Recession Odds Soar To 70% In Two Years, According To JPMorgan

A lot can change in less than two months: back on October 18, when the initial market drop seemed like just another dip-buying opportunity, JPM predicted that the odds of a recession in 1 year were a modest 27.6%, rising to 60% if the forecast period is extended to two years.

Well not anymore, because according to JPM's latest "real-time quant monitor", the risk of a recession has since spiked to a no longer trivial 35%, the highest in series history (and up from 16% back in March)...

... while the probability that the next presidential recession will take place during a recession (i.e., recession odds in two years) has now surged to more than double that, or over 70%.

While in simple regressive quantitative terms, recession risk is expected to grow substantially by 2020 - assuming it does not strike in 2019 - a qualitative explanation for why a recession may strike then is because that's when Trump's fiscal stimulus is expected to shift from an economic tailwind to a headwind, all the more now that Democrats have won the House and have made any further fiscal stimulus virtually impossible

Meanwhile, some of JPM's other near-term forecasts include:

• GDP growth nowcast drops to to 2.22% from 2.27%
• The forecast of average payroll growth over the next 12 months fell to 124k from 146k
• The forecast of core PCE inflation over the next 12 months was little changed at 1.92%

As a reminder, JPM calculates recession probabilities based on regression models, which track such indicators as prime-age male participation, consumer and business sentiment to prime-age male labor participation, compensation growth, and durables and structures as a share of gross domestic product.

Separately, Bank of America is out with its own latest recession forecast, and when looking at blowing out credit spreads and a yield curve which "has flattened like a pancake with part of the curve already inverting (the 2yr-5yr)", notes that such moves are usually indicative of a weakening economy, prompting recession fears, and notes that its "recession models - which are a function of various market measures - show that the risk of a recession in 2019 is now between 20 and 37%"

To avoid scaring too many clients, BofA is clearly unhappy with its existing model, and in a Friday note writes that it is introducing a new big data recession probability model that accounts for a broader basket of indicators: the 3mo-10yr treasury spread, building permits, commercial & industrial (C&I) loans, S&P 500, real consumption, and corporate spreads. According to this model, the risk of a near term recession is far lower, predicting a 6-mo ahead probability of only 9%.

To underscore its (still) bullish bias, BofA urges clients to keep an eye on jobless claims which are among the five most relevant indicators of a coming slump: "In the last seven recessions, the 6-month growth rate of initial claims has, on average, jumped double digits heading into the recession."

That said, claims have trended higher recently, with the 4-week moving averaging increasing from 206.5k in late September to 228k as of the latest data. While BofA observes that this is a noticeable upward trend in a short period of time, "it looks less frightening over a longer-period and part of the uptick can be explained by noise around holiday periods."

Still BofA will continue to monitor claims as it has shown to be one of the best recession indicators and notes that "increasing claims would portend a slowing in hiring and rising unemployment. In our view, sub-125k on nonfarm payrolls would likely be sufficient to push the unemployment rate higher, which is a clear signal that the cycle is turning."

Bank of America’s other top recession indicators are auto sales, industrial production, the Philadelphia Fed index, and aggregate hours worked. Some of those are weakening, but none are falling off a cliff according to the bank.

Another early indicator of a recession is business sentiment, which has softened recently, and is one reason for the increase in JP Morgan’s recession-predicting index, which is “getting close to the highest levels of the expansion so far,” analyst Jesse Edgerton says. The cycle peak came in 2016 when growth and markets wavered.

“The risks are drifting toward the economy being softer,” Edgerton said, adding that surveys aren’t uniformly weak, and his team still isn’t predicting a 2019 recession.

The third, and most relevant pre-recession indicator is of course the yield curve, for one simple reason: all the past 7 recessions were preceded by a yield curve inversion.

"We hardly have any empirical regularity that’s this regular," said San Fran Fed President Mary Daly said in a November interview. Curiously, even with the 2s10s just 13 bps away from 0, Fed officials so far don’t sound overly concerned about the curve. They’re monitoring it, but they aren’t willing to focus on it exclusively so long as real economic data hold up as Bloomberg notes.

