By David Haggith

This graph by 720Global shows how spot on my pronouncement of a US 2016 recession is. In spite of the lack of any official declaration by the US government or its economic priesthood, I’ve stated more than once in 2016 that the US is already in recession. Several interesting observations can be made from this graph:

• The red line marks current US GDP (1.2%) as estimated by the US Bureau of Economic Analysis (BEA). At virtually every point in the last seventy years when US GDP hit 1.2%, the US has been solidly in recession (blue areas). In other words, the US was not ABOUT to go in recession at that level of growth, but was IN recession each time … with only three exceptions. Two of those are “exceptions that prove the rule” (i.e., the very reason these exceptions happened prove how significant the underlying rule or belief is):


• Twice during the years since the Great Recession, GDP touched this low, and we did not go officially into recession, but look at why: In both of those instances the US only averted recession because the Federal Reserve immediately kicked in massive doses of quantitative easing. (The Federal Reserve is not going to do any immediate quantitative wheezing to keep us above the line this time because all of its talk has been about raising interest rates. More wheezing would prove the Fed is unable to raise interest rates (as I said last fall would be the case after made its first raise in December. So, the Fed will only apply QE at this point when it sees for certain that its patient is dying, which will be too late.)


• The graph reminds us of something we’re all aware of: Based on the average frequency between recessions, the US is due for a recession in 2016 anyway.


• An even more interesting observation to note is the general long-term decline of US economic growth. Seventy years ago, the US emerged from recession with 12% growth in GDP. For the next thirty years, it would emerge with about 8% growth. For the next twenty years after that, the best the US could hope to see was around 4% growth in GDP; and for the past decade, the highest peaks the US can manage in economic growth have been about 3% growth in GDP.

In part, the declining growth rate in GDP could be because it is harder to get as large of a percentage increase as GDP gets larger. (In the sense that it is easier to double your speed at ten miles per hour than it is at fifty miles per hour.)

However, I think it also reflects how, as US national debt has piled up, its ability to achieve growth has significantly diminished because of all the ballast it is carrying. The fact that it has taken enormously greater stimulus to achieve these steeply diminishing returns indicates the severe drag created by this ballast.

One could also blame increasing regulations; but there is one very interesting thing you cannot blame … and that is taxes. We consistently achieved much higher rates of growth back in times when income tax (and especially capital gains tax) was much, much higher (both corporate and individual). So, the growth decline certainly can’t be blamed on higher taxes because they aren’t higher.

By David Haggith

The following is not simply a list of negative risks to the economy but a list of of serious economic conditions that are already placing drought-like pressures on the overall economy. This list doesn’t include the long-term structural problems with the economy, such as its high debt burden, but just the forces that have risen against it this year.

1 – First-quarter US GDP growth slowed to a stagnant 0.7% (annualized) — stagnant in that population growth alone should cause GDP to rise more than that. So, really, GDP per capita is in recession, though that is not technically how a recession is called.

2 – Moody’s just downgraded China’s credit rating for the first time in thirty years, warning of fading financial strength as economy-wide debt mounts. Moody’s attributed the growing risk to years of credit-fueled stimulus, indicating the Chinese economy has grown reliant on stimulus. China’s debt was growing at an annualized rate of $4 trillion (30% of GDP)! China’s efforts to contain stimulus bubbles are expected to inhibit its economic growth, which will bring down the global prices of commodities like iron, copper and oil with similar collateral impact in the US to what we saw last time commodities like oil crashed. The Shanghai Composite stock index has fallen about 10% in less than two months. (Recall the damage China did to global stock markets from the summer of 2015 through early 2016 as the Chinese market melted down and China had to socialize most of its own stock market to save it from utter ruin. Today the Chinese government market saviors rushed in to prop it up again.)

3 – The Federal Reserve appears to be set on lowering Fed stimulus, while it is also becoming clear that no fiscal stimulus will come out of the federal government this year. Even those working on Obamacare and the Trump Tax plan say early 2018 is the best they can now hope for. The Fed has a track record of killing recoveries by remaining headstrong on stimulus retreat once it starts down that path. Markets don’t like uncertainty, and everything investors have been banking on looks increasingly uncertain at the moment. With no fiscal rain at at time when the streams of monetary stimulus are drying up, this promises to be a dry summer. If the Republican-led house and senate become even more divided, just remember Lincoln warned, “A house divided against itself cannot stand.”

