Counting Down to Recession?

Let’s play the riddle game.


Q: What happens when the preponderance of economic data is: A) slowing on both a sequential and trending basis, B) consistently and fervently missing expectations and C) just plain bad (like this morning’s 1Q GDP revision, for example)?


A: You double seasonally adjust it and make it better.


Q: What happens when the economy is: A) in the latter innings of an above-average length economic expansion (Z-Score = +0.4x vs. all cycles over the past century to be exact), B) slowing into extremely difficult base effects that should perpetuate the slowest annual rate of nominal GDP growth since 2009 and C) mired with a myriad of [horribly misunderstood] secular headwinds?


A: The Fed hikes rates on that.


LOL! (pardon the millennial in me)


Regarding the first question, the consistent and fervent missing of expectations for economic data is eerily reminiscent of the start of 2007 when it just continued and continued and continued until the cycle completely rolled over.


Counting Down to Recession? - Econ Summary Table


Counting Down to Recession? - Econ Surprise Index


Counting Down to Recession? - GDP Summary Table


Regarding the second question, trends across a variety of indicators put us roughly ~12 months away from recession.


Counting Down to Recession? - Recession Watch Jobless Claims


Counting Down to Recession? - Recession Watch Consumer Confidence


Counting Down to Recession? - Recession Watch LEI Ratio


Counting Down to Recession? - Recession Watch PMIs


Counting Down to Recession? - Recession Watch TTM EPS


That may sound like good news to investors, but our predictive tracking algorithm has YoY real GDP growth slowing throughout the balance of 2015. In lay terms, we believe the U.S. economy is past peak in rate-of-change terms and sliding down the slope to an eventual cliff (i.e. recession). That’s our call and we’re sticking to it.


Counting Down to Recession? - UNITED STATES


As detailed in the previous chart, today’s negative revision takes our full-year estimate for real GDP growth down to +2% (from +2.3% prior). Both the Fed and Street are up at +2.5%, both of which continue to careen down from perpetual expectations of rainbows-and-puppy dogs (i.e. 3-plus percent growth) earlier this year.


Counting Down to Recession? - Consensus GDP Estimates


All told, we reiterate our call to be long of long-duration in its many forms: TLT, EDV, VNQ and GLD (gold has historically performed well in down-dollar and down-interest rate environments and we think the June 17th FOMC statement has a high probability of being dovish and dollar-bearish).


We also think the current entropy of U.S. demographic trends (i.e. they’re getting worse at their fastest rate ever, like now) is likely to continue supporting our lower-for-longer thesis on interest rates.


Counting Down to Recession? -  DemographicYields GDP Surveys


Counting Down to Recession? -  DemographicYields Inflation Surveys


Counting Down to Recession? -  DemographicYields 65


Counting Down to Recession? -  DemographicYields Core Consumption Cohort


Counting Down to Recession? -  DemographicYields Life Cycle Economics


Going back to the data, the government might be able to double, triple or quadruple seasonally adjust the national accounts, but they can’t smooth corporate earnings.


Counting Down to Recession? - S P 500 Revenue and EPS Growth


The proverbial “they” better keep the buyback machine revved up! On that note, the $141B announced buybacks in April was the largest month on record per Birinyi Associates.


Moreover, buybacks are on pace to reach $1.2T in 2015, which would break the record of $863B from – you guessed it – 2007 (i.e. the last time Keith made the #LateCycle Slowdown call, which caused organic earnings growth to slow, which effectively forced companies to forgo investing in their businesses in order to keep the “game” alive with financial engineering).


As an aside, it’s worth noting that core capital goods orders and factory orders are declining on a YoY basis at -0.6% and -5.3%, respectively.


Jumping back to buybacks, the three weeks ended  7/24, 7/31 and 8/7 are the three busiest weeks for S&P 500 constituent earnings releases. In advance of those weeks, we would expect market liquidity to dry up on reduced buyback execution (blackout periods). It’s worth noting that whisper numbers put buyback execution at upwards of ~30% of total institutional volume at major sell-side desks.


Removing such a massive bid from the marketplace amid a decided slowing of growth and the Fed out to lunch in terms of teetering on making a major policy mistake by hiking interest rates, could make this summer feel as “interesting” as the summer 2011 was…


Counting Down to Recession? - MONETARY POLICY MODEL


Counting Down to Recession? - 2011 Analog


Happy month-end Friday and best of luck out there!


Darius Dale


SECTOR SPOTLIGHT | Live Q&A with Healthcare Analyst Tom Tobin Today at 2:30PM ET

Join us for this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more