Congratulations America! You Destroyed The American Bears!

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I wanted to write an extended essay about why the recession bears failed so severely in this record-breaking economic cycle. However, to make it short and sweet, it boils down to 2 things.

The American Bears can’t read data correctly, and they always look at the world through an economic, political, ideological dark lens that clouds their judgment forever.

This is why you should always be skeptical of the extreme right wing, left wing, ideological groups or political people on T.V. or social media sites that talk about an impending collapse. Make sure that you listen to people that have a model first before a 21 second sound bite.

These were never valid reasons for an impending collapse since 2009

– Federal Reserve was created in 1913
– ZIRP Zero-Interest-Rate-Policy
– QE  Quantitative Easing ending
– Labor Participation Rates
– Everyone is working multiple jobs
– Everyone is a part-time worker
– Majority of Americans are working gig jobs
– Majority of the country is living in poverty
– Americans are sitting at home since 2010 not working or 1945 take your pick, same thesis, terrible logic
– Federal Debt is too high
– Consumer debt is too high, massive debt deleverage any second now
– Student loan debt (my favorite) 
– Auto loan delinquencies
– Hyperinflation
– Deflation
–  Wages are down
– Inequality
– The dollar about to collapse
– Gold 5,000 or 10,000
– Productivity vs. Wage Charts
– SNAP
– Retail apocalypse
– 96,000,000 million people out of the workforce
– No one in America has $400 in their savings account
– Robots took all the jobs since 1913
– Unemployment claims ticked up 6,000 in one report
– Harry Dent, David Stockman, David Rosenberg, Jim Rodgers,  Peter Schiff, etc., etc., etc., etc., etc. This list can go on for days.

Ok, you get my drift we know who these people are and which ideological and political groups they represent. I promised to look forward to not the past. Let this country bury the American bears in each economic cycle post-1790.
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Let the history books remember the Great American Bears of this cycle of those who never had the faith or the proper training to read economic data correctly.  When they have passed on to the afterlife, expect them to keep on talking about those things that never really created the collapse of America.

If you really want to know about when a recession is coming, follow the numbers, numbers can’t lie.

3 of my 6 recession flags are up, but until all 6 are up, I won’t utter the R-word. What happened in this record expansion is that everyone went haywire recession crazy in a time where time stamping your calls was easy to do. This has left a graveyard of American bears that can never take back their terrible recession calls.

However, moving forward now, let’s take a look at where I believe we are.

3 Recession flags that are up for me now

1. Fed rate hike cycle has begun, check.

This is a no brainer, when we were down to zero interest rate policy, pretty much you needed the Fed rate hike cycle to start, which means the Fed felt comfortable with hiking rates. I can understand why some would call for a double-dip recession with ZIRP in play, but I never agreed with their reasons why.

From Doug Short
https://www.advisorperspectives.com/dshort/updates/2019/06/03/treasury-yields-a-long-term-perspective
June Fed Funds rate

2. The unemployment rate gets down to a satisfied % for me, and it was 4.9%, check.

As you can see below its rare to have double-digit unemployment rates in a recession, it has only happened twice post WWII, but last time this happened, we did see a 5% + decrease in the unemployment rate before the next recession occurred. I do understand that labor participation and demographics play a part in this, but I didn’t want to check this flag off until we got to 4.9%.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/06/07/may-jobs-report-75k-new-jobs-worse-than-forecast
June Jobs and stocks

These are early stage recession flags that are not as important as the other ones.

3. Yield inversion check!  Ok, this might be a controversial viewpoint. At the end of 2017, I forecasted that yields would invert in 2018.

“I am also looking for yields to invert in 2018.”

https://loganmohtashami.com/2017/12/31/2018-economic-housing-predictions/

Technically only 2/5 & 3/5 inverted and the 2/10 inversion only got to a 9 basis point spread. However, my take was that we inverted the yield curve last year, and I haven’t changed my mind at all. More on that call and my 10-year yield call going to below 2% here which has to do a lot with global and domestic PMI data.

“For 2019, I am sticking to my call that the 10-year yield will channel between 1.60% to 3%.  If world trade gets weaker, we could see the 10-year yield with a 1% handle again.”

https://loganmohtashami.com/2019/06/24/2017-yield-inversion-call-looks-great-now/

Now comes the essential stuff. How to read the later stage economic cycle data which would lead to a recession.

4. Housing Starts. Typically housing starts to fall into a recession. This is going to be tricky, we experience the weakest new home sales cycle, and housing starts cycle ever recorded in U.S. history. 

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/06/18/secular-trends-in-residential-building-permits-and-housing-starts
June Starts + Permits adj

Since this fact has stayed with us this entire expansion, we need to be mindful of this going out.

Last year the housing data on 3 points showed what we consider to be a peak of the housing data line.

– HMI data fell noticeably 
– New home sales went negative year over year 
– Monthly supply spiked up to 1994 levels 

Under those data lines, a housing peak should be called, but back then, I warned not to call for the top in housing just yet.

