Bad bets and hazards already in the market could trigger the next recession
Bad bets and hazards already in the market could trigger the next recessionRelease Date: Friday, August 3, 2018
DEAL OF THE WEEK :
Jim Cramer, host of CNBC's Mad Money and one of Wall Street's most respected and successful money managers, recently told viewers that even with our "roaring" economy investors should be adding gold to their portfolios. Pointing to the work of a technical analyst, Mr. Cramer explained why gold prices may be ready to "snap back":
"[T]he price of gold still hasn't really reacted to the current trade war or the exploding budget deficit which I know a lot of you care about tremendously of course. Or even the recent uptick in inflation. With inflation on the rise and the government borrowing insanely high, you'd expect precious metals to be more popular than the Wall Street fashion show as gold is a natural hedge against inflation and higher interest rates….Let me give you the bottom line. For those of you who are genuinely worried about inflation and trade policy and rising rates, don't forget hey let's throw in the budget deficit, you don't need to dump your stocks. Instead though, how about buying some gold as insurance against economic chaos."
You can watch Mr. Cramer's full comments at CNBC's website.
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Gold and Silver Prices
Gold prices closed higher on Friday following the lower than expected U.S. jobs data which pushed the dollar lower.
"Gold ended higher on Friday after data showing that the U.S. economy added fewer jobs in July than expected, but prices for the metal still suffered a fourth weekly loss in a row.
Bad bets and hazards already in the market could trigger the next recession – Rabouin
Some analysts believe there's great existing risk underneath this current strong market which could lead to a "sharper and deeper" decline than anyone expects andpossible recession.
Watch credit spreads
"That things are good now means nothing, says Josh Brown, a financial advisor and the chief executive of Ritholtz Wealth Management.
"'Durable goods or consumer confidence or whatever metric, no metric tells you what will happen tomorrow,' Brown told Yahoo Finance in a phone interview. 'If it did, reliably, if there were any meaning in any of that, then everyone would be a billionaire because we would all know.'
"Brown says that he's not necessarily bearish on the market, but is crafting portfolios for clients that aren't fully exposed to stocks and will shed risk if the market turns. The metric he's watching is the movement in credit spreads - the difference between the yield on bonds issued by corporations and an equivalent bond issued by the U.S. government.
"The latest Moody's data shows the spread between Baa-rated bonds and comparable U.S. Treasuries this month hit 2%, a level reached either during or just before six of the past seven U.S. recessions since 1970. In February, those spreads were at their lowest since the financial crisis.
'We're looking for waves and ignoring the tide'
"The bond market is flashing a number of other recession warnings, analysts and economists say.
"Most prominent is the steadily declining U.S. Treasury yield curve, which is pointing toward an inversion…An inverted yield curve has preceded every U.S. recession since 1955, with a lag time ranging from six months to two years.
"Andrew Weiss, founder and chief executive of Weiss Asset Management, who was noted as having had 'a substantial impact' on Nobel Prize economist Joseph Stiglitz's work, says there are currently three major market developments that worry him.
"Weiss argues that many in the market are distracted by headlines from Washington and popular economic metrics. He's watching the weakening credit quality in loans, with a record $247 trillion of debt having been issued globally, as well as increased regulation of banks and the worsening demographics of developed economies.
"We're looking for waves and ignoring the tide," Weiss told Yahoo Finance.
"Particularly onerous to Weiss are so-called covenant-lite loans - those that provide less protection for lenders and investors than traditional loans - which now account for a record 75% of outstanding U.S leveraged loans, according to ratings agency S&P Global's LCD tracking system. Moody's reported that 80% of leveraged loans issued in the first quarter were "covenant-lite."
"The banks also are taking on less of the loans and less risk overall, Weiss said, as a result of government regulation. While it makes the banks look healthier, they're passing many risky bets on to investors through securities sold to asset managers and private equity firms.
The next recession will be 'sharper and deeper'
"The combination means that much of the debt issued today is less secure and more likely to cause a substantially worse crash if the market and economy head south. That will be exacerbated by a population that is growing older and will require more resources, like Medicare and Social Security, with declining tax receipts and worker productivity to provide it.
"'In bad times things can get really bad,' Weiss added.
"Similarly, Brian Singer, head of asset manager William Blair's Dynamic Allocation Strategies Team, laid out four market risks 'keeping [him] up at night': monetary policy, smart-beta ETFs, the Volcker Rule and circuit breakers.
