An earnings recession is brewing, expert says. Look for cash.
If there’s anyone who wasn’t shocked by last week’s huge earnings misfires from major retailers, it’s our longtime (but not old) friend Stephanie Pomboy, who heads the Institutional Economics Council by MacroMavens. Even though she faced a (thankfully) mild case of Covid-19, she is still as sharp and acerbic as ever in assessing the current situation.
In order not to lose the types with short attention spans, here are some of Steph’s burning ideas:
We are now in the throes of withdrawal after the massive injection of fiscal and monetary stimulus over the past two years, which actually boosted asset values more than real economic activity. With the windfall no longer falling from Washington, consumers are turning to credit cards to pay the rising costs of ancillary items, such as food, energy and rent. Companies are also in a hurry. Producer prices far exceed consumer prices by the largest margin ever recorded,
There is also good news. Amid shortages of everything there, the supply of one thing – labor – might improve. Some people enriched by soaring asset prices, be it stocks, houses or cryptocurrencies, joined the hobby class for a while. As asset prices begin to deflate, some of these new rich face the humiliating prospect of having to return to work.
Pomboy says Wall Street and the Federal Reserve have woefully underestimated the role of stimulus policies in the current recovery. After Uncle Sam pumped about $10 trillion in fiscal and monetary largesse into the US economy, nominal gross domestic product grew by about $2.3 trillion, pathetic value for money. Household net worth, however, increased by $34 trillion, which compares to the US economy of $24 trillion. Indeed, US consumers have benefited from about two full years of income, via the increase in the value of their homes and their 401(k) accounts and other securities holdings.
Now the movie is rewinding. The notion of consumers sitting on a large savings cushion is wrong, Pomboy says, with personal savings back at December 2019 levels. Credit card balances, which were reduced after America received its plan government stimulus, are growing at a record 16% per year. It’s hard to imagine consumers incurring double-digit interest charges on plastic if they weren’t forced to pay the growing tabs at the checkout, gas pump and rental desk, adds she.
The stress that dominates the daily lives of most Americans shocked Wall Street via first-quarter earnings reports from retailers last week, highlighted by the 28.7% two-day slump in
(ticker: TGT) on Wednesday and Thursday. Soaring spending on food, energy and housing is crowding out discretionary spending, Pomboy says. Retailers who cater to hoi polloi cannot pass on their rising costs, resulting in massive margin squeezes that decimate their inventory.
The effect of the deflating asset bubble remains to be seen. She ran a chart from the JOLTS (Job Openings and Labor Turnover Survey) overlaid with the
index, which measures the entire US stock market in dollars. At the most recent reading in March, the labor market tightening indicated by JOLTS has proceeded at virtually the same pace as Wilshire.
Soon, however, the reverse may be happening. According to Wilshire Associates, the US stock market has lost some $10.1 trillion in value, or 19.9%, this year through Thursday. The losses are relatively recent, with $7.1 trillion of that decline since the start of the current quarter, including $2.6 trillion in May, of which $1.7 trillion was burned just in the rout of Wednesday.
That’s not taking into account the estimated trillion dollars of cryptocurrency wealth that has evaporated around the world this year, according to Goldman Sachs’ economics team, led by Jan Hatzius. Falling household wealth points to a significant drag on spending, not so much on crypto as on conventional assets. Equities accounted for around 33% of household wealth at the end of 2021, compared to just 0.3% for crypto, they write in a client note.
According to Goldman economists, labor market participation among young men – the main crypto fan base – has almost completely recovered. Previous academic studies have shown that the wealth effect mainly affects labor market participation among people nearing retirement age, who might be more inclined to take their money and flee.
At first glance, the employment figures seem to show that the demand for labor continues to outstrip the supply. But looking below the surface, Pomboy sees confusing data. While April’s establishment survey showed a solid increase of 428,000 non-farm jobs, the separate household survey showed a drop of 353,000 jobs. While the household series (from which the overall unemployment rate is derived) tends to be more volatile from month to month, it has never seen such a wide split, suggesting that there is something wrong with the numbers.
And recently, some big tech companies, including
(UBER), announced more restricted hiring policies. Initial jobless claims rose to 218,000 in the week ended May 14. This is a historically modest level, but it is still up from the 53-year low of 166,000 hit in March. As profit margins are squeezed, labor costs will certainly come under the microscope.
At the same time, adds Pomboy, Fed Chairman Jerome Powell wants to come across as “Volcker 2.0,” a reference to the Fed chief who beat inflation four decades ago with interest rates of 20% and consecutive recessions. And stock analysts still need to seriously cut their earnings forecasts, with consumer discretionary companies still pointing to 30% gains for 2022, she observes.
Pomboy’s conclusion: We are in the early innings of an ongoing earnings recession. The Fed would likely welcome wage gains if the labor market weakens. In the meantime, she advises investors to resist any temptation to buy the dips. Instead, she advises, squat cash; depressions are still far away.
Write to Randall W. Forsyth at [email protected]