Be Afraid… Be Very Afraid

By Michael Coolbaugh  |  October 31, 2019

Today, I’d like to revisit a theme we discussed a couple weeks ago.

Remember these leaves?

Believe it or not, I actually had someone try to tell me yesterday that those are not leaves in my back yard.

OK, not in the literal sense… but remember what we talked about regarding indisputable observations?

It all started from the simple comment that the yield curve is no longer inverted, and, thus, we’ve averted a recession.

My response was that this does not necessarily mean we have avoided a recession. In fact, following an inversion, the yield curve typically rises just prior to the beginning of a recession.

Don’t just take my word for it –

See for Yourself…

After a little bit of discussion, the debate turned to whether there was any evidence of a recession.

My view?

There are several data points that say we’re very close. If things continue to deteriorate, we could find ourselves in a recession within several months.

Unfortunately, my view was met with an emphatic statement that, not only are there not “several,” there is not a single data point that indicates the possibility of a recession in the near term…

I’d like to remind you – this was yesterday.

So, if it weren’t for the constant reminders to my son that we don’t want to dirty his new Spiderman costume before we head out for “Trick or Treat,” I’d have sworn that a Halloween ghost had just passed through my body.

As I tried to gather my wits from this mind-bending statement, I began to flip through my library of data series.

I started with two charts and made the simple statement, “You might not believe we’re close to a recession, but to make the claim that absolutely zero data points are close to recessionary is simply wrong.”

So Here we Go…

First, we have a year-over-year decline in industrial production.

Next, we have the Institute of Supply Management’s manufacturing PMI survey. In this series, 50 is the line that separates expansion from contraction. As you can see, not only have we recently entered contraction territory, but the most recent print is the weakest since 2008…

These were met with another emphatic statement, “That is not a recession. Not even close.”

And that’s what really got me.

So, I presented a few more, some of which you might remember…

Here we have the unemployment rate versus average hourly earnings.

Next, we have the recent year-over-year decline in total construction spending.

Take a look at the year-over-year decline in value of manufacturers’ new orders…

Here’s the wholesalers’ durable goods inventories-to-sales ratio…

This is the year-over-year rise in continued unemployment claims…

And then there’s the year-over-year decline in U.S. gross private domestic nonresidential investment…

A Recession Is Coming

These are just a few examples from the United States. Data from the rest of the world doesn’t look any better.

Believe me, I can keep going for quite some time. But I think you get my point.

For me, what’s truly scary is that, despite all evidence to the contrary, there I was, still being told that I don’t have leaves in my back yard!

Now, this was someone with more than 25 years of investment experience. And we can’t dismiss the possibility he might end up being right – that the Federal Reserve will help us avoid a recession.

But no amount of experience permits the denial of objective facts.

The risks are real. And, today, we stand at a critical juncture.

Will the recent actions by the U.S. central bank to lower interest rates help avert a recession?

The U.S. dollar will likely provide some helpful clues…

It’s still an open question. But I don’t need decades of experience to tell me the data are indeed pointing in a certain direction…

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Michael Coolbaugh

Michael Coolbaugh is Editor of Delta Profit Trader and the Investment Portfolio Editor for The Stockman Letter. He regularly shares his market insights through David Stockman's daily e-letter, Deep State Declassified. Michael is also the founder and CEO of Element Macro Research. Prior to founding Element Macro, Michael spent three years at K2 Advisors, LLC, a hedge fund-of-funds subsidiary of Franklin Templeton Investments.MORE FROM AUTHOR