen the greatest ratio of corporate bond downgrades (compared to upgrades) this quarter than in any other quarter since Q2 2009 — when the dust from the financial crisis began to settle.
‘In fact, 233 corporate bonds have been downgraded so far this year, including 135 junk bonds. That’s compared to only 106 upgrades…A sign that the bond market is cracking.
‘This is especially important today because we are staring down a $1 trillion junk bond tsunami…
‘One trillion dollars’ worth of junk bonds are coming due over the next five years. This is debt owed by companies on shaky ground already…And the bond downgrades ratio tells us those companies are getting even shakier.
‘There’s no way these companies will be able to pay that $1 trillion debt wall off in full, which means they will need to secure favourable refinancing terms or declare bankruptcy. A wave of corporate bankruptcies would send shockwaves through the financial system and we would see a major credit contraction, as a result…which would lead to the next recession.
‘That may be one reason why the Fed did an about-face on interest rates. The higher rates go, the more likely that wave of corporate bankruptcies becomes. As we have suggested numerous times, the Fed’s next move is much more likely to be a rate cut, rather than a rate hike.
‘But it is too late…
‘By making Mistake No. 2 — raising rates rapidly after keeping them abnormally low — the Fed has caused Treasury yield curves to flatten.
‘The spread between long-term interest rates and short-term interest rates has narrowed drastically…And that’s a sign of trouble to come.
‘We have been tracking the 10-year to 2-year Treasury yield curve in the Market Insight section of the Diary. This yield curve is now within 13 basis points of inversion — where short-term rates rise above long-terms rates. When that has happened historically, a recession has followed.
‘Now, if you look at two less-followed yield curves…the 5-year to 3-year and the 5-year to 2-year Treasury yield curves have already inverted. That’s an ominous sign…
‘And this is wreaking havoc on the financial sector. As we illustrated in a recent Market Insight, bank stocks are in free fall, right now. The Dow Jones US Banks Index dropped 9% just two weeks ago.
‘There’s no single reason behind this move, but the yield curve is a major factor. To be overly simplistic, banks borrow money at short-term rates…lend it out at long-term rates…and pocket the spread.
‘But if there’s no spread to pocket, lending will dry up.
‘And that will help push us into the next recession, as well.’
‘So, it looks like the next recession is coming fast. And based on the early data I have, it looks like the Doom Index will hit 8 in our official reading this quarter.
‘That doesn’t necessarily mean that a stock market crash is imminent. In back-tests, the Doom Index sounded the crash alert several quarters early in 2007.
‘But it could very well be that this bull market already peaked last September, and the Doom Index is warning of a larger crash to come.
‘That’s what happened in our back-tests around the dot-com bust. Stocks were trading around their peak in August 2000 and they had already fallen 6% when the Doom Index hit an 8 in the third-quarter reading. But then, the S&P 500 went on to plummet 45% from there — wiping many investors out in the process.
‘That being the case, it may make sense to give readers an advanced warning before the next official Doom Index reading comes out in a few weeks…The tattered Crash Flag shall fly again.’
There you have it. Joe says it’s time to worry.