Guest Post: Jesse Felder - Red Flags For The Economy Continue To Run Up

In The Ring - May 6th, 2022

Cramer the Shamer

One would think America’s favorite financial TV personality might have learned a lesson after his sweeping late-March declaration that the bear market was over.  As I’ve previously written, Jim Cramer made this statement after the powerful rally that began in the middle of that month which pushed the NASDAQ up roughly 17% in a mere two weeks.  Consequently, he once again demonstrated how influenced he is by recent market movements in formulating his opinions. 

Unabashed by that costly call to anyone who heeded his guidance, he was back at it this Wednesday on his daily Mad Money show.  (Actually, that’s an appropriate name for a show that often dispenses some pretty crazy advice.)  The stock market had surged late in that trading session after Fed-head Jay Powell said a 75 basis points (0.75%) rate increase wasn’t being considered.  This was in response to CNBC’s very cerebral Steve Liesman’s question on the topic.  (See, I’m not anti-CNBC!). 

The Dow closed Wednesday up over 900 points.  This surprising pop, albeit from oversold levels, produced a predictable reaction by the self-appointed leader of “Cramerica”:  euphoric delight.  This elation emboldened him into launching a fusillade of shame on “The Sellers”, i.e, those fear-wracked souls who have been reducing equity exposure recently.   

He then did a supposed “deep dive into the cranial structure of big investors”.  His voice dripped with derision as he analyzed “The Sellers’ Minds”, those “billionaire” investors who worry about geopolitical risks, like that trivial one over nuclear weapons deployment.  In his words: “… this camp is secretly very afraid. They wake up afraid, they go to bed afraid.” He even accused them of talking down stocks to benefit their short positions, specifically mentioning Paul Tudor Jones, one of the greatest investors of the Boomer generation.

He also lampooned those who have serious doubts about Jay Powell’s credibility and effectiveness.  He went so far as to say, “…Mr. Powell happens to be an incredibly thoughtful, good public servant, who’s doing amazingly.” 

Unfortunately for Jimbo, the stock market not only reversed its spectacular Wednesday gains, the very next day, it plunged even more than it had soared.  On Thursday, after the bloodbath, there was nary a whiff of apology or embarrassment.  You’ve got to give him credit — “Booyah Jim” has an abundance of chutzpah. 

Frankly, it’s merely observing not predicting that the NASDAQ is in a bear market.  The far more challenging and important question is whether the less tech-heavy S&P 500 will soon follow it in the down 20% zone that most pundits consider to be official bear market terrain. 

One thoughtful person who thinks that’s highly probable is my pal Jesse Felder, author of, appropriately enough, The Felder Report.  As you will read, Jesse’s opinions are not a function of fickle market action but rather of hard macro-economic analysis.

No doubt, Jim Cramer would ridicule the following note from Jesse, our Guest Haymaker for this month.  (Longtime readers of my newsletter — and the thousands of new ones, too — please be aware that we are returning to this cadence after a hiatus during which we published my new book, Bubble 3.0.) Yet, as Jesse relays at the beginning of this missive, another CNBC personality, Carl Quintanilla, has highlighted the fact that real final sales over the past three quarters averaged just 0.3%, a classic recession warning. 

To be fair, Jim Cramer isn’t the only one with some forecasting egg on his face.  Prior to Putin’s reckless, and heartless, invasion of Ukraine I felt the U.S. economy would be roaring come this summer, though accompanied by stubbornly high inflation. While we continue to have plenty of inflation, the myriad growth-retarding implications of Putin’s war have downgraded my views to be more in synch with Jesse’s.  However, I am still hopeful that later in the year, the U.S. economy can reaccelerate.

Because severe bear markets typically only coincide with recessions, it’s a worthwhile use of your time to consider Jesse’s take on economic conditions.  The evidence he puts forth in his article certainly calls into question Jim Cramer’s assertion that Jay Powell has been doing an amazing job… unless you are referring to an amazing job of creating the worst inflation in over 40 years.

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Jesse Felder - Image: https://thefelderreport.com/

The Felder Report - jessefelder - April 29, 2022

This week we learned that the economy actually contracted in the first quarter by 1.4%. Many pundits were quick to write it off to the yawning trade deficit but, as Carl Quintanilla points out, real final sales over the past three quarters averaged just 0.3%. This is a degree of weakness only seen during recession. And this should make intuitive sense to all but the most wonkish of market watchers. Rapidly rising inflation amid waning fiscal stimulus should make for the sort of faltering demand consumers have been warning about in confidence surveys for months now. The Economist notes:

”Economists at Deutsche Bank say that compared with the Michigan survey, the Conference Board measure tends to be dominated by lagging indicators that perform well late in the cycle, making the spread between the current-conditions gauge in the two surveys their favourite indicator of cyclical consumer sentiment. It is flashing red today, with the gap close to its widest in more than half a century. At such a level, it signals that the probability of a recession is around 50% over the next year—roughly twice as high as many economists currently estimate.”