4 – The stock market has stopped rising, and the breadth of stocks that are rising against those that are falling has slowed to a mere trickle. Only a few stocks performing very well are keeping indexes afloat. Other than the five fabulous FAANG stocks, the market has been receding since March. Correspondingly, the number of stocks still trading above their 200-day moving average is growing quite narrow. The volume of advancing issues on a fifty-day moving average has fallen sharply. Price momentum has stalled. These are  all traditionally fairly sound signs of a market top.

The minute [markets] stop moving, a powerful, even if short-lived, impulse takes over to reevaluate, cherry-pick and average down. Even if you’re sure the story hasn’t run its course, it takes real moxie to remain exposed to the other side of trades you were very comfortably holding for the previous weeks and months. We’re all leery of getting caught in over-crowded trades…. This is a be nimble, very nimble, environment…. Traders will need skills that have atrophied over years. (Zero Hedge)

5 – Existing home sales started drying up rapidly in April, falling back 2.3% (measured in number of units sold). Home prices remain hot, in fact, spiking another 6.6%, as inventory of available homes remains slight but has started to build. The amount of time a house remains on the market jumped almost half a month just between March and April. That’s the way things get at the moment of climate change when buyers are unwilling to endure escalating prices and sellers are unwilling to lower prices. (March’s sales hit the same hot summit they last attained in 2007. Ring a bell as to what might come next?) Construction of new homes and sales of new homes also plunged in April. New-home sales fell 11.4% from a nine-and-a-half year high. These drops imply a hit to second-quarter GDP, where housing plays a major role, but it remains to be seen if April was a one-off or an inversion in the housing climate.

6 – Bankruptcies are on the rise where it matters most. The Southern District of the bankruptcy courts of New York, which includes all the major national and international businesses headquartered in Manhattan, saw a sharp rise in Chapter 11 and Chapter 15 cases. Chapter 11’s tripled in the first quarter while Chapter 15’s shot up seven-fold in. A lot of this is due to the all-out crash of major brick-and-mortar retail. Millions who are laid off in this collapse will not find jobs at highly automated Amazon, which is replacing brick and mortar stores. (And what will be the knock-on effect as anchor stores in malls close, strongly impacting the customer draw to malls for smaller retailers?)

7 – Auto sales also dried up, down 8.2% from their December peak. For over a year, I’ve been warning that auto sales would wither in 2017. Desperate tactics that made sales great during 2016, I pointed out, would lead to a major failure this year, exactly as happened during the financial crisis when automakers teetered into or to the brink of bankruptcy at the same time as home owners. Ford just fired its CEO due to failing sales and is slashing 10% of its global work force (cutting about 20,000 employees, about half in the US, offsetting the 700 Ford jobs Trump recently saved). Even Ford’s mainstay truck sales are down. US automakers have, exactly as I predicted last year, entered an auto recession.

There is a fair amount of high pressure building that could mean a withering el-niño summer for the economy during a time when Fed relief, which the economy has grown dependent on, is drying up while fiscal refreshment is going to remain distant. As additional pressures build against the economy in the next week or two, I’ll add to the end of this list at The Great Recession Blog. So, you may want to check back.

You can read more from David Haggith at his site The Great Recession Blog, where this article first appeared.

By David Haggith

We just saw a major rift open in the US stock market that we haven’t seen since the dot-com bust in 1999. While the Dow rose by almost half a percent to a new all-time high, the NASDAQ, because it is heavier tech stocks, plunged almost 2%. Tech stocks nosedived while others rose to create new highs. Is this a one-off, or has a purge begun for the tech stocks that have driven the nation’s third-longest bull market?

Yesterday’s dramatic “rotational” divergence between tech stocks and the rest of the market, which as Sentiment Trader pointed out the only time in history when the Dow Jones closed at a new all time high while the Nasdaq dropped 2% was on April 14, 1999, stunned many and prompted Bloomberg to write that “a crack has finally formed in the foundation of the U.S. bull market. Now investors must decide if any structural damage has been done.” (Zero Hedge)

This is important because, without the nearly constant lead of those tech stocks, the market would have been a bear a long time ago. Tech stocks created half of the market’s gains in 2017. Financials, which led the Trump Rally, also hit the rocks in recent weeks, at one point erasing almost all of their gains for 2017, though they recovered a little of late. If both continue to falter, the rally rapidly implodes and maybe the whole bull market with it.

