The Recesssion is Here, Prelude to Depression,
by Robert Gore
May 15, 2015
The recession has arrived. The first estimate of first quarter GDP was for .2 percent annual growth. That number will be revised into negative territory after March’s increase in the trade deficit, which subtracts from GDP, is incorporated into the next estimate.The Atlanta Federal Reserve issues a GDPNow forecast that did a far better job than Wall Street and Washington economists of predicting the first quarter GDP (it was at .1 percent). For the second quarter the Atlanta Fed is at .7 percent, but that’s down from a recent .9, and there is still a month and a half left in the quarter (“Q2 GDP Forecast Cut To 0.7% By Atlanta Fed,” zerohedge.com). In all likelihood, first half GDP will be negative, which will be dismissed as a “technical” recession by most of the mainstream “experts.”
Those are the same experts who assured us that the big drop in oil prices would act as a tax cut, spur consumer spending, and propel the economy to the nirvana of 3 percent annual growth—which the US has not had for 9 years—this year. What happened to the tax cut? According to the experts, consumers instead paid down debt, and winter kept them out of the malls. There wasn’t much snow in April, however, and retail sales were flat month-over-month, up only .9 percent year-over-year. Since inflation was over 2 percent, real sales have declined since last April. One factor boosting first quarter GDP was an inventory build. Retailers, wholesalers, and manufacturers were stockpiling finished and intermediate goods and raw materials that they could not sell. If final sales are flatlining, inventories along the production chain will have to be disposed of, reducing second quarter GDP.
What the experts missed, back when gas prices were dropping and they were making their predictions, were rising medical insurance costs. “What Happened To The Big Cut In Gas Bills—Obamacare Ate It,” by Michael Pento at davidstockmanscontracorner.com is a good analysis of the impact of the Affordable Care Act. It has made medical care and insurance less affordable, as anyone who knows anything about how government actually works would expect, wiping out most if not all of that gas tax cut, some of which the market has already taken back.
With disposable income shrinking, demand collapsing, and inventories piling up, one would expect prices to drop, and apparently they are. Yesterday the government reported the Producer Price Index was down .4 percent in April and 1.3 percent year-over-year (“Wholesale Deflation Strikes US Economy: April PPI Has Biggest Annual Drop In 5 Years,” zerohedge.com). Import prices fell 10.7 percent in April, and even backing out the fuel category, the drop was 2.7 percent (“Import Prices Plunge For 9th Month In A Row, Biggest Drop Ex-Fuel Since 2009,” zerohedge.com).
SLL does not generally deep dive into economic statistics. They are often misleading, usually revised, and always boring. For those who want more facts-on-the-ground chapter and verse, see “Why the Heck Is the Trucking Business Slowing Down?” on wolfstreet.com, “The US Is In Recession According To These 7 Charts,” from zerohedge.com, and “Is The Dam Bursting?” from Jeffrey P. Snyder at davidstockmanscontracorner.com. SLL tries to anticipate what’s going to happen and lets markets and later, economic reality and the statistics, catch up. By definition that makes SLL early. Generally the bigger and more obvious the impending trend change, the earlier SLL is in highlighting it.
SLL has been predicting depression since last year (see “Oil Ushers in the Depression,” SLL, 12/1/14), not just the recession at which the statistics now seem to be pointing. That prediction is grounded on a few facts. The world is more indebted than it has ever been and debt has grown far faster than underlying economies for decades. The global economy is saturated. Years of central bank monetization of financial assets and interest rate suppression, culminating in the most massive such effort in history over the last six years, have driven the marginal return on productive investment to less than zero, left the global economy with huge surpluses of everything except solvency, and retarded saving, the true source of future economic growth. Finally, governments and central banks have no pixie dust left to counter economic contraction and its attendant financial stress. Short-term interest rates are zero, or in some cases negative; with the world choking on it, additional debt only imposes additional costs and no benefits, and central bank balance sheets are already grotesquely swollen relative to their equity capital.
Pixie dust has been the only thing keeping equity markets afloat. Paradoxically, gathering economic weakness may keep them elevated a little longer. It delays—in the case of the Federal Reserve—any prospective interest rate increase, and extends cheap money policies in Europe, China, and Japan. Speculators may not realize the economy is heading south until they happen upon a bread line or soup kitchen (doubtful), or Apple announces a shortfall in revenue and earnings (more likely). One more reason SLL is predicting a depression: those speculators are riding record leverage funded at minimal cost (see “Crisis Progress Report (7)-Carry On!” SLL, 5/11/15), and their bid disappears at the first sign of trouble ( see “How the Liquidity ‘Delusion’ Leads to a Crash,” by Wolf Richter, SLL, 5/15/18). Which leaves markets primed for a fall that could be set off by anything, for instance Janice Yellen clearing her throat. SLL wishes the best to anyone still bullish and confident they can get out unharmed when the music stops.
