Waiting for Godot’s Crash

Has the recession come already? And where’s the big market crash? [Morning Reckoning] August 15, 2024 [WEBSITE]( | [UNSUBSCRIBE]( Waiting for Godot’s Crash Asti, Northern Italy August 15, 2024 [Sean Ring] SEAN RING Good morning Reader, In Beckett’s play Waiting for Godot, two tramps, Vladimir and Estragon, spend their time waiting for the titular character. He never arrives. It feels like that with this recession. But according to my friend and colleague Jim Rickards, we’re already in one. There’s compelling evidence that Jim’s correct. But where’s the market crash we ordered? That looks like it’s never coming. And that’s a good thing. In this edition of the Morning Reckoning, I’m going to argue in favor of Jim’s thesis that we’re in a recession, damn the GDP numbers. I’ll also explain why the market hasn’t tanked yet. We have two of three ingredients for it, but the third one will prove elusive. [Buy this Sub-$5 Play on Elon Musk’s Final Masterpiece]( After revolutionizing space exploration and the auto industry… Elon Musk is now planning to revolutionize MONEY with this new venture. [Click here to see the details because once Elon flips the switch…]( Which could happen in the next 24 hours… It could send [this sub-$5 play skyrocketing in the coming months](. [LEARN MORE]( The Receding Economy Are we, or aren’t we, in a recession? I’ll answer, “Yes, since March.” Here’s why. Sahm, McKelvey, and Unemployment Claudia Sahm, an old Fed economist, takes credit for a recession indicator she didn’t invent. From [Mish Shedlock]( Edward McKelvey, a senior economist at Goldman Sachs, created the indicator. Take the current value of the 3-month unemployment rate average, subtract the 12-month low, and if the difference is 0.30 percentage point or more, then a recession has started. Claudia Sahm, a former Federal Reserve and White House Economist, modified the indicator from 0.3 to 0.5. Please consider The Sahm Rule: Step by Step, written December 7, 2023, by Claudia Sahm. I created the Sahm rule, and it’s on me to communicate it well. I try. If you have any questions, please add them to the comments. Sahm claims to have invented the rule. However, credit should go to Edward McKelvey, at Goldman Sachs. The Lag Effect Sahm modified the McKelvey rule to eliminate false positives. But that was at the expense of being far less timely. In the 2008 recession, the Sahm rule triggered three months late. In the 1973 recession, Sahm triggered 7 months late. Here’s the Sahm Rule Recession Indicator: It hit McKelvey’s 0.30 threshold in March 2024 and has only climbed higher since. Right now, it’s above Sahm’s 0.50 threshold. Either way, the indicator says we’re in a recession. The Market Crash That Isn’t Happening Generally, we need three things to happen for the market to crash. - Initial jobless claims are rising over time. - The inverted yield curve (short rates > long rates) is steepening to normal (short rates < long rates). - Oil prices are rising over time. Only two of those three are happening right now. Initial Jobless Claims Even though we had a respite last week, the numbers are trending up. An unemployed individual files an initial claimafter a separation from an employer. The claim requests a determination of basic eligibility for the Unemployment Insurance program. That means more people are losing their jobs and claiming unemployment insurance. However, what compounds the issue is that continued claims are starting to increase after a sideways trend. Continued claims, also referred to as insured unemployment, are the number of people who have already filed an initial claim and have experienced a week of unemployment and then filed a continued claim to receive benefits for that week of unemployment. Yield Curve Steepening (Un-inversion) Most people start panicking when the yield curve inverts. Since that happened in late 2022, they’ve been biting their nails for nearly two years. But the real danger of recession is when the curve steepens or “un-inverts” to become normal again. It’s normal for short-term interest rates to be lower than long-term interest rates. After all, if you were going to lend someone money for a decade, you’d demand a higher premium because of all the missed investment opportunities over that period. But you'd probably charge less if you loan money for a few months. The yield curve often inverts when the Fed aggressively hikes short-term interest rates to combat inflation. We had this for most of 2022. The inversion reflects expectations that these high rates will slow economic growth. When the curve begins to steepen, the Fed has either paused or is about to lower rates in response to weakening economic