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Mark's Market Blog

#422 4-23-17: Recession?

By Mark Lawrence

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In the last month I ran my business, listed my house for sale, accepted an offer within 48 hours, drove with my doggies to Missouri, bought a travel trailer, came back, did the required escrow nonsense like stupid repairs, got rid of a truly horrendous amount of my stuff, moved the rest of my stuff, and closed escrow. I'm now homeless. I also own no property in the People's Republic of California. And I'm catching up on my sleep. And I'm putting out a new blog. I feel conflicted about the stuff: part of me wishes to live a simple and austere life; another part wants to accumulate as much garbage as possible so that my kids have to sort through it after I die.

The news has been dominated by Susan Rice perhaps spying on Trump (I barely care), by N.Korea promising to nuke us back to the stone age (I'm no fan of war, but this guy has got to go), by continuing terrorist attacks in Sweden (the socialist paradise where everyone is happy) and France's elections (they're about to decide if they want a president who promises to remove islam from France and France from the EU). We're all being very handily distracted while the 0.001% continues to rob us blind.

In the first quarter central banks pumped $1 trillion into the markets. In one quarter. Central bankers are determined to make bankers rich. Meanwhile it seems the Trump rally has perhaps stalled out and currently seems to have turned the 50 day moving average from a floor into a ceiling. To my eyes these markets clearly want to correct, but the central banks aren't having any of that. That just means when the correction comes it's going to be all the more wicked.

S&P 500 October 24 2016 to April 21 2017

France will have a run off election between LePen, their version of Trump; and Macron, more of the same old socialist - globalist - EU loving - immigrant loving stuff that they've had for a couple decades. I'm heartily for LePen, but her chances are extremely poor; Macron seems inevitable.

Why are health care prices increasing so quickly? Lots of reasons, including Big Parma, but here's one of the big ones:

Chicago pensions are completely out of control and the government has given up. Contributions are now a small fraction of outlays. Illinois has a constitutional amendment bought and paid for by the unions that says their pensions get paid first before bonds or employees or suppliers or anything. Congress is mulling a law to allow Illinois to declare bankruptcy. And Rahn Emmanuel, ex-Obamite and current mayor of Chicago, seems determined to force the issue. I'm confident Connecticut, New Jersey and Kentucky are watching this little drama very closely, as this is one of their potential near term futures. If the stock market crashes, which personally I expect to happen in about two years, this time it's goona be pension funds, not banks, which need the trillion dollar bail outs. And who can deny 53 year old retired firemen and policemen their gulf club memberships?

Is there a recession starting? This is a tough call, and I'm not prepared to make it. Two winters ago we had a rough winter, but the economy came back in the spring. Last winter we had an even rougher time but again the economy came back. This winter was easily the worst of them all and the economy is recovering a bit but is still below normal. Here's some signs and portents:

