Recession

Albert Edwards observes that history implies that recession is starting now:

Mega Fires

From Albert Edwards:

Interesting article. This also applies to well-meaning but misguided policy intervention to prevent equity bear markets and moderate recessions. Without allowing regular fires, eventually you end up with a mega-fire (or financial and economic collapse).

Yes. This market is not a light at the end of a tunnel. Just a train.

That Which Is Not Seen

Alhambra Partners

After tax, corporate profits are still slightly less in Q2 2017 than in Q4 2014, and barely more (+3.4%) than in Q1 2012 five years ago.

SocGen’s Albert Edwards:

Our Ice Age thesis has always called for US and European 10 year bond yields to converge with Japan. We still expect that to happen, with the downward crash in US yields likely to be particularly shocking. There is mounting evidence that underlying US CPI inflation has already slid into outright deflation in exactly the same way that Japan did seven years after its credit bubble burst. Hence we repeat our call for US 10y bond yields to ultimately converge with Japan and Germany at around minus 1%.

In short, stocks are grossly overvalued and Treasury bonds are similarly undervalued. Not news, of course, just some confirmation bias.

Housing and CPI

SocGen’s Albert Edwards points out that if the US used the eurozone’s methodology, its inflation (or deflation) rate would be essentially the same:

The US CPI shelter component is made up of rent (7% of total CPI) and owner-occupier equivalent rent (OER, a massive 24% of the CPI). Now, when we exclude food and energy from the CPI we often hear people complain that we shouldn’t as food and energy are real expenditures that cannot be avoided. In contrast, the OER is a totally made-up number which no homeowner actually pays! OER is meant to measure the implied rent they incur by living in their home rather than renting it out – economists debate its inclusion in the CPI. Typically OER mirrors actual rents which tend to lag house price inflation, which rose strongly in 2013 but is now slowing sharply. Hence OER inflation will probably slow too this year, revealing the underlying deflation threat. But whatever the whys and wherefores, the bottom line is simple – OER is not part of the eurozone CPI and to compare like-with-like we should exclude it. If we do, the yoy rate of core US CPI inflation is the same as in the eurozone.

But, perhaps more significantly, the 6m change in core US CPI inflation (using the eurozone definition) is actually already negative, unlike the eurozone series. Who then do you think has the bigger deflation problem? the US or the eurozone?