conditions, which is where we are in the cycle. The market sees this as a sign that the central bank is concerned about economic growth, reinforcing the recessionary outlook. The steepening process signals a shift from the market expecting economic stagnation to actively preparing for a downturn, mainly as the economic data reflects weaker growth, declining consumer spending, and rising unemployment. Unemployment unexpectedly rose in the U.S. to 4.3% two Fridays ago. Historically, recessions often follow a period when the yield curve first inverts and then steepens. The inversion signals economic stress, and the steepening tends to occur when that stress transitions into actual economic contraction, leading to a big market sell-off. Oil Prices Everything you’re wearing, eating, or sitting on was either made with or transported to you by oil. Never mind those green idiots; oil is the most important commodity on earth. When oil gets expensive, we’ve got big problems. If we have increasing initial claims, a yield curve “un-inversion,” and an oil price rally, we will be smacked in the head with a market crash. But here’s where the crash theory fails. Despite the war in Ukraine, a war in Israel, saber-rattling over Taiwan, and the Houthis effectively closing the Suez Canal, oil prices are languishing. We’ve been sitting around $80 forever. It’s a big yawnfest. So, no market crash… for now. Wrap Up The recession has already begun. Most people can feel it. Some ignore it. Kamala Harris mustn’t acknowledge it. But if I were Trump, I’d be hammering her over it. As for the market crash, it’s not imminent, and we may never get it. Unless and until oil prices start to rise, we should be reasonably fine in equities for the time being. All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com X (formerly Twitter): [@seaniechaos]( [Nearing Retirement? Claim This Exclusive $1 Book Offer Right Away!]( [Click here to learn more]( “The Banker” is a hedge fund titan who spent years helping America’s richest families grow even richer. [And today, for the first time ever, he wants to send you his new book – where you’ll find 36 of his never-before-revealed income and wealth generating secrets](. If the potential at steady, predictable income (as well the chance at a few nice, quick windfalls) interests you, then I urge you to act right away. [== > Click here now to claim this exclusive $1 book offer](. [LEARN MORE]( In Case You Missed It… Betrayed by the Dip! Greg Guenthner, Editor [Greg Guenthner] GREG GUENTHNER Good Morning Reader, If you’re reading this, you managed to survive last week’s brief but hair-raising stock market horror show. No, the world didn’t end during the Yen carry trade panic. In fact, the S&P 500 finished the week lower by less than a tenth of a percent. Not bad! The 3% skid on Monday was the large-cap index’s worst one-day performance since 2022. To all but erase that kind of one-day move in less than a week is downright impressive. Thanks to some eager dip buyers, this summer volatility spike hasn’t led to any serious pain. Despite the VIX ramping up to levels we hadn’t seen since the Covid crash, investors were far from fearful last Monday as they raced to pick up “cheap” shares of their favorite stocks. Axois reports that Interactive Brokers data showed that “clients saw Monday's selloff as a buying opportunity rather than a reason to get out of the market,” as buying picked up in popular names such as NVIDIA Corp. (NVDA), Tesla Inc. (TSLA), and Amazon.com Inc. (AMZN). The mega-caps weren’t the only plays attracting the bulls. Leveraged tech ETFs like SOXL and TQQQ also experienced increased buying activity, Axios notes. Hey, if you’re going to BTFD, you might as well do it in style… It doesn’t take any deep market knowledge to see why investors were so eager to grab shares last week. Like any powerful bull market, this year’s rally has rewarded dip buyers without fail. When it comes to the big, popular stocks, every single drawdown was a strong buying opportunity. NVDA is the perfect example of just how powerful the buy-the-dip phenomenon has been this year. Here we have a highly visible market leader that has shoved the major averages to new highs. The stock fell double-digits during last Monday’s Yen carry meltdown, yet buyers immediately stepped in to scoop up shares. Recession fears, the failure to post new highs last month, and an upcoming earnings report – none of these situations seem to faze investors who eagerly backed up the truck last Monday. They’re back at it again this week as NVDA offered refuge during yesterday’s choppy session, gaining 4% as the Nasdaq finished near breakeven. I can’t tell you how it’s all going to play out. But