By now it is clear to even the most tenured economists that the half of the US economy, the one that deals with manufacturing and industrial production, is sliding into, if not already, in recession with today's contractionaryChicago PMI and subzero Dallas Fed data confirming this deterioration.
But while the NBER is notoriously behind the curve when it comes to determining the onset of recessions, the market may have already spoken, and nowhere louder than in the collapse of corporate cash flow generation. This collapse in EBITDA is also what we cautioned three weeks ago is the biggest risk facing the economy.
This drop in cash flow is also one of the key catalysts listed by JPM in its report (noted earlier) which said it is time to lower allocation to US equity exposures as "the long period of indiscriminately buying any dip might be coming to an end."
Specifically, JPM looks at the corporate financing gap, the difference between organic cash flow and the outflow on dividends and buybacks, and is very concerned with what it sees.
The current deterioration in the credit market is particularly worrying at a time when corporates are becoming more and more dependent on external sources of liquidity. The US corporate financing gap – the difference between cash flow generation and spending on capex and dividends – has turned strongly negative. In the past, when the financing gap went strongly negative, the next downturn was just around the corner.
And here is the chart which JPM believes suggests the next downturn may be "just around the corner."
Will it be different this time? Here JPM is pessimistic again, for the simple reason that any attempts to extrapolate profit margins, the lifeblood of corporate cash flows, suggests that much more pain is ahead:
"If we were to perform a simple modelling of NIPA margins, using as inputs the unemployment rate, wages and nominal GDP growth, we get as a result a clear deceleration in profit margins next year."
One wonders, and can only hope, that these observations are part of the Fed's deliberations as Yellen and company sit down in two weeks to discuss whether the US economy is finally "strong enough" to weather the first tightening cycle in nearly a decade.
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - Nov. 29th, 2015 - Dec 5th, 2015
RISK REVERSAL - WOULD BE MARKED BY: Slowing Momentum, Weakening Earnings, Falling Estimates
JAPAN - DEBT DEFLATION
EU BANKING CRISIS
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
TECHNICALS & MARKET ANALYTICS
COMMODITY CORNER - AGRI-COMPLEX
THESIS - Mondays Posts on Financial Repression & Posts on Thursday as Key Updates Occur
Gordon Long, FRA Co-Founder had a conversation with Bill Laggner. Principal and Co-Founder of Bearing Asset management in Dallas, TX. Mr. Laggner and his partner manage the Bearing fund using an Austrian economics lens in terms of identifying boom-bust cycles, value in the market place, bubbles, and distortions created by both fiscal and monetary authorities to manage wealth in today’s environment that’s unprecedented in terms of intervention.
“We started back in 2002, creating the Bearing credit index when we say that authorities would not let the recession play out”
On describing the Austrian school of economics, Mr. Laggner says that Austrian economists would categorize their theory as human action and individual decision making and their responsibilities of those decisions being what really creates normal economic activity. He points out how unfortunate it is that today we have fiscal and monetary intervention which distort human actions.
“We create these boom-bust cycles that are magnified by the very interventions that we’re witnessing today”
SAVINGS & PROPER ALLOCATION OF THOSE SAVINGS
Mr. Laggner thinks that one of the key aspects of the Austrian economic theory that investors should pay attention to is that one has to have savings and a proper allocation of those savings. He also says that people have to quantify both risks and return as well.
“In that environment as well, you would want interest rates to be set by the market place and not a group of bureaucrats who are essentially socialising credit”
On whether we have an inflation or deflation right now: There is a lot of discussion about inflation in the Austrian theory in terms of the phenomena comes about in terms of pricing, in light of that we have deflation in commodity prices which was a function of the excess supply created by false signals coming out of China. According to Mr. Lagger we are facing a deflationary state as of right now.
Mr. Laggner has looked into commodities in China and could tell that it was hard lending as debt was not serviced there and the fact that Glencore was essentially extending credit into the Chinese market place while the signals were false, the copper breaking down meant the company got into huge amounts of debt. In as recent as September their shares nose-dived 30pc. So China and Glencore are the canaries in the coalmine when it comes to credit cycles in the commodity market.
CREDIT CYCLE HAS TURNED
Mr. Long stated that the credit cycle is now changing, taking its signals from the business cycle. This was agreed upon by Mr. Laggner who in his own words said:
“We’re at the end of the credit cycle, the whole mal-investment in shale oil…tens of billions of dollars in lost wealth”
For the future, Mr. Laggner anticipates a massive series of defaults, resulting from huge deflationary pressures and a tightening by the market place, which is basically an unintended result of constant intervention. We are looking at corporate bond defaults, sovereign defaults which will send shockwaves into the currency system.
“we’re probably looking at some kind of new currency system, which looks likely to be gold”
At Bearing Asset Management: They run an aggressive, long-short portfolio, they looked at eco-bubble that were shortable they thought the stock prices would be wiped out. So ultimately they shorting something that eventually goes to zero. However they went long on Gold.
Mr. Laggner points out even in the turmoil we’re in he remains optimistic. He thinks that technology will be the savior as the wheels are coming out from the bus, looking at how the internet connects people all over the whole who do business daily.
“we’re coming to a realization that we can look to each other and share expertise, knowledge, goods and shy away from things like speculating in commodities, speculating in real estate, speculating in the stock market and get back to pricing money correctly…”
“The beauty of America is that the entrepreneurial DNA in this country is unlike any other part of the world”
Mr. Long mentioned that if we could take away centralized control and planning from the planners and controllers in a logical fashion, adjustment will happen. He said that “a crisis is nothing but more than change trying to happen.”
If people want to get more information and insight from Mr. Bill Laggner, they could go to Bearingasset.com/blog. They write a lot about relevant topics relating our wealth and the financial markets.
Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.
THE CONTENT OF ALL MATERIALS: SLIDE PRESENTATION AND THEIR ACCOMPANYING RECORDED AUDIO DISCUSSIONS, VIDEO PRESENTATIONS, NARRATED SLIDE PRESENTATIONS AND WEBZINES (hereinafter "The Media") ARE INTENDED FOR EDUCATIONAL PURPOSES ONLY.
THERE IS RISK OF LOSS IN TRADING AND INVESTING OF ANY KIND. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
Gordon emperically recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, he encourages you confirm the facts on your own before making important investment commitments.
Information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities.
Please note that Mr. Long may already have invested or may from time to time invest in securities that are discussed or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.
FAIR USE NOTICEThis site contains
copyrighted material the use of which has not always been specifically
authorized by the copyright owner. We are making such material available in
our efforts to advance understanding of environmental, political, human
rights, economic, democracy, scientific, and social justice issues, etc. We
believe this constitutes a 'fair use' of any such copyrighted material as
provided for in section 107 of the US Copyright Law. In accordance with
Title 17 U.S.C. Section 107, the material on this site is distributed
without profit to those who have expressed a prior interest in receiving the
included information for research and educational purposes.
If you wish to use
copyrighted material from this site for purposes of your own that go beyond
'fair use', you must obtain permission from the copyright owner.