August 9, 2023

The Signs

The signs are there.

What if we’re already in a recession?

Before you react, hear me out.

Photo 4302197 | Recession © Feng Yu |

Gross Domestic Income, the measure of all the money we make in the country, trails Gross Domestic Product, the measure of output, by about 25%, says the St Louis Federal Reserve.  You can find the data yourself.

The two should match. So why don’t they? 

Two factors. Government spending, which is one of four core components of the GDP calculation. And inflation.

Yes, we try to remove inflation from measures of output but it’s not fully possible through “deflators” that adjust consumption metrics.

And the government can only get money two ways: From the people in the first place, or by printing it (which is inflation, diminished purchasing power resulting from more money than output).

GDI is falling. It’s never declined without a recession since WWII. Until now. 

I’m just getting started.

Corporate earnings have fallen three straight quarters (yes, the decline this quarter turned out to be better at roughly -5.7% than the predicted -9.1% before the reporting season).  Back to WWII, falling earnings have always coincided with recessions.

Except now, and in 2015-16.  Then, the last time we had back-to-back quarters of declining year-over-year corporate earnings, coordinated central banks stepped in to “stabilize” a wobbling global economy, and supposedly the US had no recession.

Because prices rose.  That’s what you get from central banks. Higher prices. They know only one thing: More money.

Now, Chinese exports are plunging to levels last seen early in the Pandemic. That means big global consumers like the USA and Europe aren’t buying as much stuff.

We’re consumption-driven economies. How can the economy be growing if our demand is falling?  Government spending. Inflation. And that’s not growth.

Yellow Corp had roots to 1906 in Oklahoma. One of the country’s oldest and largest trucking companies, it shut down and went bankrupt this week after surviving WWI, the Great Depression, WWII and everything between then and now.

But it failed in 2023.

UPS missed revenue expectations and lowered its outlook.  UPS moves the stuff we buy.

Blackrock Mortgage Trust and KKR Real Estate Financial Trust have stopped originating mortgages, said the WSJ yesterday, and Starwood Property Trust has cut back. Nonbank lenders like these three dominate the mortgage business, controlling about 70% of it.

They’re all concerned about rising delinquencies, unstable housing prices.

We have a surfeit of apartments in the country and rental rates are falling just as the cost to investors to finance these properties is rising.

Consumer debt has reached a record. 

I could go on.

Yeah, but Tim.  People are still getting jobs. 

They did in the 1970s too, during Stagflation – stagnant growth, surging prices.  When prices soar, people have to work 2-3 jobs to make ends meet. Prior to 1971, the US workforce participation rate was below 60%.  Households only needed one job.

That payrolls are rising amid layoffs and rumors of layoffs (I hear about them every day) suggests the probability the data reflect multiple jobs. And hours worked are falling.

Against this backdrop, the trenchant governmental assertion that the economy is awesome stretches the bounds of credulity.

Look, I don’t mean to cast a pall. I just want honesty. Let’s be clear-eyed about the data. Let there be no deception (that means you, Government).  Things are not awesome.

I’m not worried. We humans are resilient, inventive, resourceful.

Which brings us at last to the stock market. It appears resourceful. It’s soared on falling earnings and amid economic data pocked with the marks I’ve drawn here.

The stock market doesn’t reflect fundamentals. I’ve said it before. It reflects what the money is doing. Not one trade out of ten is driven by fundamental investment. Machines and Passive Investment are most of the volume.

Both follow models, and Passives allocate money to equities around macroeconomic signals. A core problem is that risk systems have faulty inputs. Would they be increasing exposure to equities if the factors in the model were the data points I’ve noted here?

So beware.

As in the economy, demand in the stock market has fallen for the second-longest stretch of 2023, surpassed only by the period between Feb 9 and Mar 3 – right into the banking crisis.

Maybe it’s nothing!  Demand might bottom tomorrow and return to rising.


I think it’s good to be clear-eyed about the data. Whether it’s equity-market data, or economic data.  We’re good at marrying them, a help to investors and companies alike.

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