I do know dip buyers will continue to push their chips in the middle until they’re eventually crushed. Can they survive a deeper drawdown? We might soon find out. While the initial shock of last week’s quick drop has dissipated, we’re now facing the possibility of much choppier conditions as the market attempts to regain its footing. Is the Market Losing its Mojo? I’m not predicting a big crash (or a spectacular rally, for that matter). But I do believe the market is potentially at its most vulnerable point since the melt-up rally began late last year. If there was a time when the dip might finally betray the early buyers, this could be it. For starters, it’s important to note that the major averages had turned lower before last Monday’s Yen carry trade scare. The S&P 500 topped out nearly a month ago in mid-July and had posted three straight weeks of declines before volatility popped and everyone headed for the exits. Could the S&P in the process of forming a corrective channel over the past four weeks? I think this is one possible conclusion. If it’s true, last Monday’s lows simply represent a logical spot for a short-term bounce – the bottom of the downtrending channel. This would also mean the S&P would need to close the Aug. 2 gap and extend to approximately 5,450 in order to break the current short-term downtrend. Is this move possible? Of course! And if a sharp rally does materialize here, plenty of buyers will gobble up shares and shove the markets back to all-time highs. But if the S&P bumps its head at the top of this channel and fails to climb back above 5,400 in a timely fashion, a retest of those Monday panic lows are probably in our future. The 200-day moving average (not pictured in the above chart) near the April swing lows at 5,000 looks like a reasonable landing area. This also matches up well with the bottom of our downtrending channel. To be clear, a drop to these levels would not kill the current bull market. We’re not talking about a crash or anything else out of the ordinary. Overall, this move would mark a peak-to-trough drawdown of approximately 11%. That’s normal behavior, especially considering the strength on display during the first half of the year. Surviving Another Data Dump The bulls’ work isn’t finished yet. Now, buyers will also have to navigate a barrage of economic data this week that could set the tone for the rest of the month. First up: the market runs the inflation data gauntlet. PPI came in first this morning and was weaker than expected, earning a positive market reaction. CPI hits on Wednesday, followed by retail sales on Thursday. Obviously, CPI is the big number everyone is watching. Bloomberg reports that Citigroup options data indicated the S&P will move 1.2% in either direction on the CPI release. Economically sensitive investors are looking for any clues that will offer a little clarity as to which way the Fed might move next month. A hot or cool CPI could begin to swing the odds of the expected September rate cut, which is currently a dead heat between a 25 basis-point cut vs. a 50 basis-point cut. Is the so-called “soft landing” still in play? Or is the dreaded R-word (recession!) going to creep back into the picture? These are the forces we’re dealing with in this crazy late-summer market. Don’t be surprised to see the overall market remain choppy for the next few weeks, potentially sucking in overeager traders on some false moves. Bottom line: This is NOT the type of environment where we can just trade any stock that’s caught a bid and is moving higher on any given day. We can also expect overreactions to the data and any other surprises the financial media might toss out this week. Remember, the news is always changing. But people are the same as they’ve ever been. The lizard brain always wins! It’s the most predictable aspect of any big investment question. Best, [Greg Guenthner] Greg Guenthner Contributing Editor, Morning Reckoning feedback@dailyreckoning.com Thank you for reading The Morning Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Sean Ring] [Sean Ring, CAIA, FRM and CMT]( is a former banker and financial educator and is the editor of the Rude Awakening. Sean has trained interns and graduates from Goldman Sachs, Morgan Stanley, Citi, Bank of America, Standard Chartered Bank, DBS (Singapore), the Abu Dhabi Investment Authority (ADIA), Bank Indonesia (the central bank), HSBC, Barclays, RBS, and BlackRock. He knows the global economy is being corrupted by forces that most people can't understand and has used his unique and worldly experiences to help people navigate the markets. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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