  1. The ratio of corporate debt to earnings before interest, tax, depreciation and amortization is at an all time high. If interest rates should materially increase the IMF estimates as many as 22% of all corporations could default on their bonds, a total of $4 trillion. Some years ago I noted the Fed could likely not raise interest rates above something around 1% to 1.5% without causing a recession; the only thing that's changed is perhaps "recession" should now be changed to "crash." Several years ago Ben Bernanke said he expected low interest rates for the rest of his life. Smart call.
  2. At the same time unsecured debt in the UK is at an all time high. The banks in Spain, Portugal, Italy are not only insolvent, in the last couple of years they've added to their non-performing loan books - they're getting worse.
  3. In the last ten years China has added $24 trillion in debt - 2.5 * GDP. An unknown but large percentage of that debt is already bad, but being hidden inside derivatives (sound familiar?). This is completely unsustainable. Their central bank is managing to hold everything together, but any large shock and this goes.
  4. Industrial production peaked in Nov. 2014 and is currently 2% below the peak. This has never happened outside a recession. In March industrial production dropped by 0.4%.
  5. Charles Schwab reports that new brokerage accounts soared by 44% during the first quarter; last time this happened was 2000 and the markets crashed.
  6. The Bank of Japan and the European Central Bank bought $1 trillion of assets in the first quarter. They clearly didn't get $1 trillion worth of extra economic activity, much less the perhaps $4 trillion they might have hoped for. This cannot go on forever; a few months ago I noted they would run out of assets to buy in late 2018, more or less. At any rate we're clearly living in a wonderland market.
  7. Reported margin debt, which is by no means all the margin debt, spiked in March to a record $528 billion. If you have over $100,000 in your trading account you can borrow up to 30% of account value at 3.25%. And you don't have to use the margin debt to buy stocks: you can write a check for a home, or a boat, or a vacation. Margin debt is the steroids of the markets: bug muscles on the way up, heart attack on the way down.
  8. Auto sales are slowing. Used cars coming off rentals and leases are flooding the markets. Bonds based on rentals and leases are getting hammered. Hertz is already rated in junk bond territory - they aren't far from the crumbling edge. Used car prices are projected to keep dropping for several years. Which will only put more pressure on new car sales: when a clean low mileage 2 or 3 year old car is dirt cheap, why buy new for perhaps as much as twice the price? Morgan Stanley projects by 2021 used car prices will be down by 20% to 50%.
  9. GM and Ford have record inventory levels. They refuse to believe car sales are slowing so they're continuing to build. Incentives are at record levels. Harley's sales are down by 15% and they're laying off.
  10. Retail sales have dropped for two months in a row. Malls are dying all over America. Several big retailers are in serious, perhaps mortal trouble. 2,880 retail stores have closed so far this year, and Credit Suisse estimates the final number for the year will be an eye-watering 8,640. Several retailers are on bankruptcy watch, including Sears, Claire’s, True Religion Apparel, Nine West Holding, Rue21, 99 Cents Only, Gymboree, NYDJ, Indra, Bon Ton, David’s Bridal, TOMS Shoes, Tops, Velocity, Fairway, Charming Charlie, J Crew, Payless. Internet sales plus slowing retail sales = death for the weak members of the herd.
  11. US earnings per share are down for the 1st quarter.
  12. Credit card debt has hit $1 trillion, the highest number since 2008. There's another $1.4 trillion in college debt, perhaps as much as 40% of it non-performing. And there's another $1.2 trillion in auto debt, a quarter of that sub-prime. What's up with all this? Most of this debt is in securitized high-yield bonds, for which pension funds are desperate. Pension funds in the US are holding $24 trillion and they're supposed to be earning 7% on that. The pension funds have income levels to meet, and they either don't care or are too stupid to calculate risk. So Visa, universities, GM and Ford are encouraged to produce massive amounts of debt which Wall Street bundles up and shovels out. When these loans go there will be a lot of pension funds that go with them. So, is this a recession? I'm not prepared to call one, but the data is poor and the trend is that it gets worse every winter. We will not escape the next recession forever.

    You know those bar codes that are on everything these days, and the checkers scan them at the register? Turns out they're a huge scam. Some guy invented them, and now to get a set you have to join his club for several thousand dollars, plus a few thousand a year. If you want to sell anything at Walmart you have to be a member of the club. You can buy bar code numbers cheply from before the scam club started, and those work (today) at Amazon, but Walmart requires full club membership and one day it seems likely Amazon will too. This guy is taking in a few hundred million per year for maintaining a database that says which numbers belown to which companies. I could build and maintain that database at a cost of a couple hours per week.

    Packers 2017 Game Schedule
    All times EST
    Nationally televised        Seen by much of the nation
    * Start time and broadcast may shift due to NFL flexible scheduling
    1August 10Thursday8pm Philadelphia Eagles

    1August 19Saturday7:30pmat Washington Redskins

    2 August 26Saturday9pm at Denver Broncos

    4August 31Thursday7pmLos Angeles Rams
    Regular Season
    1September 10Sunday4:25pmSeattle Seahawks
    2September 17Sunday8:30pmat Atlanta FalconsNBC
    3September 24Sunday4:25pmCincinnati BengalsCBS
    4September 28Thursday8:25pmChicago BearsCBS
    5October 8Sunday4:25pmat Dallas CowboysFox
    6October 15Sunday1pmat Minnesota VikingsFox
    7October 22Sunday1pmNew Orleans SaintsFox
    8October 29Sunday
    9November 6Monday8:30pmDetroit LionsESPN
    10November 12Sunday*1pmat Chicago BearsFox
    11November 19Sunday*1pmBaltimore RavensCBS
    12November 26Sunday8:30pmat Pittsburgh SteelersNBC
    13December 3Sunday*1pmTampa Bay BuccaneersFox
    14December 10Sunday*1pmat Cleveland BrownsFox
    15December 17Sunday*1pmat Carolina PanthersFox
    16December 23Saturday8:30pmMinnesota VikingsNBC
    17December 31Sunday*1pmat Detroit LionsFox

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