The recessionary red flag is waving wildly in the second half of 2023 which could make the first quarter US GDP increase annualized rate of 1.3% in the first quarter, up from an initial estimate of 1.1% be the anomaly for the remaining year.
Employers’ job cutbacks are waving the recessionary red flag
Waning demand for temporary help is the first sign of a weakening job market as the economic cycle dips into contraction.
Employers typically let temporary staff go first in a slowdown before full-time employees.
“Employers’ job cutbacks are waving the recessionary red flag”
Temp help fell again in June and has been contracting on an annual basis for several months, which is anticipating the slowing trend in payrolls.
Companies are not only cutting temporary employees, but they are also reducing hours worked, which is typical of what happens before firms start to fire people. The average weekly hours worked by all employees has been steadily falling.
Meanwhile, as the jobs recessionary red flag waves stocks and yields are currently back to where they were before the jobs data release. suggesting the market continues to think the Fed will prioritize inflation over growth.
“Companies are not only cutting temporary employees, but they are also reducing hours worked, which is typical of what happens before firms start to fire people”
US Foreclosures are another recessionary flag appearing on the landscape
Home foreclosures are rising nationwide, with Florida, California and Texas in the lead.
Ten consecutive Fed fund rate hikes have more than doubled the cost of servicing a typical variable-rate mortgage and food inflation is north of 40%. So the worst cost of living crisis in generations is beginning to translate into a wave of foreclosures.
For example, May foreclosure-related filings, which include default notices, scheduled auctions and bank repossessions, were up 7% from April and up 14% from a year ago, to 35,196 properties, according to the real estate data group ATTOM.
Lenders began the foreclosure process on 23,245 properties in May, up 4% from last month and up 5% from a year ago. States with the most foreclosure starts in May included Florida, where 2,901 foreclosures got underway, followed by California, with 2,451 foreclosures started, and Texas, where 2,286 properties fell into the foreclosure column.
Illinois and New York foreclosure starts came in at 1,358 and 1,287, respectively.
“The recent increase in foreclosure filings nationwide indicates a trend that has been observed throughout the year, and what we have expected to occur,” Rob Barber, ATTOM’s CEO, said in a statement. “This upward trajectory suggests the possibility of continued heightened activity, and with foreclosure completions seeing the largest monthly increase this year, we will continue to monitor the potential impacts this may have on the housing market.”
“With no soft landing in sight, the recessionary red flags could indicate that the cycle down could be a hard one” – Win Investing
The junkiest junk bonds feel the pain as the recessionary flag signal defaults
Banks are starting to fret about all the loans they have made as central banks continue with their tightening crusade.
So banks are dumping junk bonds hand over fist.
The riskiest corporate bonds and mortgages are dropping in price as their corresponding yields rise, which reflects a lack of investor demand for risky loans. In an economic downturn, high-risk lenders are more likely to default.
Debt from companies rated CCC — the lowest tier of junk — fell by the most in eight months in May, led by a 23% plunge in Chinese bonds. It’s expected to remain under pressure from rising interest costs, declining earnings and dwindling access to capital as the economies of Europe, China and the US sputter.
“Buying CCCs now is playing with fire,” said Hunter Hayes portfolio manager of the Intrepid Income Fund. “Most CCC situations are destined for problems,” said Hayes, whose firm manages $650 million in assets.
With no soft landing in sight, the recessionary red flags could indicate that the cycle down could be a hard one.
The Fed Powell reiterates that the FOMC is data dependent so will a raft of recessionary red flag data cause the Fed to continue pausing on its rate hikes. The pivot from tightening to easing comes in phases, the magnitude of the rate hikes is first reduced, then consecutive rate hikes continue with the reduced rate. A pause in rate hikes is a sign that Fed tightening has peaked. We believe that the Fed could have reached or is nearing a trough in its liquidity cycle. The second quarter of the US GDP is likely to confirm the economy has hit a wall and entering contraction.
A coming tsunami of job losses, business failures, foreclosures, and bank failures could mean the Fed’s destructive tightening path is done.
“The astute investor buys low when central bank tightening has troughed and sells high when it peaks” – Win Investing
Recessionary flag, Fed pivot and risk assets
From cycles analysis, we know that the optimum time to buy risk assets, stocks, commodities and cryptos is when central bank liquidity has reached a trough. The end of a tightening cycle provides investors with an opportunity to buy risk assets at a deep discount.
The astute investor buys low when central bank tightening has troughed and sells high when it peaks.
These investors harvest their investments in a boom, which is when Joe Public buys and they plant their seeds in an economic downturn, a recession when Joe Public sells.
The contrarian investor speculates to accumulate wealth by playing the cycles, central bank liquidity cycle and investor psychology cycle.
“Be “fearful when others are greedy and greedy when others are fearful,” Warren Buffett.
So the recessionary flag is waving but the fear should be replaced with opportunism.
Do you have a wish list of assets you would like to buy at discount prices?