Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

RECESSION CALLING

Did you know there is a moose calling championship? During the three-day event, 50,000 applicants replicate the eerie sound a moose makes during mating season in the hope of winning one of the few available hunting permits.

Moose CallingThe contest entails callers to demonstrate their skills to the judges who vote on the moose caller who shows and demonstrates the best or most innovative moose calling techniques. (…)

It was like Kevin was in a trance. Although he was on a stage he wasn’t in his own mind… he was out on a moose hunt.

The audience sat through the performance but really wasn’t showing much emotion towards Kevin and his moose calling. I could imagine some saying “We’ve seen this stuff before!”

Then the unforeseen happened! Kevin’s 5 year old daughter, wearing her hunter blaze orange hunting gear got up on stage with her POP Gun and SHOT the moose. The audience apparently erupted in applause with shouting and whistling.

Kevin won the Moose Calling Championship for 2012 (his third straight win) in Maine and was awarded $1000.00. (…)

The championship being held just prior to the opening of the hunting season, the moose population traditionally renounces appearing at the contest to cast its expert opinion.

Another contest is more interested in the quantity of calls than in quality. You will all be happy to know that Guinness World Records has confirmed that Main Street Skowhegan and the Town of Skowhegan set the new world record for the most people moose calling simultaneously! The record was established on June 9, 2018, at the 2018 Skowhegan Moose Festival when 1,054 people participated in the world record attempt led by Registered Maine Guide Roger Lambert.

All the same for recession calling. It seems that 2019 will set a new record for the number of simultaneous recession calls. Time will tell if a recession will succumb to the calls and timely show up on stage.

Callers must be even sharper this time given that Jerome Powell seems uninterested to use his POP gun and abruptly end the contest.

A reader pointed to a recent Bloomberg op-ed from Danielle DiMartino Booth declaring that (my emphasis)

According to historic payroll data and the National Bureau of Economic Research, every time the three-month average unemployment rate exceeded its six-month average at cycle peaks over the past 50 years — like it did in January — the U.S. economy has experienced a recession. In a 2016 speech to the International Monetary Fund, then Federal Reserve Bank of New York President — and current Bloomberg Opinion contributor — William Dudley corroborated the historic pattern citing research first conducted earlier in his career at Goldman Sachs:

“History shows it is very difficult to push the unemployment rate back up just a little bit in order to contain inflation pressures. Looking at the post-war period, whenever the unemployment rate has increased by more than 0.3 to 0.4 percentage points, the economy has always ended up in a full-blown recession with the unemployment rate rising by at least 1.9 percentage points.”

Fact checking DiMartino Booth’s claim: obviously, the 3m average exceeds the 6m average much more often than there are recessions.

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But if you read too rapidly, you missed the key part of her claim: “every time the three-month average unemployment rate exceeded its six-month average at cycle peaks over the past 50 years, the U.S. economy has experienced a recession.” We can all easily agree that every time we reached cycle peak the economy has experienced a recession not long after. The challenge remains to correctly call the darn cycle peak.

Perhaps if there are enough calls, the peak will graciously appear.

This next chart includes the unemployment rate in red (inverted right axis). Of course, once you have identified the actual peak, you can watch when the 3m average exceeds the 6m average to conclude that the cycle has effectively ended and “make your call”. But how many times will you have called the peak before the actual peak really happens? The call looked good on October 2016 when the unemployment rate rose from 4.8% to 5.0%. Oups! Not good enough. How about 1995, 1997, 1998? The recession began in March 2001. Or 1963, 1967, well before the recession started in December 1969?

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The other twist is to have Bill Dudley, “then Federal Reserve Bank of New York President” having “corroborated the historic pattern”. At least she did cite Dudley correctly who, if I read well, is not exactly corroborating the “historic pattern” as described by DiMartino Booth:

Looking at the post-war period, whenever the unemployment rate has increased by more than 0.3 to 0.4 percentage points, the economy has always ended up in a full-blown recession with the unemployment rate rising by at least 1.9 percentage points.

David Rosenberg used the same Dudley pattern in early February to support his recession call which prompted me to comment in the Feb. 4 Edge and Odds:

David Rosenberg highlights the fact that the unemployment rate, at 4.0%, is up 0.3% from its 3.7% cycle low and that “the mean, median and mode is for the jobless rate to rise 0.4 of a point from the low by the time the recession hits. We are now three-quarters there. Data back to 1950 shows that at no point in the past did we see a 0.6 point increase off the trough without seeing a NBER-defined recession.”

This is true with the only possible exception being June-Nov. 1959 when the U3 rate rose 0.8 points before falling back to a new low in Feb. 1960, two months before the recession (!). However, there have been six occasions since 1950 when the U3 rate rose 0.4 or 0.5 points without being followed by a recession.

I sure wish calling recessions were that easy.

But DiMartino Booth added some meat to her cracked bone:

To Dudley’s point, the odds that layoffs will continue rising are high. As per January data from Challenger, Gray & Christmas, layoffs have risen over the prior year for six straight months. Economists would characterize that as an established trend. Retail and more recently, energy, have been some of the weakest sectors. Media is another sore spot.

Facts are:

  • There were other periods of “established trends” in CGC data: layoffs rose during 4 consecutive quarters between Q3’11 and Q2’12, and again during 3 consecutive quarters between Q1’15 and Q3’15. And yet, employment kept rising and the unemployment rate kept declining.
  • Retail layoffs have indeed been bad (42% of all announced layoffs in January) but she omitted to mention that most of January’s retail layoffs were “related to Gymboree’s plan to liquidate remaining stores in the U.S. and Canada, costing a reported 10,000 jobs”. Also omitted was CGC’s other comment that “Lowe’s announced it would hire 50,000 seasonal workers for the spring, as well as 10,000 permanent roles and 6,000 managers”.

