After today’s market meltdown, I noticed Tim Duy voicing scepticism about whether the right comparisons to today were during previous recessions like 2000-2001 and 2008-2009. I share that scepticism, because I don’t think we are anywhere close to recession, and I was having this exact conversation with Marshall Auerback earlier today.
We were talking about whether markets could continue upwards once real economy data began confirming continued expansion. After all, in 2008 we saw what a “malign feedback loop” — a downward spiral due to what George Soros calls reflexivity. And given the fake liquidity in this market from ETFs and volatility hedging, you have to wonder if we are going to see some nasty reflexivity here.
I think 2008 was different because we were off the back side of the credit cycle. And we just aren’t there yet now. Today is more akin to 2005 or 2006 — that is if we are definitively that late in the cycle. Remember, multi-decade up-cycles in Australia and the Netherlands tell you that the late, late cycle can go on for a long time.
I saw that Pennsylvania-based retailer Bonton went bust today. But that’s retail and it’s not large or systemic. I’m looking for something more akin to Household International’s February 2007 writedown as a negative signpost. Spreads are just too narrow in other frothy markets to think things have become systemic.
So how do we know when we are in a recession, anyway? Well the US recession arbiter actually tells us how. Here’s their explanation – and notice the parts in bold:
Using those data points, I called that recession with my very first post here. And my reasoning came directly out of the NBER’s data set:
Well, the private sector has lost jobs for three months running now (Dec 2007-Feb 2008). And Employment is a lagging indicator to boot. To my mind, this means that we entered recession in December or January. What’s more, the dubious Birth-Death model that the Bureau of Labor Statistics uses to determine Non-Farm Payrolls shows huge net job additions in the most recent months from small businesses being created. This is rather unlikely given the state of the economy and these numbers are very likely to be revised downward next year when the first major revisions are done.
We all know that income growth is non-existent and according to the ISM surveys, both the Manufacturing and the Service sector are in recession. Finally, according to a number of retailers, sales are definitely down. So, the long and short of all of this is that we are definitely in recession. And the downturn has just begun. The question is: how long and how deep?
My view: hallmarks of recession are all around about the time they happen if one looks close enough — certainly in 2008. I don’t think we are in a recession by any stretch, right now — not even close. The real question is whether we get some sort of malign feedback loop, as Marshall put it, and end up with GDP sliding toward recession. If so, I think the Fed will downshift. And so, even there, recession is not a lock. 1200 points is a big day, don’t get me wrong. But let’s not confuse the market with the economy.