“Inconceivable!” Economic Data Confound Markets As Recession Accelerates

May 12, 2022

   Two months ago, in my last blog “The Incredible, Inevitable, Avoidable Recession of 2022”, I predicted the start of a recession (defined as two consecutive quarters of negative growth) for Q2 and Q3 of this year.  Apparently, I was overly optimistic.  As of April 28th, the initial Q1 results are in and while economists were expecting a positive +1.1% growth rate, the government reported a -1.4% contraction instead. While economists are often off by a few tenths in their predictions, this was a miss of a whopping 2.5%, the firing range equivalent of not even hitting the paper, never mind center mass or the bull’s-eye.  As one analyst snarked, “Who are these people and who is paying them to be so wrong so often?” Even Kenneth Rogoff, the former chief economist at the International Monetary Fund, called the drop “shocking” and “even below the worst” he thought it might have been.

   Unlike economists, investors are far more discerning given their stake in the economy. As of this writing, the tech-heavy NASDAQ Composite index is now down -30% from its all-time high last year, but that doesn’t even begin to accurately describe the carnage within that sector. Over half of the 2500 companies in that index are down more than -50%, while 22% of them are down over -75%. It’s only because companies like Apple (which makes up 11% of the weighting of the index) is only down -17%, that the NASDAQ’s official decline keeps us from seeing the true story of the bloodletting now taking place in the tech sector. As the chart below shows, the pace of growth of the NASDAQ throughout the pandemic was entirely unsustainable, and investors are once again learning that the hard way, amid the likelihood that stocks have much farther to fall.

   On Wednesday of this week, the Consumer Price Index (CPI) inflation number for April came in at 8.3%, even as economists were expecting an 8.1% slowdown from March’s peak of 8.5%. Internally, the “core” CPI number (excluding food and energy) came in at a shocking 0.6% month-over-month, against a March read of 0.3%, so real consumer inflation doubled from March to April.  On Thursday (this morning), the Producer Price Index (PPI)—what factories and manufacturers pay for the raw materials they use to make their products—came in at 11% (amid an expectation of 10.6%), and March’s previous estimate of 11.2% was revised higher to 11.5%.  Since the producer is upstream from the consumer, all of this is worrisome for more price increases this summer.

   Airline fares are up 33.3% in April, year-over-year. Diesel prices are up 78% from a year ago, while regular unleaded is “only” up 48% year-over-year. Diesel is what moves the economy, and its cost affects shipping, construction, trucks, and tractors. Over 90% of farm equipment runs on diesel, meaning that the Biden administration’s emphasis on renewable fuel mandates like ethanol will only compound the problem, as producers need farm equipment running on diesel in order to plant, grow, and harvest energy crops such as soybeans, corn, and barley to produce ethanol. The same administration that doesn’t understand the processes involved in the demands that they’re imposing on the farming economy, is the same leadership team that’s choosing to buy dirtier oil from OPEC rather than Texas—citing “the environment” as their justification.  Diesel prices are now at record highs, and we’re seeing daily interviews with truck drivers telling reporters that they can’t make a living at these prices and will soon be parking their rigs until prices come down.  Fewer drivers will not end the supply chain challenges still facing American businesses.

   The stock market has now taken away $22 trillion of household wealth since the first of the year, and tech companies have lost over one trillion in just the last three daysCredit card debt just surged by 21.4%—a stunning $52 billion—in March, this in spite of the constant mantra from the buy-the-dip crowd that consumers are flush with post-pandemic cash.  Clearly, they’re not, otherwise they wouldn’t be buying their groceries on credit.  When one considers that consumer spending is two-thirds of economic growth, perhaps this explains some of the contracting economy in the first quarter.

   In the 1987 classic The Princess Bride, the bungling kidnapper Vizzini repeatedly misuses the word “Inconceivable!” as he is proven wrong again and again.  Fed Chairman Jerome Powell, along with most of the FOMC, have become the Vizzinis of the current crisis, and their year-long claims of “transitory” inflation are now the subject of late-night comedic routines. During the past 80 years, the Fed has never lowered inflation as much as it is setting out to do right now—by four percentage points—without causing a recession, even as they insist that it’s not already here.

   Reversion to the mean, the tendency of over-inflated asset prices to revert to their historical averages, remains alive and well as investors are again finding out.  Time in the market, rather than timing the market, remains the best strategy for long-term investors in their 30s, 40s, and 50s, but no sane pre-retiree should look at what’s happening now dismissively.  The economic experts and market historians that I have been following for over 20 of my 32 years in this profession are very worried, some more so than they were at the depths of the 2008-9 Financial Crisis. Predictions of prolonged 1970s-like inflation, food shortages, world-wide recession, and even the potential for a nuclear exchange over the war in Ukraine are not idle threats to your investments.  Waking up to these possibilities is our first responsibility, followed by protecting some of our retirement nest egg from risk. 

   Otherwise, we may be pouring over our depleted account statements in another 3-6 months, muttering how inconceivable our losses have become.

2 Comments

  • John Kyker says:

    My thoughts mirror Thom’s. I have been long feeling that a huge drop in all stock prices has to happen based on inflation alone, let alone the impact the super high fuel prices will have in all aspects of the economy. When the ‘big rigs’ start parking enmasse, the partially empty shelves will really be empty.

    • Thomas Brueckner says:

      Exactly right, John! According to the National Bureau of Economic Research, the all-time peak of American economic activity (going all the way back to 1854) was February, 2020, right before Covid hit and we locked down the economy. Never letting “a crisis go to waste”, the Pelosi House threw trillions at the problem, paid people not to work long after the economy reopened, and the inflation cycle began. When Biden was inaugurated, CPI was 1.4%. It literally began climbing the very next month after Biden declared war on fossil fuels, and it hasn’t stopped since. None of this has been about the environment (otherwise they wouldn’t be buying dirtier oil from OPEC, Venezuela, and Iran), it’s been about appeasing the illogical/hysterical environmental leftists in their party, using the environment as the pretense for power, control, and the imposition of socialism/communism onto any free republic with a constitution. We had better wake up to this well before the mid-terms, or our children/grandchildren will grow up in a very different country than the one we inherited. As my mother likes to say to her friends, “You can vote your way into socialism, but you have to shoot your way out of it…”
      Thanks for commenting!
      Thom

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