US whole economy profit slump makes a recession now virtually inevitable
Despite risk assets enjoying a few weeks in the sun our failsafe recession indicator has stopped flashing amber and turned to red. Newly released US whole economy profits data show a gut wrenching slump. Whole economy profits never normally fall this deeply without a recession unfolding. And with the US corporate sector up to its eyes in debt, the one asset class to be avoided – even more so than the ridiculously overvalued equity market - is US corporate debt. The economy will surely be swept away by a tidal wave of corporate default.
The temper tantrum risk assets threw at the start of the year was sufficient for the Fed to backpedal furiously on rate hikes. Like the Grand Old Duke of York, the Fed marched us up to the top of the hill and then down again - at the behest of the markets. And as more and more contorted excuses are wheeled out to justify its inaction we all surely know by now that the Feds articulated data-dependent rate hikes are primarily focused solely on the
level of the S&P, i.e., when it slumps they will quickly back off rate hikes and use any excuse necessary including dismissing surging core CPI inflation. How sad that Central Bankpolicy should have come to this.
Emerging markets have recovered particularly well, with inflows surging last month to a 21-month high according to the Institute of International Finance (IIF). The esteemed folks at PIMCO are putting that down to the three Cs: China, Commodities and Central banks. Personally I think the first two Cs are very much driven by the last C, or indeed just the Fed. The IIF reports that inflows into EM rocketed in the two days after the Feds March meeting.
At the same time the US dollar slumped, hence relieving downward pressure on both commodities and the Chinese renminbi.
I suppose now the S&P has recovered we are about to go through another turn on the monetary/market merry-go-round. Ignore this noise. Recent whole economy profits data show that while the Fed plays its games, the economic cycle is withering and writhing from within. For historically, when whole economy profits fall this deeply, recession is virtually inevitable as business spending slumps. And if I had to pick one asset class to avoid it would be US corporate bonds, for which sky high default rates will shock investors.