"As the Federal Reserve withdraws liquidity from the market by continuing to raise U.S. overnight interest rates as it has since December 2015, Singer worries that the high correlation of stocks in many of the world's most popular exchange-traded funds combined with banking regulations and circuit breakers that shut down trading when stocks fall too quickly will worsen problems rather than solving them.
"'When the next market decline comes, we believe it will be sharper and deeper than investors expect,' Singer said in a note to clients.
Tariffs are the No. 1 concern
"There are also the more well-known risks, including the growing trade war between the United States and China that worry forecasters. Tendayi Kapfidze, chief economist at Lending Tree, says he's starting to become concerned about housing.
"However, he says tariffs are the No. 1 risk to the ongoing recovery because they could offset and negate the positive impact of the tax cut passed by U.S. President Donald Trump and Congress.
"'If you don't get the growth, what have you just bought for this big hole you've put in the budget? You've bought nothing," he said during an interview in Manhattan. "So now you just have a big deficit problem that you've created and you have nothing to show for it on the other side.'
"Even a win in the trade war could be disastrous for the United States and the rest of the world. Tom Essaye, a longtime financial analyst and the founder and editor of the Sevens Report, says the risk of China's economy slowing down is a major risk that investors aren't giving enough attention.
"'It's not a problem yet,' Essaye told Yahoo Finance, 'but it's very unlikely the global economy can continue to grow if China has an issue.'" ("Bad bets and hazards already in the market could trigger the next recession," Dion Rabouin, Yahoo Finance, 08/01/18.)
Concern about Trump's trade war has 'spiked tremendously' among America's largest companies – Bryan
Companies in the S&P are more aware of tariffs and have incorporated mentions of tariffs to historic highs in their earnings calls.
"President Donald Trump's trade war is grabbing the attention of some of America's largest companies.
"Throughout the second-quarter earnings season, S&P 500 firms across the spectrum have weighed in on the president's tariffs on steel, aluminum, Chinese goods, and more. Companies ranging from Apple to Stanley Black & Decker to BlackRock have discussed the tariffs on their quarterly conference calls with investors and analysts.
"An analysis by CB Insights found that mentions of the word 'tariff' on earnings calls hit a record high in the second quarter, even before the most recent round of threats between the US and China.
"'Mentions of tariffs in earnings calls reached a historic high this past quarter,' the report said. 'Mentions of the words 'trade war' have also spiked tremendously.'
"According to Bespoke Investment Group, mentions of tariffs have more than doubled from the first quarter.
"'For the entire Q1 earnings season, the word 'tariff' came up 290 different times in S&P 500 conference calls (in some calls, the word came up more than once), while during this earnings season, the term has already come up 609 different times,' Bespoke said in a note Wednesday.
"The tariffs were mentioned most on calls for companies in the sectors of industrials (mentioned on 65% of calls), materials (57%), and consumer staples (56%), according to Bespoke. That would make sense, considering Trump's tariffs so far have focused on industrial machinery, materials like steel or aluminum, and large appliances like washing machines.
"The corporate concern reflects similar comments in various business surveys over the past few months…'The so-called trade war is now taking its toll on business activity, resulting in substantial reductions to new export orders,' one manager at a wood-products company told ISM. 'China has all but stopped taking orders, causing inventories to build up in the US.'
"The tariffs on steel and aluminum also concerned respondents.
"'We have already seen steel prices increase due to the threat of the tariffs and are seeing kickback from our customers due to the higher prices,' a producer of fabricated metal products said. 'We are concerned that the end customer will go to offshore to purchase the finished product.'
"The ISM report contained comments similar to those in various Federal Reserve surveys and consumer-confidence indexes. In them, Americans reported increasing price pressures and expressed worry about the future of Trump's trade war.
"Trump has threatened to impose tariffs on another $200 billion worth of Chinese goods, including many consumer products, as well as imports of cars. Either move would represent a major escalation of the trade war and ensnare a much larger swath of companies in the tariff fights." ("Concern about Trump's trade war has 'spiked tremendously' among America's largest companies," Bob Bryan, Business Insider, 08/02/18.)
Two recession warning signs are here – Goldman
The housing market and interest rate hikes have some economists concerned that a recession is emerging.
"'One of the biggest concerns is the housing market," said Lindsey Piegza, chief economist for Stifel, on CNNMoney's "Markets Now" live show Wednesday. "It's throwing up a very large red flag and suggests maybe this 4% growth we saw in the second quarter is not sustainable."
