“See No Evil”: A Recession Is Coming, But Who Cares?

Last year, the Bureau of Economic Analysis did away with recessionary GDP prints through the magic of “residual seasonality.”

The thing about numbers is that they don’t, generally speaking, lie. But statistics sure do. That’s because numbers are just numbers until humans start tinkering with them. Once the human element is introduced, you can throw objectivity out the window.

Essentially, the concept of residual seasonality allows the US government to double-adjust the data until they get the number they want. It’s especially silly, but then again, so are a lot of the methods used to calculate the economic data that headline scanning algos rely on as ignition switches and carbon based traders depend on to assess the relative health of the economy.

Is the US headed into a recession? We don’t know. And frankly, the permabear peanut gallery doesn’t know either, and neither does Wall Street have any idea. The only people worse at forecasting than weathermen and permabears are economists and it’s not really through any fault of their own. Economics is a pseudo-science that academia has succeeded in transforming into a “real” science in the minds of the public. And that’s too bad.

In some respects, you have to wonder whether the Western models are any better than what the Chinese do (i.e. just call it 6.5-7% growth regardless of what the real number might be). If you need proof of the futility of economic forecasting by “experts” look no further than the IMF, which has a had a particularly difficult time forecasting of late:

(Table, Charts: IMF)

Nevertheless, the market still listens to economists and assigns some weight to their projections so pay attention we must.

One of the amusing things about the research that comes out of the Street these days is that it’s become fashionable to be bearish. Whether that’s because the global economy faces a laundry list of headwinds or whether it’s the usual lemming phenomenon that allows thousands of people to make a quarter of a million dollars a year each to all say the exact same thing is unclear, but whatever the case, there’s a bearish feel to a lot of today’s desk commentary.

Take the latest from Deutsche Bank’s US credit team (who are actually really good) for instance. In their latest weekly, they flag a number of troubling indicators on the way to suggesting that secular stagnation has set in. Here are a few key excerpts:

“Recent data have exhibited symptoms of secular stagnation. Real GDP growth has slowed, raising the risk that the output gap will not close before the onset of the next recession, a nearly unprecedented occurrence in post-WW II history. We also find increasing evidence on a key aspect of secular stagnation theory, the nexus of weak business investment, depressed aggregate demand and low real rates. The secular stagnation hypothesis is gaining ground, and the large downward revisions to the “dot plot” in June suggest that the Fed’s optimism is eroding.”

“The following table summarizes the above analysis. It also highlights that the post-recession data are more concerning if we compare them to past periods of expansion alone instead of considering all of the post- WWII data, which contain a mix of economic expansions and contractions.”

(Chart: Deutsche Bank)

Finally, here’s Deutsche Bank’s recession indicator:

(Chart: Deutsche Bank)

Of course none of the above should be expected to stop investors from pouring more money into the market. After all, US equity ETF shorts are the lowest they’ve ever been and as far the Treasury rally goes, you can expected US paper to continue to be well bid because… well, because if you’re looking for riskless debt, 145 bps looks a lot better yield wise than the negative rates on German and Japanese government bonds.

Do you know who else has a less than sanguine view on the US economy? Bill Gross. “This is the end of globalization as we know it,” he told Fox on Monday, referencing the UK referendum results. The odds of a recession are 50% he added, before predicting the 10Y yield would fall to 125 bps which, incidentally, is exactly where Deutsche Bank sees it heading.

The takeaway for risk assets? Well, if this week is any indication, the takeaway is “see no evil…”

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