“Despite the terrible optics for the new home sales market, I caution everyone not to assume that we have hit our peak and are heading for an epic crash in housing starts and new home sales.  New home sales and starts are still very low. In order to lift the dark cloud hovering over the new home sales, we will need to see the following:” “You need to see monthly supply get back down below 6.5 months and new home sales show trend growth of 640K with revisions confirming this.” “That isn’t a tall order, especially if the builders start to discount, but until this happens, don’t expect to see too much action in housing starts.

https://loganmohtashami.com/2018/12/18/the-housing-market-has-materially-changed-but/

Just for now, keep an eye out of monthly supply data, and as long as 3 months average supply stays below 6.5 months and sales trends stay above 640,000 we are right.

From Fred:
https://fred.stlouisfed.org/series/MSACSR

June Monthly Supply
More on this subject in my recent interview on Bloomberg Financial

https://loganmohtashami.com/2019/06/26/bloomberg-interview-are-the-homebuilders-in-trouble/

5. Leading Economic Indicators Fall 4-6 straight months with no recovery during those months. 

From the Conference Board 
https://www.conference-board.org/data/bcicountry.cfm?cid=1

“The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. The leading, coincident, and lagging economic indexes are essentially composite averages of several individual leading, coincident, or lagging indicators. They are constructed to summarize and reveal common turning point patterns in economic data in a clearer and more convincing manner than any individual component – primarily because they smooth out some of the volatility of individual components.”

 The ten components of The Conference Board Leading Economic Index® for the U.S. include:

Average weekly hours, manufacturing

Average weekly initial claims for unemployment insurance

Manufacturers’ new orders, consumer goods and materials

ISM® Index of New Orders

Manufacturers’ new orders, nondefense capital goods excluding aircraft orders

Building permits, new private housing units

Stock prices, 500 common stocks

Leading Credit Index™

Interest rate spread, 10-year Treasury bonds less federal funds

Average consumer expectations for business conditions

For full press release and technical notes:

http://www.conference-board.org/data/bcicountry.cfm?cid=1

Notice below these data lines gives you a good heads up into each recession, and currently, it hasn’t done much lately.

From Doug Short
https://www.advisorperspectives.com/dshort/updates/2019/06/20/conference-board-leading-economic-index-unchanged-in-may

June LEI

June LEI YoY

6. Look for sectors that can create a supply shock that would create a noticeable rise in unemployment claims that would mean we are in a recession. 

We already had a PMI recession in this cycle, and that couldn’t do it, housing was flashing recession indicators but never really had any major supply shock that couldn’t be fixed. We had something called the retail apocalypse as well, and that didn’t do it either. I would keep an eye out on Auto sales and commercial real estate to see if that may be the sector.  Another graveyard bad recession call data line has been unemployment claims. Every time we see a spike on unemployment claims, people start to use the R word. I am willing to talk about unemployment claims forming at the bottom but not using this as a recession data line yet.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2019/06/28/weekly-unemployment-claims-up-10k-worse-than-foreacast

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I know right now we have a lot focus on the trade war. However, I don’t believe in the thesis of a trade war. Trade war to me really means we plant tariffs in and we keep them going on forever to change behavior not try to make a deal. I do understand that the current trade tap dancing game everyone is playing can cause pain for specific sectors, but I am not buying this whole trade war thesis and never have since day 1.

Remember this, we roughly 329,000,000 Americans living here, over 157,000,000 working Americans, and 12,839,000 of them, are working in the manufacturing sector. However, all 329,000,00 are net consumers of goods and services. I don’t buy the thesis that the world is going to go into a massive trade war that can impact the reality that as a world we are consuming more goods and services in the past 30 years than the past 300 years.

My best advice I can give you all is this. If people are talking about economics or a recession and the words President Trump, President Obama, Socialism or Capitalism, run away. These kinds of conversation starting points lead any talk down the nonintellectual fighting pits.

Economic cycles come and go, we always find a way to recover, and most Americans are still working even in the darkest days of any recession.

I leave you with this last fact. All these things happened now in this record expansion while the recession bears screamed for a collapse.

– The Longest Job expansion ever recorded in U.S. history  104 months and growing still.

– The Longest economic expansion ever recorded in U.S. history. 

– The most significant job openings ever recorded in U.S. history over 7,600,000 in this cycle, and we have 1.6 million more job openings than unemployed workers.

– The lowest level of unemployment claims vs. the civilian labor force ever recorded in U.S. history.

Not bad considering how many people doubted not only America but its people, our people are much stronger, smarter, more robust and pretty much badasses than the American bears give them credit because we hustle hard, we work hard, and we have an unbelievable work ethic. This battle that I am having with America bears, it’s only in its infancy, until death do us part.

Have a happy and safe 4th of July!

Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data  daily on his own facebook page https://www.facebook.com/Logan.Mohtashami