"Home sales have declined in four of the past five months as housing prices have grown -- but paychecks have remained stagnant. Many people can't afford to buy homes, and those who can are taking on a lot of debt to get into them.
"Piegza says that echoes what happened right before the Great Recession in 2008.
"'We're not there yet, but this is what led us to the housing crash,' she said. 'I don't know if we learned our lesson from the Great Recession,' she said. 'We are going back to a lot of the easy lending that we used to see.'
"Although Piegza said a recession isn't necessarily imminent…there are signs of waning momentum in the economy.
"Interest rates, for example, are starting to become a bad omen. The Federal Reserve, which is finishing up its two-day meeting Wednesday, is expected to raise its target rate two more times this year.
"With two more interest rate hikes planned, the Fed could boost short-term rates higher than long-term ones, inverting the so-called yield curve. An inverted yield curve has preceded every recession in modern history.
"Fed Chairman Jerome Powell has said that he is not concerned about an inverted yield curve. Piegza strongly disagrees.
"'It is a predictive measure of a recession,' she said." ("Two recession warning signs are here," David Goldman, CNN, 08/03/18.)
Is The Next Recession On Its Way – Farrell
The second longest economic expansion in U.S. history, the current economic boost from corporate tax cuts, and possible trade war are all reasons for a next possible recession.
"Here are two safe forecasts, the kind you can count on. First, the U.S. economy will sink into a recession. Second, no one knows when the recession will arrive. Taken altogether, these two "forecasts" have critical implications for managing your finances.
"But first, let's look at the economy.
"… the second quarter Gross Domestic Product (GDP) number came in at a 4.1% annual rate. Nevertheless, GDP growth is healthy, the unemployment rate is 3.9% and the labor force participation rate is climbing. Business and consumer confidence is high, too, and inflation is moderate. The Federal Reserve is confident enough in the economy's resilience that it will likely raise short-term interest rates again next month.
We're In the 2nd Longest Economic Expansion
"In short, the second longest economic expansion in U.S. history doesn't show many signs of flagging yet.
"That said, readers of The Wall Street Journal, The Financial Times, The New York Times and Bloomberg are seeing daily articles weighing the risk of recession. The commentary definitely leans toward the worried, although the favorite year of reckoning is around 2020 (which, if accurate, means the current expansion will become the longest on record).
"The mood is best captured by the current Fortune coverline: The End is Near for the Economic Boom. "A significant slowdown or even recession is coming sooner or later, and it's probably coming sooner than you think," wrote editor-at-large Geoff Colvin. "It always does."
What 'The Next Recession' Worriers Are Worrying About
"… The consensus expectation is that the economic boost from the corporate tax cuts will fade in coming quarters. The GDP numbers so far don't show the administration's promised surge in business investment, the kind that leads to higher, sustainable growth. Instead, as the economy shifts into lower gear, it will be vulnerable to a stumble or unexpected shock - with government, business and consumers debt at nosebleed levels. The Fed and other central banks are hiking short-term rates, always a tricky maneuver that can backfire. Meantime, the Chinese economy is showing signs of stress, and growth is faltering in most developing nations.
Effects of a Trade War
"… economists are deeply unsettled by the prospect of a spiraling trade war.
"The Trump administration has imposed import tariffs on steel, aluminum and on many Chinese goods. (The U.S. has a temporary cease fire with the European Union.) The administration is now threatening 25% tariffs on $200 billion in Chinese imports, more than double the previous levy threat.
"The economic impact from the tariffs has been muted and limited to certain industries - so far. But if the trade war of words turns into actual widespread tariffs and steep trade barriers, the global economy including the U.S. will be hit hard.
"A classic signal that a recession is lurking: when the yield on 10-year Treasury bonds is lower than the yield on three-month Treasury bills. That's not happening yet. But today's interest rate trends may be signaling slower growth ahead.
Preparing Your Finances for the Next Recession
"You can't get rid of the uncertainty. Nor can you control the timing of the business cycle or the direction of the stock and bond markets. What you can do is examine your personal financial circumstances and make appropriate adjustments.
"In essence, take advantage of today's mostly good economy to prepare for the inevitable bad economy - whenever that occurs...
"Ross Levin, a Certified Financial Planner and co-founder of Accredited Investors Wealth Management in Edina, Minn., says you should think about how a downturn could affect your finances and take actions accordingly. 'How will you be personally impacted? Calibrate where you are at now,' he says." ("Is The Next Recession On Its Way," Chris Farrell, Forbes, 08/03/18.)