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Only the Fed Can Save Us
After returning home from a television appearance this week, I had the following conversation with my wife.
Debbie: You were great today (she is a supportive wife). Everyone agreed with you.
Me: That’s not good.
Debbie: No, they all agreed with you, why isn’t that good?
Me: It means I am probably wrong.
This week’s August private sector employment growth, August ISM manufacturing, July construction spending, July German Non-EU capital goods orders, August global PMIs and South Korean exports were all weak and consistent with our view that the trade war has tipped the secular downtrend in global trade into recession and stopped 2018 US capital spending boom in its tracks. Perhaps because of the consensus around the view highlighted in the discussion with my wife, the equity and credit markets took their cue from economic surprise indices, robust auto sales, a strong ISM non-manufacturing survey and firm average hourly earnings growth. With equities within a couple of percent of the highs and credit spreads near their best levels, these markets are discounting a 2016 scenario when the Fed stopped quantitative tightening and the US economy shrugged off a collapse in oil prices, Chinese heavy industry hard landing, 25% increase in the trade weighted dollar and an earnings recession.
In reality the US economy did not really shrug off the Chinese heavy industry hard landing and oil price collapse. Two of our preferred measures of growth to forecast the business cycle and corporate earnings and revenues; gross domestic income and final sales to private domestic purchasers fell 4.7% and 3.8% from the 2014 peak leading to a 5.8% plunge in S&P 500 revenue growth to -1.6%. Those same measures are 1.4%, 2.2% and 3.7% off their 2018 peaks through 2Q19. While we continue to believe that the second Chinese malinvestment bust in five years will not send as large a negative shock to the rest of the world as the first, despite the improvement in economic surprise indices for emerging markets and China, we do not see any evidence that global trade is stabilizing let alone recovering. Additionally, while the recovery in equities and credit in 2016 was initially driven by a reversal in 2015’s quantitative tightening, this week’s global government bond market selloff hinted that markets may be too far in front of monetary policymakers at least in the near term.
Suggested Reading from the Federal Reserve Research Staff…
https://www.federalreserve.gov/econres/notes/feds-notes/does-trade-policy-uncertainty-affect-global-economic-activity-20190904.htm
Barry C. Knapp
Managing Partner
Ironsides Macroeconomics LLC
https://ironsidesmacro.substack.com
908-821-7584
https://www.linkedin.com/in/barry-c-knapp/
@barryknapp
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