“What is a butterfly?
At best, He’s but a caterpillar dressed.
The gaudy fop’s his picture just, as Poor Richard says.
But what madness must it be to run in debt for these superfluities! We are offered, by the terms of this vendue (public auction), six months’ credit; and that perhaps has induced some of us to attend it, because we cannot spare the ready money, and hope now to be fine without it. But, ah, think what you do when you run in debt; you give to another power over your liberty. If you cannot pay at the time, you will be ashamed to see your creditor; you will be in fear when you speak to him, you will make poor pitiful sneaking excuses, and by degrees come to lose you veracity, and sink into base downright lying; for, as Poor Richard says, the second vice is lying, the first is running in debt. And again, to the same purpose, lying rides upon debt’s back…When you have got your bargain, you may, perhaps, think little of payment; but creditors, Poor Richard tells us, have better memories than debtors, and in another place says… the borrower is a slave to the lender, and the debtor to the creditor, disdain the chain, preserve your freedom; and maintain your independency: be industrious and free; be frugal and free. At present, perhaps, you may think yourself in thriving circumstances, and that you can bear a little extravagance without injury; but,
For age and want, save while you may;
No morning sun lasts a whole day.”
Lt. Col. Bill Kilgore’s best on-screen moment did not end with the utterance of “napalm,” that soul-searing substance that still lingers in the minds of a troubled generation. No, his words were not powerful for the overt horror elicited, but for their resigned sense of hopelessness, the disquiet induced as his speech to his troops trails off, “Someday this war’s gonna end…”
Speak to veterans of Vietnam and they will tell you the deeply divisive war did not have to end as it did. I’m proud to be related to one of the soldiers who fought valiantly and with honor. What went wrong is sadly straightforward. Without getting swept up in politics, from a purely strategic perspective, Americans did not hold the ground they’d won. “Search and destroy” missions required U.S. soldiers to take enemy territory, in many cases destroying its livability in the process, and move on to the next target. The Viet Cong were pushed out but for a moment — as soon as American patrols left the area, they would return and rebuild with more reinforcements and win the confidence of the South Vietnamese in the process. Worse yet, American soldiers would rebuild a bridge the enemy had destroyed and promptly abandon it to be blown to bits once again.
Will the real Easter please stand up? Roughly one-in-three inhabitants of our shared planet can tell you that “on the third day” after the crucifixion, Jesus rose from the dead and ascended into heaven. They can also tell you what preceded the crucifixion — the Last Supper. That particular breaking of unleavened bread also happened to be a Passover feast, which marks the Jewish Exodus from slavery in Egypt. Or at least, that’s the version conveyed in Matthew, Mark and Luke. There was blanket agreement among the earliest Christians that what followed the ultimate sacrifice — life itself and new beginnings — should be commemorated. As for the day Easter would be celebrated, time would bring controversy.
Few legends have had humbler beginnings than that of the unicorn. In fact, the literary introduction of this wondrous creature was met not with fanfare and adulation but with such derision that the author of the beast became nothing if not Ancient Greece’s answer to literary mockery. Adding self inflicted insult to the chronicler’s injury, was the reality of what we think of as an otherworldly, graceful beast being nothing more than a large, wild ass. Unknowingly, Ctesias, the much-mocked ancient author, did the greatest kindness to artists, dreamers and little girls through the ages by immortalizing the unicorn in his mid-fifth century B.C. Indica. Until Alexander the Great launched his ill-fated campaign to conquer India in 326 B.C., the book would stand as the only written account of life north of Persia. In Indica, Ctesias relayed other incredulous beings such as the Skiopolae, a ginormous people whose feet were so big they could be used as shelter from the elements, and the martikhora, a red creature with the face of a man, three rows of teeth and a scorpion’s stinger on its tail. (There were also mundane accounts of massive mountains, a.k.a. the Himalayas, and creatures of indescribable proportions, which were in fact, elephants.)
Why go with the Ancient when you can go Mod and have it both ways? There still exists a place, or two, where Greek meets Latin, where you don’t have to choose which of the cultures bests the other, because you can indulge in both at the same time. The journey requires you venture to the tip and heel of Italy’s boot, to the regions of Bovesia and Grecìa Salentina. There, Griko is spoken as it was when the Greeks first crossed the Strait of Otranto in the 11th century BC, where the transcendental turquoise waters of the Adriatic and Ionian Seas meet as one. In that Griko and Standard Modern Greek are close cousins, you can partake of the delights of both Italy and Greece without moving an inch.