Actually, CGC also points out that “retail is going through a transformation that may cost many jobs, but is also creating many jobs”. Brick and mortar jobs lost are more than offset by internet retailing. The BLS numbers on retail trade hires also has its own established trend:

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As I mentioned last week, recent trends in aggregate hours worked do not suggest strongly rising layoffs:

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But perhaps if we keep calling, something will eventually show up.

THE DAILY EDGE: 26 FEBRUARY 2019

Chicago Fed: Slower Growth in January

The Chicago Fed National Activity Index weakened in January, pointing to softer economic growth. (The Daily Shot)

Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) fell to –0.43 in January from +0.05 in December. One of the four broad categories of indicators that make up the index decreased from December, and two of the four categories made negative contributions to the index in January. The index’s three-month moving average, CFNAI-MA3, decreased to a neutral reading in January from +0.16 in December. (…)

When the CFNAI-MA3 value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above -0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended.

CFNAI and Recessions

February Vehicle Sales Forecast: 16.6 Million SAAR

From JD Power: J.D. Power and LMC Automotive Forecast February 2019

“The year is off to its slowest start since 2014 with the industry set to post sales declines again in February. While retail sales through the first two months will be down more than 4%, it’s important to note that January and February are among the lowest volume sales months of the year.” (Last year the two months combined to account for only 13.5% of the annual total.)
Looking ahead to the coming months, the industry should expect to receive a slight boost with the recovery of any lost sales due to inclement weather. [Forecast: total sales 16.6 million SAAR]

This forecast is for sales to be about the same level as in January, and down from 16.9 million SAAR in February 2018. 

Tariff Worries and U.S. Business Investment, Take Two

This is from the Federal Reserve Bank of Atlanta which concludes that

All told, our [survey] results continue to suggest that tariff hikes and trade policy tensions have had a rather modest impact on U.S. business investment. Of course, tariffs and other trade barriers affect U.S. and foreign economies through multiple channels. Even if the near-term business investment effects of trade policy developments are modest in magnitude, trade barriers can disrupt supply chains, raise input prices, and lead to higher prices for consumer goods. That’s important to keep in mind as the trade policy outlook remains murky.

But this slide suggest that the effects of the trade wars may still be working their way through the economy:

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World Trade Slowed at End of 2018 World trade fell at the end of last year as imports to and exports from China plummeted, a sign that higher tariffs and the threat of more to come are cooling global economic growth.

Data released on Monday by the CPB Netherlands Bureau for Economic Policy Analysis indicated that the total volume of goods moving across borders increased 3.3% in 2018, a slowdown from the 4.7% rise recorded in 2017.

But flows in the final three months of the year were 0.9% down from the previous quarter, and China’s trade with the rest of the world accounted for most of the drop. (…)

China’s imports fell 13% in December compared with the same month in 2017, while exports were down 5.6%. Trade flows in and out of the U.S. and the eurozone were largely flat in the final quarter of 2018 compared with the previous quarter. (…)

Since the shutdown of the U.S. government delayed the publication of December trade figures, economists at the CPB assumed there was no change in U.S. trade flows between November and December.

Moreover, there are few signs of a strong rebound this year. A January survey of 13,500 manufacturing companies in more than 40 countries by data firm IHS Markit found orders for new export work decreased for the fifth straight month and by the largest amount since May 2016. A measure of likely trade flows for the first quarter of this year from the World Trade Organization fell to its lowest level since early 2010. (…)

Source: Deutsche Bank Research (via The Daily Shot)

Chinese orders for German machine tools fell 24% between January and September compared with the year-earlier period. By comparison, Chinese orders jumped 11% in 2017.

That is in line with other economic data and surveys from around the world suggesting trade uncertainty has sapped business confidence and weakened business investment. In the U.S., a widely watched measure of how much businesses are investing fell for the fourth time in five months at the end of 2018. (…)

U.S. exports peaked in May and have trended lower since. Food exports, hit by retaliatory tariffs that targeted America’s agricultural heartland as well as the effects of a strong dollar, faced an especially sharp decline. (…)

  

(…) “The reality is that the global economy is slowing,” he said. “You’ve got negative growth in Italy, Germany may just grow…1% this year, [and] a slowdown in China. These are all things that we need to factor in.”

Slower global growth would crimp U.S. exports and could also negatively influence financial and asset markets, a primary transmission mechanism for monetary policy. “That’s definitely a relevant factor in our thinking,” he said.

Mr. Clarida also cited potential risks from the lack of monetary policy firepower available to the large central banks abroad, particularly in Europe and Japan. “On balance, that makes the global economy more fragile,” he said.

Still, Mr. Clarida didn’t signal significant concern about the U.S. economy right now. “The U.S. economy is in a good place right now,” he said. (…)

Saudis Likely to Push to Maintain Output Cuts Despite U.S. Pressure   Saudi Arabia and others in OPEC are likely to back a continuation of oil-production curbs when the group meets in April, according to officials in the cartel, in defiance of U.S. pressure to keep crude prices low.
U.K.’s May Considers Brexit Delay to Avoid No-Deal
  • U.K. Labour Party Would Back Second Brexit Referendum The U.K.’s main opposition Labour Party said it would support holding a second Brexit referendum, a policy shift that breathes some life into the prospect of Britons voting again on whether the U.K. should leave the EU.
EARNINGS WATCH

Almost done with 445 reports in. The beat rate is steady at 69% but the surprise factor edged up to +3.3% and the blended growth rate rose to 16.5% (13.8% ex-Energy) from 15.8% on Jan. 1.

Q1’19 estimates keep slipping: now –0.9% (-0.2% ex-Energy). Trailing EPS are $162.74.