There is also the question of timing:while a yield curve inversion virtually assures a recession, the timing remains unclear, prompting UBS Global Wealth Management’s Chief Investment Officer Mark Haefele to write in a Dec. 5 note that inversions are a "flawed crystal ball" as the lag between inversion and recession was longer than 24 months on the last two occasions.

* * *

And yet, despite the cautious optimism from the sell side, the Fed’s own Survey of Professional Forecasters is starting to sour on the economy’s prospects four quarters from now: the Survey puts the odds that economy will be shrinking in a year’s time at 23 percent, the highest level since 2008.

Even so, this implies a recession probability of less than 20% according to a Goldman Sachs analysis, with the vampire squid calling forecasts pretty inaccurate that far out, and respondents put a low probability on a recession within the next couple of quarters.

That “supports our view that a 2019 recession is unlikely,” economists Daan Struyven and David Mericle conclude. The wisdom of crowds can work, they say, “but primarily at relatively short horizons.”

In the end, as Bloomberg notes, markets and hard data are clearly diverging in their signals about recession odds as of this moment, with most economists - still stuck in a hopium mood - clearly sticking with the latter until a more decisive shift becomes obvious.

"The incoming data continues to be good,” Deutsche Bank’s perpetually cheerful Torsten Slok wrote last week: “Where is this recession the market is so worried about?"

Well, according to some it has already started... and judging by the market, traders don't exactly disagree.

Fonte: qui

Peter Schiff: "The Truth Is We Don't Have A Booming Economy"

Peter Schiff doesn’t mince words when he declared the precarious state the United States economy has found itself in. As SHTFplan.com's Mac Slavo notes, Schiff says “the truth is we don’t have a booming economy,” and he’s not the only one who has noticed.

October was the worst month for global equities in more than six years. Globally, stock markets lost 7.5%, their worst month since May 2012. Even with the late rally, it was the biggest monthly decline in the Nasdaq since 2008.

“All of the bulls were out in force on the financial networks claiming that the correction is over. Everybody was confident that the lows are in, that the big back-to-back rally is proof and you better buy now, otherwise you’re going to miss the rally, and this is the typical correction and now it has run its course. And you know what? If this really was the end of the correction, most likely there wouldn’t be so many people that were so confident that it’s over. You’d have a lot more fear, especially on Halloween. The fact that there is no fear, to me, shows that it’s more likely that this is not the end of the correction, but the beginning of the bear market and that this rally is a correction.” –Peter Schiff via Seeking Alpha

Schiff is well-known for predicting the 2008 financial crisis, but that becomes slightly more real when hearing him say that the job market if a gigantic bubble. Schiff says that jobs are just one more bubble that’s about to burst.

Two hundred thousand jobs a month in an economy the size of ours, especially given how few people, or what a large percentage of the workforce is not working, we should be creating a lot more than 200,000 jobs per month. But we’re not.”

Even though wages are rising for people that have jobs, the cost of living is rising faster. But the cost of servicing their debt is rising even faster than that.”

As far as the job growth goes, the mainstream keeps pointing to it as a sign of a booming economy. But as Peter pointed out, we’re borrowing a tremendous amount of money to get this jobs growth.

Clearly, if we’re running record budget deficits, and record trade deficits, and everybody is levered up, you know, spending all of that borrowed money creates some jobs. But those jobs are not sustainable because the debt is not sustainable. The consumption based on debt is not sustainable.”

Increasing prices is a direct result of a decade of Federal Reserve easy money policy, Schiff accurately says. Over the last 10 years, the Fed has printed trillions of dollars out of thin air.

The point is we’re running record trade deficits. We’re running huge government budget deficits. The GOP cut income taxes. We’re giving everybody money to spend, so people are spending.

And in the short-run, yes, you can goose up the economy and you can create some unsustainable jobs. But just because we have these jobs today doesn’t mean these jobs are going to be here tomorrow.”

And remember, Schiff concludes: "that every boom has been followed by a bust.”

Fonte: qui

Nassim Taleb Explains How The Global Economy Is More Fragile Today Than In 2007

In what was incredibly appropriate timing given the 'shocktober' market blowup, Bloomberg News invited "Black Swan" author Nassim Taleb to its set on Halloween for a discussion about the increasingly fragile market ecosystem in which we all reside, and the mounting risks that, Taleb believes, could soon ignite another financial crisis that will be even more severe than what we saw in 2008.