Are we in good company? Were we at some point? It would seem we have a little bit more waiting to do. It isn’t until 2020 that we can get six feet under to ascertain if signs of life on Mars come from within its fertile (?) soils or if a whiff of an organic presence happened upon the Red Planet by way of its solar surroundings. The European Space Agency’s ExoMars spacecraft, scheduled to touch down in 2020, will be capable of drilling deeper that NASA’s Curiosity rover, characterized as an engineering marvel conveniently housed in an SUV body. Being restricted to 2-inch forays into a watery lake bed that once filled Mars’ Gale Crater revealed sulfur-spiked rocks containing organic molecules (LIFE!). Three Martian meteorite landings later, researchers at the Carnegie Institution for Science were able to probe deeper and confirm the 3.5-billion-year-old carbon footprint.
The remarkable rebound in the U.S. stock market from the lows in late December has resulted in gains that the analysts at Goldman Sachs rightly point out already constitute banner returns for an entire calendar year. History is replete with examples of major recoveries following big sell-offs, many of which turn out to be head fakes otherwise known as bear market rallies. At the end of the trading day, it’s still fundamentals that should drive investing decisions.
If the economy is, in fact, slowing and that is what has sidelined the Federal Reserve, then what we are witnessing at the moment is a bear market rally. AdMacro Ltd head of research Patrick Perret-Green recently warned the firm’s clients that though the January employment jobs report might have looked good on paper with 304,000 jobs created, it nevertheless flashed a bright recession signal as the unemployment rate ticked up to 4 percent, the highest since June.
According to historic payroll data and the National Bureau of Economic Research, every time the three-month average unemployment rate exceeded its six-month average at cycle peaks over the past 50 years — like it did in January — the U.S. economy has experienced a recession. In a 2016 speech to the International Monetary Fund, then Federal Reserve Bank of New York President — and current Bloomberg Opinion contributor — William Dudley corroborated the historic pattern citing research first conducted earlier in his career at Goldman Sachs:
“History shows it is very difficult to push the unemployment rate back up just a little bit in order to contain inflation pressures. Looking at the post-war period, whenever the unemployment rate has increased by more than 0.3 to 0.4 percentage points, the economy has always ended up in a full-blown recession with the unemployment rate rising by at least 1.9 percentage points. This is an outcome to avoid, especially given that in an economic downturn the last to be hired are often the first to be fired.”
To Dudley’s point, the odds that layoffs will continue rising are high. As per January data from Challenger, Gray & Christmas, layoffs have risen over the prior year for six straight months. Economists would characterize that as an established trend. Retail and more recently, energy, have been some of the weakest sectors. Media is another sore spot.
Backing out to the broader economy, one of the fastest growing reasons for increased layoffs last year was mergers and acquisitions. There’s likely to be no letup in 2019 after last year’s record M&A activity, which is just one of the more creative avenues companies have pursued to reduce costs in recent years. The looming earnings recession will compel firms to be more direct in their approach, as in outright headcount reduction to protect profit margins.
Auto dealers are struggling to shoulder the weight of the most crowded lots in almost two years. As a result, auto production contracted in January, promising to pressure Midwest manufacturing, a stand out area of the economy in recent months as other regions faltered. As is the case with the earnings sudden stop, motor vehicle and parts swung from 8.4 percent year-on-year growth in December to a 0.7 percent contraction in January, according to Industrial production data from the Fed.
Although autos were a sweet spot in the delayed December retail sales release, that strength appears to be wavering as cumulative tax refunds disappoint. In the first 18 days of the tax season through Feb. 21, cumulative refunds totaled $36.3 billion, down $61.7 billion, or 63 percent, from the same period last year. This portends poorly for the seasonal surge in auto buying and consumer spending tied to households’ propensity to spend the majority of their tax refund proceeds. If anything, Fed data show households are hunkering down, with checking and savings account balances rising dramatically, moves generally associated with spending pullbacks.
It is the combination of an earnings recession and an economic slowdown that derail parallels with the 2015-16 stock swoon and rebound. As breathtaking as the rally off the Christmas Eve lows has been, it is not at all unusual to see protracted and magnificent surges punctuate bear markets. In the five months through August 1989, the S&P 500 rallied 19.2 percent before backsliding.
What makes the current run historically remarkable is the magnitude of the 10.5 percent rally in such a short time span, which belies the bottoming of the unemployment rate in the face of accelerating layoffs.
Bear Market Rallies can be Protracted and Pronounced
It was a bit curious to read in his recent Bloomberg Opinion commentary that Dudley thought it was “hard to see how the normalization of the Fed’s balance sheet tightened financial conditions in a way that would have weighed significantly on stock prices.” The current bear market rally was, after all, catalyzed by Chairman Jerome Powell’s assurances that quantitative tightening might be suspended soon, a stance since corroborated by both hawkish and dovish Fed officials.
Skeptical investors have been badly bruised if they were emboldened to fight both the Fed and the C-Suite at the same time. There is one force, however, that trumps both of these faith-based investing approaches and that is economic fundamentals. This may be a bear market rally for the ages, but that shouldn’t imply investors should do anything other than rent it. Owning it promises to end in tears.