However, you don’t have to be able to put together models of consumer sentiment like this to understand that rising prices and slowing growth are pinching consumers’ pocketbooks; they’re happy enough to tell you themselves. “48% [of Americans] say it’s [their financial situation] worsening, similar to levels seen in April 2020 and the financial crisis of 2008,” reports Bloomberg.

The reason consumers are so down about their financial situation is simply because it has been deteriorating significantly for over a year now. As the Wall Street Journal points out, “Consumers have cause to feel poorer,” as real disposable income has now declined for four quarters in a row.

That these dour consumer sentiment readings are now making their way into the headline economic numbers should really come as no surprise. As I’ve noted for months now, the relative performance of cyclical sectors in the stock market have been raising the red flag here for quite some time.

Most notably, the retail, transportation and consumer discretionary sectors have led to the downside lately. Freight volumes and rates are now flashing warning signals that confirm the idea consumer demand is faltering. And while it might be easy to dismiss one earnings miss to the idiosyncrasies of a specific stock it’s much more difficult to do so with a raft of them, especially when they are the bellwethers of their industries.

A week ago, Netflix told us that it actually lost 200,000 subscribers after expecting to add 2.5 million in the first quarter.

As Lazard’s Steve Wreford explained to the FT, “What’s happening with the streaming services is the canary in the coal mine. Inflation puts pressure on the consumer, you think about which is your least valued purchase, and you then find out which businesses are really going to struggle in that inflationary environment.”

This week, Amazon became the latest to disappoint investors on Thursday. The company reported revenue growth in the first quarter of just 7%, the weakest reading in over two decades and the worst two-quarter performance in the company’s history. Amazon guided the second quarter number to, at best, roughly the same rate of change and, at worst, just 3% year-over year.

Think about that for a second. Here’s a company that, like Netflix, is considered one of the premier growth stocks on the planet and its revenues in the first quarter actually fell in real terms (after inflation) and this in spite of the company’s cloud business still growing revenues north of 30%. The consumer side of the business is clearly faltering in a significant way.

These are merely the latest signs in a growing trend. “A recent report by Currency Research Associates, a US-based financial strategy firm, identified strong anecdotal evidence that a ‘global “buying strike” is emerging’, as consumers around the world begin to cut back their spending on anything they don’t absolutely need,” reports the FT’s Rana Foroohar. If the reports out of Netflix and Amazon aren’t further confirmation of this spreading “buying strike” I don’t know what is.

The reason that I am so focused on the rising prospect of recession is that there is a reflexive relationship between the economy and the stock market: On the upside, economic strength precipitates stock market strength and the resulting “wealth effect” supports further economic growth. Conversely, economic weakness precipitates stock market weakness which exacerbates economic weakness via a reverse wealth effect.

For this reason, bear markets and recessions typically go hand in hand. The trouble is that recessions are only labeled as such well after the fact and long after stocks have already declined dramatically. If not for all of these growing signs of recession, it might make sense to assume the recent stock market decline was nearly over. However, if we are now entering recession, it is likely the decline in stocks has only just begun.

And, in addition to the cyclical sectors within the stock market, breadth also points to the growing probability of a bear market and thus recession. Jason Goepfert points out that more than 45% of all stocks have now fallen more than 50%; more than 22% have fallen more than 75% and more than 5% have fallen more than 90%. Only during the last two bear markets (and recessions) did we see such widespread distribution.

Perhaps, even more troublesome for markets than deteriorating fundamentals and breadth, though, is the fact that inflation pressures show no sign of easing. Unilever, one of the largest consumer products companies in the world, told investors this week it expects inflation to actually accelerate in the second half of the year. Personally, I’ll trust Unilever’s inflation models over those of the Fed or any other economist for that matter.

The highest inflation in 40 years is already putting an immense amount of pressure on the Fed to dramatically tighten monetary policy even as the economy may already have entered recession. On top of that, inflation expectations are still rising even as the central bank indicates it is willing to pursue an even more hawkish path than was recently anticipated by markets. In other words, “the Fed is losing control over the inflation narrative,” Lisa Abramowicz writes.

And, because inflation is largely driven by narratives, losing control of the inflation narrative is no different than losing control of inflation itself. In short, stagflation is here – the economy is now contracting amid an inflationary surge like we haven’t seen in a very long time and the Fed has never been so far behind the curve – and it’s not going away any time soon.

It is the nightmare scenario for the stock market come true: valuations have only begun to retreat from record extremes as a decline in the economy begins and at a time when the Fed is not only unable to come to its rescue but is forced to implement policy that will only make things worse. Last year’s fever dream in which “stocks only go up” is already starting to feel like a distant memory.

(Note from the Haymaker: For information on Jesse’s content subscription plans, please follow this link.)

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