US stocks are at or near all time record highs across all major indices, with the markets bursting out after the election win of Donald Trump back in November 2016. Since then investor bullishness has also spiked to 10 year high levels. While this bullish euphoria is occurring something else is taking place far more important. The US economy has been trending down for some time now and the slowdown momentum is gathering pace as it moves closer to a recession possibly as soon as this year.
Market Euphoria Clouds Judgement
The markets have a history of becoming totally blind to whats actually occurring in the real economy, instead focusing on the direction of the market to give them an indication of whats taking place. In the chart below you can also see that the composite bullish index (red line) back in mid 2007 was very high around 130 just before the markets began their 50% decline.
Currently the market greed / fear index (see chart below) is close to at the maximum level of extreme greed side, while the actual economy is rapidly declining with a similar dynamic playing out presently with a potential twist to the market outcome.
How Can The Market Be At Record Highs While The Economy Is Heading Towards Recession?
In a nutshell the answer is Central Banks, if you take a look at the chart below you can see how the Central Banks have massively increased their balance sheet since 2008 / 2009. This has been achieved by printing money and buying up assets to provide additional liquidity into the system. This extra liquidity has flowed its way into stocks all over the world, regardless of which Central Bank has been been providing the additional liquidity.
Recently though most Central Banks have once again picked up the pace in growing their balance sheet . So even though the US has effectively kept their balance sheet flat to slightly down over the last 2 years, the other Central Banks have effectively been adding to the pool of global liquidity pushing up prices of stocks, real estate and other assets. Clearly this practice is totally artificial and is giving false bullish signals to investors as the markets are not functioning on their own.
The S&P 500 Index No Longer Tracks Earnings
Further evidence that the Central Banks actions are providing false signals to the markets is shown in the chart below. S&P 500 earnings per share (EPS) are totally out of sync with the rise of the market and now represent a large divergence in their trends.
Earnings are now slowly tracking higher after falling for several years, however this is more a case of financial engineering of companies artificially raising their EPS by buying back their stock usually with debt. Since 2012 corporate profits are down so even companies themselves are misleading investors to the true financial health of their investments.
How Lower Corporate Profits Tie In With The Economy – Jobs, Jobs, Jobs
Since 2016 global employment in S&P 500 companies has been slowing down (see chart below) and late 2016 turned negative as the slowdown accelerated with employment growth. The last time this occurred the US economy went into a recession shortly after.
If you look at US non-farm payrolls you will notice that its also trending down but a slower pace.
The interesting point about the non-farm payrolls data is that the data each month is provided based on the combination of a Government surveys (small sample) as well Government generated predictions of jobs, Ie Birth death model of estimated new businesses commenced to produce the monthly result. Several months later up to a 1 year later the actual data collected from companies are imputed and adjustments are made on prior months. Usually the number of jobs actually created is readjusted lower. So the true effect of a slowdown with companies in the S&P 500 will not show in the non-farm payroll data for several months.
Every Time The FED’s Own Signal Falls Below Zero Y/Y A Recession Occurs
Scroll video to 12min 52sec.
This video indicates that an indicator that the FED actually monitors has fallen -0.3 in December and has fallen 5.8% y/y, which is the largest since 2010. Each of the last 8 occurrences of this indicator falling below zero y/y has resulted in a recession in the US.
Consumer Credit Grow Demand Drops 43% Month on Month
In December consumer credit grew by $14.2 billion a 43% drop compared to November’s $25.2 billion. Since consumer spending makes up over 70% of the GDP data and the savings rates is falling in the US, a large drop in the amount of new credit card debt also points to a slowdown in retail sales.
The credit data below is actual data collected from the banks rather than from surveys, so it shows a very accurate picture of demand for credit card debt. Given the big collapse in S&P500 employments levels the trend in credit demand will likely continue to move lower and lower the GDP result.
FED Senior Loan Officer Survey Demand Falls Over
The overall trend for credit demand going forward is not looking good with the latest results from the FED senior loan officer survey. Indications for demand for debt for Construction, credit cards and auto loans are all down at multi year lows.
This is important as credit demand overall has been tied to overall demand within the economy and especially with consumers. If the intentions from the survey follow through, the slowdown in the economy will begin to gather pace with the higher probability of the US starting a recession in 2017.
Auto sales have performed very strongly since hitting the lows in 2009, with demand for auto loans driving a large proportion of retail sales demand. Auto sales have recovered strongly also because interest rates for auto loans have fallen substantially over the last 7 years from the FED dropping interest rates and pushing down bond yields via QE purchases. This has allowed buying a new car more accessible for consumers and allowed consumers to own more expensive models that previously they have not been able to afford on higher interest rates.
Auto sales Decline Y/Y First Time Since 2009
The strong performance of auto sales bubble appears to be over as December and January figures have been very weak. Making things worse y/y auto sales have recorded its first decline since 2009 the same year the US experienced a recession.
The data below shows the big 4 car companies in terms of autos units sold all experienced declines in y/y figures. Since the