The Tech sector suffered its worse high-altitude nose bleeds at the end of May — the biggest outflow in over a year. Said Miller Tabak’s Matt Maley in a note to clients:

Everybody remembers 2000, so they might be getting a little nervous with this development. I just wonder how many people have said to themselves, ‘If AMZN gets to $1,000, I’m going to take at least some profits. (Zero Hedge)

Last Friday, of course, may be a one-off, but it may also be happening because central banks are pulling the plug on their direct ownership of the stock market or, at least, their hoarding of tech stocks. That direct cornering of the stock market largely went unnoticed until this past quarter. Central banks now have enough interest throughout the US stock market to be considered as having cornered the entire stock market, which means they have the capacity to let it fall or to keep it where it is by just refusing to sell their own stocks.

Have central banks rigged the stock market entirely?

Whether or not the market implodes now depends entirely on whether central banks let it fall. If they decide to continue to buy up all the slack, they may be able to keep it artificially afloat a lot longer because they can create infinite amounts of money so long as they keep it all in stocks so that it only creates inflation in stock values, as it has been doing, and not in the general marketplace. We have certainly seen that not much of it trickles from Wall Street down to Main Street. So, there is little worry of creating mass inflation from mass money printing.

I have long suspected that central banks were the only force preventing the crash of the NYSE that I predicted for last year and that started last January, which was the worst January in the New York Stock Exchange’s history. Last week, however, was the first time I read something that indicates I was right about the Fed propping up the stock market in order to take us through an election year by the extraordinary means of buying stocks directly.

In an article titled “Central Banks Now Own Stocks And Bonds Worth Trillions – And They Could Crash The Markets By Selling Them,” Michael Snyder writes,

Have you ever wondered why stocks just seem to keep going up no matter what happens? For years, financial markets have been behaving in ways that seem to defy any rational explanation, but once you understand the role that central banks have been playing everything begins to make sense…. As you will see below, global central banks are on pace to buy 3.6 trillion dollars worth of stocks and bonds this year alone. At this point, the Swiss National Bank owns more publicly-traded shares of Facebook than Mark Zuckerberg…. These global central banks are shamelessly pumping up global stock markets, but because they now have such vast holdings they could also cause a devastating global stock market crash simply by starting to sell off their portfolios…. The truth is that global central banks are the real “plunge protection team”. If stocks start surging higher on any particular day for seemingly no reason, it is probably the work of a central bank. Because they can inject billions of dollars into the markets whenever they want, that essentially allows them to “play god” and move the markets in any direction that they please. But of course what they have done is essentially destroy the marketplace. A “free market” for stocks basically no longer exists because of all this central bank manipulation. (The Economic Collapse Blog)

It is no secret, of course, that central banks were attempting to create a wealth effect by pumping up stocks through their own member banks — buying US bonds back from banks with free overnight interest with the proviso that banks use the income to buy stocks. As I wrote during last year’s stock market plunge, even central bankers finally admitted to that.

What is a secret is the fact that they have started buying stocks directly in order to pump up stock indexes. Federal Reserve chair, Janet Yellen, began talking openly about the possibility of doing that last year when it became obvious that the stock market was failing, and I speculated that the Fed actually started to do what they were talking about covertly through proxies so it wouldn’t show up on their own balance sheet.

Those proxies could have been there own member banks, but it turns out to have been other central banks. Their ability to get other central banks to do that for them could go like this. “We’ll buy $100 billion of your bonds if you agree to buy $100 billion worth of stocks in the US stock market to help us keep this thing up through the election season.” (Replace bonds with whatever else that central bank may need to see happen in the economy that it manages.)

The Swiss National Bank is one of the biggest offenders. During just the first three months of this year, it bought 17 billion dollars worth of U.S. stocks, and that brought the overall total that the Swiss National Bank is currently holding to more than $80 billion.

Have you ever wondered why shares of Apple just seem to keep going up and up and up?

Well, the Swiss National Bank bought almost 4 million shares of Apple during the months of January, February and March.

I wonder how many it bought last year when the stock market needed a recovery team. And that’s just one of the Fed’s friends, who was ready to rush in so as to suppress the Swiss franc. These banks are now following the Chinese model of crash protection. This is exactly what China’s central bank did on a massive scale to prop up its failing stock market and end the crash. It essentially nationalized many of its companies by soaking up all the slop in stocks.

Will central banks now let the rigged stock market crash?

If I was right about the Fed shoring up the stock market through proxies — and it appears now that I was — I also said all of last year that they would most likely only do that long enough to make sure Obama’s team won the election. If their recovery was failing as bad as I believed it was, I figured they’d do anything they could to continue to hold it up long enough to make get Team Obama (Hillary) elected. Trump, during his candidacy, was talking a lot about how Janet Yellen needed to go. So, you know the central bank would definitely want to keep Trump out of power. I noted how the Fed held mysterious closed-door emergency meetings last year, including one immediately called with the president and vice president.