Taleb, dressed up as "black swan man", wasted little time in explaining how the global economy is becoming increasingly vulnerable to a global debt crisis, how the global quantitative easing did nothing to fix the underlying problem of too much debt - instead it exacerbated it - and how the inevitable reckoning might play out in markets once the long-dreaded "inflection point" finally arrives.

Taleb began the interview by describing how the global aggregate debt burden has only climbed since the crisis. And while this debt is no longer dangerously concentrated in a single sector, like, say, the housing market, it doesn't change the fact that the overall credit risk in the system has been amplified. And while central banks have for years managed to impose metastability in global markets, as they transition from a period of low interest rates back to "neutral", the destructive forces that they long suppressed will surge back to the surface.

Just like he did in the run-up to the 2008 crash, Taleb isn't trying to forecast the next crash; he's only trying to explain how the global economy has become "more fragile today" than it was in 2007.

"You put novocaine on cancer, and what happens? The patient is going to look better, he's going to feel better, but at some point, you pay a higher price."

And while this debt is distributed in different ways, "you don't get a free lunch." In other words, just because governments and corporate balance sheets have done most of the accumulating, doesn't mean that this debt is 'risk-free'.

"Governments, they think they can borrow for free. But they have had to borrow a lot. We have had to borrow more than $1 trillion dollars...and we're paying some $300 billion in interest.

This has left the US and the rest of the world on the cusp of a dangerous downward spiral.

"You can enter a spiral. In my mind, it's when governments have to borrow more and more to pay interest - like a Madoff scheme."

And once that spiral begins, it's incredibly difficult to arrest the progression.

"The minute you enter that phase, there's nothing healthy about it from an economic standpoint."

Take the US federal government for example. Not only has it accumulated another $10 trillion in debt since the crisis, but it also has "hidden liabilities" on its balance sheet that Taleb believes should be factored in to this total. Social security is one hidden liability. Student debt, which the government will almost certainly need to backstop, is another.

"But we've accumulated an additional $10 trillion in debt since the crisis. Plus we have hidden liabilities that should count as debt - like social security, you have hidden liabilities when you have to bail out firms, you have hidden liabilities from student debt...you have a lot of things, if you've committed to some expenditures, on top of debt you have hidden liabilities that should act like debt."

And while in the past, debt crises have been confined to emerging-market economies like Argentina, today, major developed economies like Italy are already seeing signs of strain as their populist government is hoping to expand the country's budget deficit, adding to what is already the third-largest debt-to-GDP burden in the developed world.

"Years ago we had a debt crisis...in 82' it started in Latin American countries...today it's hitting the core, it's no longer the periphery...look at countries like Italy...but it's getting closer to us."

In the past, the go-to fix for overwhelming debt has been inflation. But the problem with inflation - as the US experienced in the 1970s, is that, once it gets going, it can be almost impossible to control.

"In the past, the normal solution is inflation...but the minute you start to create inflation it's an animal, you can't control it...like we learned in the 1970s...price stability will not be there and traditionally it hasn't been controllable."

It wouldn't take much to trigger a debt crisis in the US. If the Chinese and other 'regular customers' of Treasury debt were to step away from the market, who would take their place?

"The Chinese and the overproducing states were regular customers...maybe they're not going to be there."

Circling back to central banks and their strategy for averting an all-out financial collapse, Taleb pointed out that QE's biggest accomplishment was the transfer of credit risk from individuals to the state. And with interest rates now beginning to rise, somebody is going to need to pay the price for all of this leverage.

"In 2008, we transferred debt from individuals to the states...now ten years later, we're starting to raise rates. We have to raise rates. It's unhealthy to keep rates at zero. So someone is going to have to pay the price.

Though debt isn't as concentrated as it once was, the first signs of stress, according to Taleb, are already beginning to surface in real-estate, where stress that has already appeared in the high end of the market will likely spread (a trend that we have anticipated again and again and again).

"The first shoe to drop will be probably real estate. The higher end real estate has already gone down world wide, people have noticed but they're not talking about it...it will be the higher end real estate first then the rest of the real estate market. One thing that quantitative easing did was increase inequality."

