Gut Check

Posted On Dec 17, 2019 By Dave Gonigam

  • Mainstream sounds “all clear” on recession risk (uh-oh)
  • The 5 revisits its reliable recession checklist just in case
  • Stocks reach for more records, economic numbers humming
  • Beyond cannabis: Magic mushrooms as medicine?
  • The chart we meant to run last week
  • Meat as the solution to climate change?

The mainstream has reached a consensus: Whatever recession risk that loomed earlier this year has receded going into next year.

“The U.S. economy is heading into 2020 at a pace of steady, sustained growth after a series of interest rate cuts and the apparent resolution of… trade-related threats mostly eliminated the risk of a recession,” says The Washington Post.

And so it goes worldwide, says the Financial Times: “A flurry of rate cuts and an easing of trade tensions in recent months should be enough to fend off a global recession, according to an influential survey of some of the world’s largest fund managers.”

“What if the next recession and bear market are still several years away?” we asked in this space just after Memorial Day.

We asked that question mindful of the fact that for the preceding 18 months we’d been saying the boom-bust cycle was in the “late boom phase.”

Six months later and the current economic expansion is now 10 and a half years old — the longest on record, longer than the 1990s boom.

But nothing’s carved in stone saying there’s a finite limit to the length of an economic expansion — even a phony one juiced by Federal Reserve money-printing and epic Obama-Trump spending sprees.

(Or if such stone tablets exist, no one has unearthed them yet…)

So today we revisit our reflections from late May. Are they still valid now that the mainstream is giving the all-clear?

At least right now… the answer’s yes.

For one thing, there’s still no accelerating inflation that marks the end of a boom and the start of a bust.

It’s not for lack of trying by the Federal Reserve. The Fed has conjured an abundance of new money into existence since the Panic of 2008. But most of that money has found its way into financial assets — especially stocks and real estate.

In contrast, consumer price inflation is (relatively) muted. Throughout this past autumn the rate has held steady, no matter how you measure it.

That’s not how it usually works at an economic peak and the start of a recession.

Think back to late 2007–early 2008. Your cost of living was rising relentlessly — so much so that the Fed and other pillars of the Establishment tried to steer public focus onto the “core” inflation rate, a figure that excluded food and energy prices and just happened to be lower than the regular inflation rate. Here in The 5 we would periodically mock the core rate as inflation for people who don’t eat or commute.

Speaking of energy prices… nearly every recession is preceded or accompanied by a huge jump in oil. That’s not happening either.

The 1973 “oil shock” triggered the vicious 1973–75 recession. Rising oil prices preceded the “double-dip” recessions of 1980–82. Oil jumped again before and during the early months of the 1990–91 recession. The oil price tripled in just over two years before the mild 2001 recession set in. And oil set a record of $147 a barrel in July 2008 — about six months into the “Great Recession” of 2007–09.

Now? Oil began rising steadily from $26 in February 2016. We fretted much of last year… all the way to the peak at $76 in October. But we haven’t come close since. Heck, for four years of this economic expansion, oil stayed above $80 — and we averted recession the whole time…

Ten Years of Oil Prices

Even with crude trading above $60 this week for the first time since September, there’s no reason to sound the alarm.

And another thing: Where’s the bubble?

The end stage of an economic boom is usually accompanied by a glaring bubble, a euphoric mania, in a single asset class where the masses convince themselves trees grow to the sky. Think housing in 2004–06 or dot-com stocks in 1999–2000. Before the 1990–91 recession it was commercial real estate financed by the savings and loans.

But where’s that bubble now? We’ve had a handful of mini-manias in recent years — shale energy in 2014, cryptocurrencies in 2017 — but nothing that’s really stoked mass consciousness.

Cannabis stocks? True, they’re going through a shakeout, as we’ve discussed from time to time this year, but the sector is way too small to have a ripple effect on the rest of the economy.

[By the way: We’re aware a handful of analysts are playing up a decline in trucking volumes as a sure sign of impending recession. On the surface, that makes sense. But it turns out the story here is also a mini-mania; trucking firms expanded their capacity last year, anticipating a huge jump in economic growth that never materialized. What’s happening now is the shakeout.]

Bottom line: There’s just nothing on the scale of tulips in Holland in the 1630s or railroads in England in the 1840s, or anything else of the sort.

Besides, a large number of mom and pop investors are still sitting out the stock market, more than 10 years after it hit bottom.

At the peak of dot-com mania in early 2000, the Gallup pollsters determined 61% of American households had money in the stock market. Going into the 2007–09 “Great Recession,” the figure was 63%.

But more recently? The number has been mired in the low–mid-50%s since 2012. Large numbers of retail investors are still spooked by the losses of 2000–02 and 2007–09.

The S&P 500 is up 27% so far in 2019… but figures from Refinitiv Lipper find individual investors bailing from U.S. stock funds this year at the fastest pace on record. And the records go back nearly 30 years.

Odds are that sentiment will reverse sooner or later. The proverbial “fear of missing out” will shift Mom and Pop’s mindset.

You could argue all day that current stock market valuations are historically high and out of whack with reality — and you’d be right! But that doesn’t mean they can’t go much higher from here. And at least right now, that’s how it’s looking for 2020.

Speaking of which, the major U.S. stock indexes are all creeping higher into record territory today.

At last check, the Dow is 20 points away from 28,300. The S&P is five points away from 3,200. And the Nasdaq is microscopically higher at 8,816.

