Has the stock market finally caught up with the economy?

For the past two years, many important economic indicators have pointed to the probability of a recession, either in 2019 or 2020. These include: the $9 trillion corporate debt load; almost $14 trillion in consumer debt (having risen for 16 straight quarters); an impending retail business Armageddon (we’ve seen the beginnings of this with major retail chains filing for bankruptcy), a significant slowdown in home purchases; a continuing decline in small business formation; and the yield curve coming close to inverting (when short term Treasury bills have a higher yield than long term T-bills). Call me a pessimist, but all of these trends are precursors to recessions. In fact, an inversion of the yield curve has predicted all of the recessions since the 1950s!

Now the stock market, which is on course to have the worst December since 1931 (despite a temporary reprieve), seems to have caught up with the news. Even the faux economists, employed by big business and private equity managers, have started to talk about a recession. The question at this point should be not when, but rather how bad will the recession be?

That question might well be answered by looking at the history of the post 2008 “recovery”. A few things stand out. First, the recovery was fueled by historically low interest rates (actually negative interest rates at some point) which encouraged consumers and businesses to buy, buy, buy on credit. This occurred during a period of very low inflation. Since inflation reduces debt burden (the debtors end up paying back $ that are worth less than they were when the debt was incurred), low inflation results in a greater burden of debt on consumers and businesses which eventually affects demand. BTW, banks make out like bandits under these circumstances, and as a consequence we have seen further financialization of the economy, the major source of runaway inequality.

But not to worry. A third source of demand (besides businesses and consumers) in the economy is government, and, at least at the federal level, the government has followed a policy of stimulating the economy for the past 10 years by spending more than it takes in. Lately, tax cuts under Trump, without spending reductions, have put more money into the economy (primarily in the hands of the rich. As a result the economic boost in the past year has been minimal, since tax cuts for the 1% always have generated less demand than those for the 99%.

When folks wake up to the fact that the Trump tax cuts put very little into their pockets and their wage increases (if they actually got any) are just barely keeping up with inflation, will they keep spending on the hope that their future earning are going to increase significantly? While early reports indicate that holiday shopping is up, we probably need to see what happens in the next few months, when the bills come due and anticipated tax refunds don’t necessarily materialize.

One person who has probably seen the writing on the wall is the Fed Chairman, Jerome Powell. I can only guess at his motivation, but it looks like he’s aiming for a “soft landing” with regard to the coming recession. By raising interest rates now, he hopes to curtail borrowing and keep the economic “house of cards” from collapsing all at once. 

In a sense we have all been living now on borrowing against the future. From Forbes -  “...corporate debt is now 72% of GDP. That's in addition to the government debt that is approaching (or has passed depending on how you count debt) 100% of GDP and household debt at 77% of GDP. Add in 81% financial sector debt, and the U.S. combined debt-to-GDP ratio is near 330%.” And from Market Watch – “Recalling the 2008 crisis, worriers say excessive leverage is building among U.S. firms, many of whom took advantage of low interest rates after the financial crisis to load up on cheap debt …Corporate debt levels relative to U.S. gross domestic product have pushed past the previous peak hit during the 2008 financial crisis.”

All of this, plus the petulant fool in the White House, seems to have given investors a case of the jitters. Hence the volatility of the market. Whether the market will continue its decline is a crapshoot. As a result of massive buybacks of stock and the financialization of the economy, I would argue the market is no longer the bellwether of economic crises.

But by all other measures, the US economy is overdue for a recession. Now it appears we can add the market to the growing list of warning signs.