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Storm Watch

In a recent conversation with one of our economists, I asked him how we distinguish between a recession and a depression. The straightforward answer was to wait and see whether accommodations ultimately coming from the Federal Reserve were working or not. Obviously, if the economy does not respond, it would result in a depression. In other words, there is no real proactive analytical method to project whether an economic slowdown will result in either a recession or depression.

There are many signs of economic weakness and we’re unable to determine whether they are cyclical (looking for a recession) or secular (looking for a depression). We are clearly in the recession camp and are frankly waiting for more definitive data to effect the markets. Those who expect a soft landing are ignoring some important facts. Here are some of the month-over-month data points1:


Housing starts:-11.3%
NAHB housing index:-10.0%
New home sales:-8.7%
Conference Board consumer confidence:-5.2%
Auto sales:-4.6%
U of Mich consumer sentiment index:-2.6%
Existing home sales:-0.7%
Real retail sales:-0.1%
Real weekly earnings:-0.1%

Clearly, this is not a picture of strength.

Looking ahead, we can see employment disruptions coming from the Teamsters, the Pilots Union, the UAW, and soon, the Culinary Workers Union which is threatening to strike Las Vegas Hotels & Casinos. Is there really a +40% wage increase in store for 168 million workers in the country?

The technical picture for stocks has joined the bad bond market in a move southward. The drop in bonds has lifted interest rates to where 30-year mortgage rates have reached 8%. What might this portend for home prices? The Fed Chairman keeps repeating his new favorite slogan “higher for longer” so there doesn’t appear to be any help on the way for interest rates.

The Stock Market technical picture now looks like the third and final leg of a bear market. For those who need clarification, recent final legs to bear markets have resulted in drops of -25% to -50%.1 With that picture in mind, we can assume that the market rally for the first half of this year was a bear market rally and no more. Meanwhile, the P/E (price/earnings) multiple is still high at 18x, and earnings projections are coming down. We must remember that the price of oil (controlled by the Saudis) has been moving higher. A higher price for oil represents a profit margin squeeze for most companies.

Corporate debt service numbers are also at a new high for the S&P 600. 30% of the Russell 2000 debt is in floating rate debt, not a solid footing.1 As to loans in general, Bankers remain pessimistic, expecting a deterioration of loan demand over the next six months.

There are other facts that we can go into, but they pretty well support the picture we’re giving you. The big picture fact that says it all is the amount of cash in our entire banking system, known as M2. This includes all demand deposits and cash in circulation. Our M2 monetary aggregate has declined by -7.9% over the last year. I have a hard time believing that our economy can grow when “money,” in the aggregate, is declining.

Based on what we can see today, we seem to be headed toward hard times. A contrarian would say that when things appear to be this bad, it’s probably time to buy. I am a contrarian soul, and I want to rally to this call, but I don’t feel the market can see the bottom yet. We’re probably months away from something definitive that will turn the market.

The look ahead is all speculative. China is in a deflationary slump. Germany seems closely behind. Russia and Eastern Europe are in a conflict and whether this spreads to the Pacific is the big question. Saudi Arabia is flexing toward positioning with its hoard of wealth.

Lastly, it will be important to stay current with regard to our political situation. The 2024 election results are probably the most critical in determining our long-term view. Half of the candidates want tax increases so the outcome will give us a picture of taxes for the long term. The present tax code expires at the end of 2025, so a new code will be coming, whether we like it or not.

Policies advocated by candidates should be watched. President Biden is an advocate for high taxes and large expenditures for “green policy.” Donald Trump is calling for a tariff of 10% for anyone selling to the United States. We are not fans of tariffs. In fact, a check in the history books will highlight the “Smoot Hawley Tariff” which helped bring on the Depression in the 1930s. A tax increase levied on a weakened economy helped also. When looking at the present situation, we see many similarities that could slip into something worse than a recession.

We are actually more hopeful than that, but we will stay disciplined and keep risk at an appropriate level. There you have it—in straight communication. We welcome your comments and views.


[1] Rosenberg Research Associates Inc.

About the Author


Harlan J. Cadinha
Founder, Chairman and Chief Strategist
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