News Coverage for ‘Flation
Recession: The Handwriting is on the Wall
Who to believe – those who predict a recession or those who say a recession will be avoided?
A Bloomberg recession probability model prompted this headline back in mid-October (Bloomberg, Oct. 17):
Forecast for US Recession Within Year Hits 100% …
On the other hand, as we kick off the final month of the year, a different news item says otherwise (CNN, Dec. 1):
Inflation is cooling. Consumers are still spending. And hiring is slowing — but not collapsing. That’s why [a] chief economist … is increasingly confident that the American economy will — narrowly — escape a recession.
Well, in Elliott Wave International’s view, the handwriting is on the wall. Here’s a chart and commentary from the December Elliott Wave Financial Forecast:
An economic depression is closing in. The Elliott Wave Financial Forecast’s main reference point for this ongoing forecast is the stock market, which is the best leading indicator for the economy. There are other useful indicators. The Conference Board’s Leading Economic Index combines the trend of the S&P 500 with nine other economic variables. We’ve discussed some of these measures in recent issues, with updates on housing and credit conditions and the inverted yield curve in this issue. Other inputs include the ISM Index of New Orders, Average Weekly Manufacturing Hours and New Orders for Manufacturing and Consumer goods. As the chart shows, the Conference Board LEI has been plunging. In October, the six-month annual change dropped to minus 6.3. As the dashed line indicates, similar readings slightly preceded or accompanied all eight economic recessions since the 1960s. The first leading datapoint of November hit the wire yesterday morning. Last month, the ISM Manufacturing Index slid to 49 from 50.2. After falling for five of the past six months, the measure is now below 50, the threshold separating expansion from contraction. It is the first signal of contraction in this indicator since May 2020.
A “Precondition” for Deflation is Being Met
Robert Prechter’s Last Chance to Conquer the Crash says:
Deflation requires a precondition: a major societal buildup in the extension of credit and the simultaneous assumption of debt.
With that in mind, look at this Nov. 15 Bloomberg headline:
US Household Debt Jumps Most Since 2008 …
Specifically, households added $351 billion in debt in Q3 and this brings the total to $16.5 trillion, according to the Fed.
Don’t be surprised if delinquencies rise fast as the economy contracts.
The Elliott Wave Financial Forecast warned about this back in April 2019 – even before interest rates jumped.
In February , EWFF described record-high U.S. household debt as a “pernicious” threat that will eventually wreak havoc with the U.S. economic order. Many of these borrowers are already coming up short. According to Bloomberg, U.S. student loan delinquencies hit a record high of $166 billion in the fourth quarter of 2018. The story is the same for auto loans. The Federal Reserve stated on February 12  that a record 7 million Americans were 90 days or more behind on auto loan payments. … Delinquency rates as a percentage of total outstanding balances are also significant. Student loan delinquency rates are at the high end of their range and much higher than during the last credit crisis. Auto loan delinquencies are approaching their former highs of 2009, despite a supposedly hot U.S. economy. The total amount of credit-card debt is said to be more contained, but it rose to a new record high of $870 billion in the fourth quarter, surpassing the peak registered in the fourth quarter of 2008. In the last quarter of 2018, consumers added $56.1 billion in credit card debt to the total outstanding, 35% more than the post-Great Recession average for a fourth quarter. The increase was the fastest among household credit categories. Credit-card users are obviously back to their old ways; delinquencies will rise fast in the next contraction, as the average consumer’s margin of safety is razor thin. According to USA Today, the average American has less than $4,000 in savings, while the rainy-day fund of 57% of U.S. adults is less than $1,000.
What makes household debt even more precarious now is that the economy is weaker than it was in 2019.
Plus, as we all know, interest rates have risen substantially. So, the implication is clear: the debt bubble appears to be much closer to bursting.
Europe Braces for Serious Economic Slump
European consumers haven’t been very happy.
Indeed, consumer confidence tumbled to its lowest level ever in September, according to the European Commission.
It’s climbed some since then, even so, there’s this Nov. 16 headline (CNBC):
Euro zone predicted to have a deep recession and a difficult, slow recovery
The chief economist for an investment bank in Germany opined that the Continent’s economy will show deterioration in Q4 2022 and Q1 2023.
Elliott Wave International’s monthly Global Market Perspective has been keeping track of Europe’s economy. Here’s a chart and commentary from the November issue:
The power of the new bear market is also clearly visible outside of the stock market. In manufacturing, for example, economists tend to view orders minus inventories as a forward-looking gauge of economic performance. The view makes sense, because if orders increase amidst low inventory, manufacturers will need to ramp up production to meet demand. The problem is that manufacturers ride around on the same waves of optimism and pessimism that get reflected first in stock prices, which is why orders-inventories are now deeply negative in the UK, Germany, France, and the eurozone. In fact, the only two weaker readings in the past 20 years occurred when the global financial crisis hit in late 2008, and when the world’s economies closed in early 2020. Here, too, we believe that these low-water marks will be surpassed before the bear market is over.
Big-Time Bankruptcy in the World of Crypto
As you might imagine, an economic depression will bring widespread bankruptcies.
Indeed, in Robert Prechter’s Last Chance to Conquer the Crash, he offered a suggestion for those seeking steady employment when times are tough. Here’s part of what the president of Elliott Wave International said:
There will be a boom in bankruptcy services in a depression; maybe you can keep out of debt by helping others manage theirs.
Well, some of those who already handle bankruptcies have their hands full with a major crash in the crypto world (ABC News, Nov. 11):
What FTX’s bankruptcy filing means for the future of digital currency
Crypto trading platform FTX is filing for bankruptcy and its CEO has resigned.
FTX was valued at $32 billion earlier this year.
The August Elliott Wave Financial Forecast warned about the froth in cryptos and had a section titled “The Exchanges Tell the Story.” Here’s a quote:
In bull markets, financial exchanges are celebrated houses of commerce enjoying popular exaltation. In bear markets, they are necessary evils that need to be curtailed. This very dependable correlation is the reason we’ve tracked a dramatic turn in the valuation of crypto exchanges over the course of the last 15 months. In classic fashion, crypto exchanges bathed in celebrity associations at the final highs. Some attached their names to major sports venues such as the FTX Arena in Miami and the crypto.com Arena in Los Angeles. The share price of each of those exchanges is down significantly in 2022. [In July, we showed] declines of more than 90% in Voyager Digital and Coinbase Global from early 2021 when the Elliott Wave Financial Forecast identified them as candidates for steep falls. These selloffs attest to the potential for further declines in crypto… [emphasis added]
Bank Employees Fear Layoffs as Mortgage Volumes Nosedive
The deflation of the housing boom has employees at a major U.S. bank worried about their jobs.
Here’s a Nov. 2 CNBC headline:
Wells Fargo mortgage staff brace for layoffs as U.S. loan volumes collapse
Get this: The volume of mortgages is down about 90% from just a year earlier. As the article notes, this big slowdown has left some of those on the mortgage staff with little to do.
Elliott Wave International sees evidence that this is only the beginning of another housing bust.
Review this chart and commentary from Robert Prechter’s book, Last Chance to Conquer the Crash:
Although real estate prices on average exceeded their 2006 highs, the recovery has been thin, as housing starts have slackened and transaction volume is down. Underlying weakness in a recovery is characteristic of terminal advances.
The next wave down in real estate prices will be even deeper and more prolonged than that of 2006-2012. When the institutional investors who bought properties in bulk finally give up on their holdings, there will be a glut of homes on the market, which will contribute to the price decline. In a few years, much of the newest batch of mortgage debt will become worthless.