Another warning light is blinking on the dashboard of the US economy. This time it is the inflation-tied Consumer Price Index (CPI) which has the bears scurrying for their bomb shelters. David Rosenberg, a so-called perma-bear, was filling Twitter feeds with his unique brand of doom and gloom for the Dow Jones and wider US stock market.
Gluskin Sheff Economist: CPI Data Portends Recession
Today's CPI data confirmed that the peak in core inflation has been turned in. The YoY trend peaked either just ahead of the last three recessions or just as it was getting started. The NFIB index confirmed that pricing power is fading and fading fast.
— David Rosenberg (@EconguyRosie) March 12, 2019
Today’s CPI did miss targets against an expectation of a 0.2% increase relative to the 0.1% reading. The Dow Jones is easing gently off its highs today as well, having lost 53.29 points as of the time of writing.
In isolation, that’s a snoozefest, but Mr. Rosenberg did note something particularly interesting about the data as a predictor of recession. Apparently, he is using price pressure as a sort of alternative yield curve.
Bond-Yield Inversion: a Strong Indicator of Recession
Given that interest rates are always somewhat interconnected with inflation due to the Fed’s approach to monetary policy, this is not particularly ground-breaking. It is interesting, though, particularly with the bond market teetering on the brink of inversion.
All the bearish stars seem to be aligning, and the constellation is Ursa Major. The stock market has been steady, however, and there is a definite sense of the old-guard to Mr. Rosenberg’s comments.
Here’s what his view ignores. Firstly, the Fed doesn’t weight the CPI extremely highly in their consideration because they think it doesn’t get to the root of the issue very well and has too many contravening factors. This means that the PCE (Personal Consumption Expenditure) is more relevant to interest rates. So, therefore, if you are using the CPI to predict bond inversion, you have to take into the account the Fed might be more hawkish than the CPI suggests.
US Still Outperforming Major Rivals
Next, you have the fact that interest rates are so low that most of Wall Street can’t remember what a bear market is. December’s crash in the Dow and other major indices was erased quickly, and this made everyone feel smart and vindicated that it will be just a temporary dip. But can the old bull keep on chugging?
While global growth is slowing, the US is doing better than pretty much anyone else, so if stocks are the only game in town, US indices like the Dow Jones are still in demand because the money has to go somewhere.
Finally, a broken clock is right twice a day, and Mr. Rosenberg is always bearish (it’s his thing), so he would have to admit he probably missed the great rally back from December lows.
Death by a Thousand Cuts Possible for US Economy
However, despite all of this evidence that says ignore Rosenberg and the doomsayers, the cuts are starting to show on US productivity.
A recession doesn’t happen overnight. An economy is a living thing that has momentum. It doesn’t just slam to a stop.
Because 2008 was an implosion that led to the near insolvency of some banks, people look at the stock crash as the start of it. Not true. Many of the world’s brightest traders had seen warning signs of this for some time. Stocks can rise while things are falling apart, so saying the Dow Jones is increasing is not truly an indicator of health – just sentiment.
The most recent non-farm payrolls data miss was written off as a temporary blip, but it comes at a time when China is struggling, and Europe is easing again. Don’t forget that the Fed has shifted down to a more neutral outlook as well, so this is not just speculation. The people with a front-row seat to the data are getting worried, and we probably should be, too.
As his comments on 60 Minutes showed, Federal Reserve Chair Jerome Powell is putting on a brave face while confirming global concerns:
“Patient means we don’t feel any hurry to change our interest rate policy. What’s happened in the last 90 or so days is that we’ve seen increasing evidence of the global economy slowing down, although our own economy has continued to perform well.”
No Smoke Without Some Oxidation-Reduction
Smart money gets scared when their hairdresser tells them how much money he’s making in the stock market. Big money gets scared when liquidity dries up, and they can’t get out of positions. Stupid money gets worried when the ticker flashes red.
Remember a lot of hedge funds won’t even look at positions intra-day because the noise distracts them from their focus. The yield curve is a powerful indicator of recession, and Mr. Rosenberg might be correct that the CPI is as well. The big issue here is that everyone thinks because a recession isn’t necessarily imminent that things will continue as usual.
You don’t call the fire department when your house is on fire; you call it when you see smoke. Looking at the Dow Jones above 25,000, clearly, a lot of bulls think it’s just a cheese pita in the toaster oven.
Disclaimer: The views expressed in the article are solely those of the author and do not represent those of, nor should they be attributed to, CCN.