Sometimes the shoe fits. September 13, 2016 would have marked the 100-year anniversary of British children’s author Roald Dahl’s birth. In rejecting appeals to issue a commemorative coin celebrating his life, the Royal Mint noted the author was, “associated with antisemitism and not regarded as an author of the highest reputation.” Dahl did indeed make incendiary and hateful remarks stemming from Israel’s 1982 invasion of Lebanon which Israel felt justified in undertaking, and which did in truth result in 15,000-20,000 civilian deaths. Upon learning of his stained character by his own words, that even seemed to give Adolph Hitler a pass, I resolved to move on to a theme other than Dahl which had been my first intent, for this week’s missive. It would not be one caricatured by Jay Powell careening downhill in a giant peach that laid waste to his nemeses.
To be truly faithful, one must commit to the seemingly impossible. Add acts of apparent random to the faith, and sometimes the impossible becomes the possible. So it was for two faithful researchers whose journey had them stumbling upon the Holy Grail of an ageless quest. In a 2014 book, “Los Reyes del Grial,” (“The Kings of the Grail), Margarita Torres and Jose Miguel Ortega del Rio maintain that the quest had ended. They had definitively identified the most sought after chalise from which Jesus Christ drank at the Last Supper, one in the same with that then used by Joseph of Arimathea to collect Jesus’ blood as it flowed from His side at the crucifixion.
Even though evidence is mounting that the U.S. economy may be soon heading into a recession, there are plenty of analysts who say that the surge in credit card borrowing is a sign of strong confidence among households. That’s hardly the case. In fact, households’ confidence in the future growth of their incomes has been cooling since late last summer, which means borrowers will only reach for what’s in their wallet to compensate for what their paychecks will not cover.
Many working adults have no recollection of credit card borrowing not being a mainstay among their financing options. But then, few would be able to identify a Diners Club card, which was a popular brand during the 1980s “yuppie” era when Americans first began to embrace credit card spending in earnest. These days, consumers are not keen to lean on credit cards, partly due to a cultural and financial shift in the industry.
The financial crisis arguably altered households’ views on charging beyond their means. It didn’t hurt that the availability of subprime credit all but disappeared for a few years or that the interest rate on credit cards remained in double-digit territory despite the Federal Reserve’s zero interest rate policy. That said, the idea of frugality re-entered many households’ thinking in the wake of the severe hardship the foreclosure crisis brought to bear on millions of working Americans. Debit cards became the predominant form of plastic used at the checkout.
And yet, consumer credit likely rounded out 2019 at a new $4 trillion milestone as runaway higher education and car-price inflation coupled with ridiculously looser lending standards pushed households to take on record levels of student loan and auto debt. At roughly $1 trillion, credit cards are but a co-star in a star-studded, full-length feature film. A long history of credit card borrowing suggests that we would have multiples of today’s $1.04 billion in outstanding balances had the growth rate of spending on plastic maintained the headier double-digit paces clocked in the 1980s and 1990s.
Credit Card Borrowing Decouples from Income Expectations in Current Cycle
Several factors worked to slow the rate of credit card usage, few of which were virtuous. The past several recoveries were characterized as “jobless” due to the prolonged period required to recapture prior cycle highs in the employment-to-population ratio and anemic wage growth that persisted in such environments. And while credit card spending certainly held up during the years the housing bubble was inflating, households didn’t have to lean near as hard on plastic when their homes had infamously become de facto ATM machines.
The question is where credit card borrowing goes from here in view of the deteriorating economic outlook. August marked the high in income expectations as measured by Conference Board data. If history is precedent, there will be a rush to tap available credit as households become increasingly aware that the economy is headed into recession.
Challenger, Gray & Christmas layoff announcements began rising on an annualized basis in August. And the quits rate, as measured by the Job Openings and Labor Turnover Survey, or JOLTS, peaked in August. Janet Yellen, a labor economist by training, was known to lean heavily on the quits rate, which rises as workers gain increased confidence in the availability of jobs. And finally, confidence among small businesses, which we know are the largest source of job creation, also peaked in August. There is a pattern.
You may note that the effective personal income tax rate — defined as the taxes paid on income, including realized net capital gains and on personal property — has tended to move up alongside credit card borrowing with two exceptions in the history depicted. The 1980s and the current episode are marked by falling income taxes, hence the decline in this tax rate ahead of recession. It’s intuitive that this holistic tax rate also rises as stocks rally throughout an expansion and declines into recession as the swing factor of capital gains drives the marginal moves.
Add it all up and it’s likely that any rush to “charge it” will be a last gasp as income expectations continue to decline and eventually cross lines with credit card borrowing. The closer we get to recession, the more desperate a sign credit card borrowing is anything but a reflection on strengthening in household finances. Households wouldn’t be reporting that they expect their incomes to rise less if that was the case.
Danielle DiMartino Booth, a former adviser to the president of the Dallas Fed, is the author of “Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America,” and founder of Quill Intelligence.