Recession

Recession talk is in the air. And not just from Democrats.

     "Peter, Why not stay with political stuff -- where you do pretty well --  WHY are you now the Sage of WALL STREET? You are not paid tor predicting economic downturns. 
      Maybe you WANT to tell people to believe a recession is coming because Democrats pray for a horrid downturn every day at the alter of LETS DESTROY TRUMP!! TODAY AND EVERY DAY!!"

                       

                      Letter to me from a successful retired businessman

CNBC's Web page greeted viewers yesterday with a recession warning.

Economists and financial advisors have talked about yield curves for decades, but all of a sudden the term "inverted yield curve" went mainstream. It simply means that short term interest rates are higher than long term interest rates, a reversal from the normal pattern in which there is presumably more risk to a long term loan than a short term loan, so interest rates climb as the duration increases. 

This isn't just lines on a graph. The inverted yield curve relates to something important in the real world of businesses and the economy generally. 

CNBC

Banks make most of their money from the spread between short and long term rates. They borrow money from depositors and pay little or nothing because depositor money is short term and can be withdrawn daily. They loan money for months or years at higher interest rates. That spread is a big source of income. If banks are making money they have capacity to make more loans to businesses, which fuels the economy. If that is reversed, then banks make less money and therefore pull back.

They pull back, too, because the presence of a yield curve is describing something ominous in the real world, that bond investors expect interest rates to go down because future demand for borrowing will be lower. Bond investors are thought to be sophisticated, informed people. The fact that they expect rates to drop is evidence of cues they see: recession.

And, third, there is the vicious cycle. People pull back because they think others are pulling back. Recession expectations help cause recessions.

But it isn't just Democrats "talking down" the economy. Republicans and conservative news outlets are describing objective signs of a slowdown. Something real is going on.

The CNBC story reads:

     "Data is coming at investors from every angle with so-called recession indicators flashing signs of an economic slowdown brought on by slower growth abroad and the U.S.-China trade war."

They list:  

     1. Interest rates are dropping.

     2. GDP growth is slowing.

     3. Corporate profits are dropping.

     4. Manufacturing is slowing 

     5. Freight shipments are down.

     6. The price of copper is dropping.

     7. The price of gold is going up.

     8. Global uncertainty index is up.

     9. Business spending is down.

CNBC amplifies each of these indexes and explains their relevance. CLICK

Meanwhile, Oregon readers start this first day after Labor Day with news in the state's flagship newspaper, the Oregonian, that business and farm leaders in Oregon are battening down for a recession, starting with Oregon's big export crop, wheat. It wrote that Trump's recent rally speech in Pennsylvania "disparaging" wheat exports "left Oregon wheat farmers aghast."

Signs of pulling back

Along with charts of slowing indicators-- CLICK -- the Oregonian article went through a list of business leaders who were complaining of Trump's trade policies and saying that they were pulling back. 

     

     Wheat farmers-- "In general, this uncertainty with trade issues certainly weighs heavily.” 

     

     Electronics manufacturer-- “It’s all preventative kinds of measures we’re taking right now, being cautious, keeping as much cash dry as we can." 

    

     State economists-- "Cracks may be forming due to the trade war.”

     Columbia Sportsware-- “There are some investments we’re choosing not to make because of uncertainty around trade.”

Bad timing for Trump

20 years of US unemployment data

The economy hit bottom ten years ago, in March, 2009, and we have been in a recovery ever since. Trump called the economy "carnage" in his inauguration, but has been talking it up beginning two months later. Obama failed to claim the economic recovery and Trump stepped into the vacuum.

But now, after ten years, excesses have accumulated. The relationship between asset prices and incomes have become stretched. Credit quality has gotten loose. Deficits rose to new highs during a boom. 

Recessions are normal. Something causes them. People get cautious, maybe for good reason, and one of those reasons is that they believe others are getting cautious.