After real estate "the next shoe to drop" will be the stock market..."though what we're seeing today is nothing," Taleb said. Equities cannot maintain their high valuations when interest rates are rising.

"No...what we're seeing today is nothing...but you cannot maintain high valuations in the stock market with higher interest rates."

"With higher interest rates we're going to see some volatility."

While the risks are arrayed against the average investor, there is one "miracle scenario" that could save the US economy from an extremely painful bout of deleveraging. And that would be a combination of torrid real growth with low price instability - essentially a turbocharging of the "goldlilocks" economic conditions that enabled the ever-higher highs during 2017 and 2018.

"What we need, the thing that would save us, miraculously, is real growth without debt...real growth maybe miraculously will take us out...or maybe some type of inflation that maybe wouldn't cause so much price instability...but we've never seen that. Unless we have these two, we're doomed."

While anybody who has expressed concerns about the blowout in the US budget deficit under Trump should find Taleb's arguments compelling, a quick glance at the S&P 500's annualized returns over the past decade might be enough to quash these doubts. After all, why should investors listen to the doomsayers when so many crisis-era superstars, who built their reputations on the rightward bets they made during the runup to the crash, have not only failed to match their returns from 2007 and 2008, but have seen their winnings dissipate entirely in the years since?

Because, as has been demonstrated by at least one fund, the above assumption isn't entirely accurate. Mark Spitznagel, CIO at Universa Investments, which counts Taleb as an advisor, revealed back in September that funds betting on the "end of the world" can, in fact, produce alpha and tack on a few points to a fund's CAGR even during bull markets if the balance of allocations, and the hedging strategies employed, are calibrated in just the right way.

As he revealed in a letter to investors obtained by the WSJ back in September, Spitznagel has managed to outperform the S&P 500 by keeping the bulk of his money invested in a passive benchmark-tracker, while using a tiny sliver of his portfolio (just 3.3%) to buy up out-of-the-money put options when they're looking cheap. This has allowed Spitznagel to book staggering profits during a handful of blowups (like the August 2015 ETF flash crash, where this strategy returned 20% in a single day).

Watch the full interview below:

Fonte: qui

JPMorgan Now Sees 60% Odds Of A Recession In 2 Years

According to a new real-time economic monitor launched by JPMorgan this week, the US economy has a roughly 28% chance of falling into a recession over the next 12 months, a pessimistic take which is double the prediction spit out by a similar model used by the NY Fed which shows as 14.5% recession probability in 1 year.

The recession probability surges to 60% if the forecast period is extended to two years, or more than even odds that the US will be in a recession some time around the next presidential election.

JPM calculates recession probabilities based on regression models, which track such indicators as prime-age male participation, consumer and business sentiment to prime-age male labor participation, compensation growth, and durables and structures as a share of gross domestic product.

While in simple regressive quantitative terms, recession risk is expected to grow substantially by 2020 - assuming it does not strike in 2019 - a qualitative explanation for why a recession may strike then is because that's when Trump's fiscal stimulus is expected to shift from an economic tailwind to a headwind, all the more so if Democrats win the House and prevent any further fiscal stimulus from being enacted.

And speaking of upcoming recessions, yesterday we brought readers the latest bearish commentary from Guggenheim Chief Investment Officer Scott Minerd who in an interview with Goldman said that he expects a recession in just over a year, during which a 40% drop in equities is "justifiable to me on a technical and a fundamental basis" and that "by the end of Q2 next year, I expect risk-off everywhere." The good news is that it probably won't last too long, because in response "the Fed will cut rates to zero, employ aggressive forward guidance, and resurrect QE."

Fonte: qui

Peter Schiff Explains "What Happens Next" In 47 Words

Outspoken critic of The Fed and one of the few that can see through the endless barrage of bullshit to how this really ends, has laid out in a tweet "what happens next"...

Likely sequence of events:

1. Bear market;

2. Recession;

3. Deficits explode;

4. Return of ZIRP and QE;

5. Dollar tanks;

6. Gold soars;

7. CPI spikes;

8. Long-term rates rise;

9. Fed. forced to hike rates during recession

10. A financial crisis without stimulus or bailouts!

h/t @PeterSchiff

Fonte: qui