Gold is steady at $1,474.

What’s more, the big economic numbers of the day both surprised to the upside.

Housing starts jumped 3.2% from October to November. The year-over-year increase works out to 13.6%. Permits — a better indicator of future activity — grew 1.4% for the month and 11.1% for the year. These are “hard data” that bear out yesterday’s “soft data” showing homebuilder sentiment at its highest in over 20 years.

Meanwhile, industrial production grew 1.1% in November. The number is skewed high by the end of the General Motors strike, but it’s still a more-than-respectable showing.

That said, Boeing’s decision this week to suspend production of the 737 Max will likely drag the number back down, even if the company’s promising not to let go any workers (yet). There will be knock-on effects with suppliers and so on. Something’s wrong when one company’s slipshod practices can have such widespread effects…

“Party drugs as medicine?” muses our Ray Blanco.

Specifically he’s talking about magic mushrooms — a topic that touches on two of his specialties, biotech and illegal drugs gaining newfound respectability.

It’s been more than a year since we explored the possibilities of ‘shrooms. Here’s what’s new.

Researchers at King’s College in London and Johns Hopkins in Baltimore are looking into the medical uses of mushrooms. Potential uses include treatment for everything from addiction to Alzheimer’s to migraines.

In addition, “recent research has shown that the psilocybin found in magic mushrooms may actually have some therapeutic effects for folks suffering from post-traumatic stress disorder,” Ray tells us.

These developments come six months after voters in Denver narrowly approved decriminalizing the recreational use of mushrooms. As you’re likely aware, it was Colorado that led the way with legal recreational marijuana.

“Frankly, I’m not sure how this will play out — cannabis and magic mushrooms are very different animals,” says Ray.

Thus he says it’s too early to scope out investment possibilities — but not too early to put it on his radar. Stay tuned…

“Love The 5, but occasionally you need another editor!” a reader chides us after last Thursday’s episode.

“I probably spent one of the five minutes comparing the two graphs. They sure looked identical, so I can understand your assertion that history rhymes, but they looked too identical. Absolutely no way they could be that identical.

“Then looked at the header. At least my copy had two graphs for the same date range in 1998. Neither was 2019. No wonder they were identical!”

The 5: Ugh. Nostra culpa.

Here are the two charts we intended to run in close proximity to make the point…

Impachment was Bullish

And It's Bullish This Time Too

In light of our main topic today, we’ll remind you of another historical parallel between then and now.

The Fed under Jerome Powell cut the fed funds rate steadily between July and October this year — from 2.5% to 1.75%.

In late 1998 and early 1999, the Fed under Alan Greenspan cut the fed funds rate steadily from 5.5% to 4.75%. Over the following 12 months, those cuts delivered enough juice to the stock market that the dot-com boom reached its bubble heights.

“Dave, I greatly respect you on how you responded to the writer who wrote in complaining about what was written concerning climate change. Your response was calm, unemotional and professional.

“It was a total contrast to the writer who couldn’t offer up a cogent intelligent rebuttal but instead resorted to what many of his ilk do, snarky comments and denigrating people they don’t agree with (‘I didn’t realize Jim Rickards is a scientist’). In fact Jim never claimed to be one: In the dialogue that he was having with you and sharing the information on climate change he very clearly said, ‘That’s not me saying this.’  

“It’s such a common tactic for these nonthinkers. If you don’t like the message, then kill the messenger. I know Jim Rickards doesn’t need me to defend him so I’ll just say this: If I were to place a bet on who has the higher IQ, Jim or the writer, my money would be on Jim.

“The other amusing thing that he wrote was the subtle threat that he would quit reading The 5. I’m like so who cares? I’m sure you’re probably thinking, Hey, dude, you know The 5 is free, right? I serve up an issue every day at no cost to you, so you can choose to read it or not. It’s no skin off of me… duh.

“Love The 5.”

The 5: We can’t be everyone’s cup of tea, so there’s no point in trying. Gotta keep it real…

After a reader suggested yesterday that climate change can be slowed with lower meat consumption, we heard from one of our regulars…

“Given that huge amounts of greenhouse gases come from the meat and dairy industries, I’m taking a stand and putting a stop to emissions by consuming a totally meat-based diet. The way I figure it, the more animals I eat, the less they will (a) devour the plants and (b) poison the atmosphere by exhaling carbon dioxide and bottom-burping methane.

“Everyone wins. Brilliant, no?

“On a separate issue, I’m curious if that reader could educate us: When is the last time top-down central planning solved anything?”

The 5: Four years ago a reader tipped us off to a study that suggested meat should be taxed like cigarettes to combat climate change.

We pointed out that if you take livestock outside the modern industrialized feedlot, they do wonders to limit carbon.

“Cattle are powerful carbon-fixers,” said our former colleague Brad Lemley, the renowned food-and-fitness writer.

“Each time a cow takes a step, its sharp hooves push grass — which is primarily made of carbon pulled from the atmosphere —- into the soil. Cattle manure does the same thing. In other words, via two mechanisms, cattle ‘fix’ free carbon, a greenhouse gas, in the Earth’s crust.

“This means that intelligent grazing practices ‘can take us back to preindustrial [CO2] levels… and feed people,’ says biologist Allan Savory. In fact, his research indicates ‘only livestock can save us.’”

So there’s a whole ‘nother wrinkle to think about…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

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