E Dismal Data & Inverting Yields Signal A Recession

Watching any financial media the past couple weeks is full of bullish stock market news. The Dow hit a new record a couple days ago and nothing seems to shake the markets bullish confidence. 

But there are deep problems brewing within the economy.

And these problems are causing a divergence between the stock and bond markets . . .

… but remember the bond market takes a longer-term view of what’s going on. I think people are taking a longer-term view on our economy, our economy growth, and where they think policy’s going – said Gary Cohn, Former Goldman Sachs President and Trump Economic Adviser, in an interview with Jim Cramer. 

Since bond investors take the “longer term view”, recent falling yields signal the market is expecting lower growth. Possibly a recession.

Meanwhile, a rising stock market is signaling higher growth and pricing in a bullish future.

What do we make of such contradictory views? Let’s look at some key economic trends.

Recent data from loan markets are showing significant deceleration. And there is no sign of this trend changing anytime soon…

“Carmageddon” has been unfolding throughout 2017. Auto loans are down a whopping 66% from their 2016 peak. The growth in new loans is only 1/3 of what they were last August, 10 months ago. 

Making matters worse, auto loan delinquencies are trending upwards. . .

This is squeezing the auto market. New loan growth is collapsing while current outstanding loans are souring. This is the worst case scenario. 

Most car companies are still wooing bullish investors with optimistic future sales forecasts. For example, even as auto loans dry up and growth slows, Tesla’s stock has soared. They are now the 4th largest automotive company worldwide. And they merrily estimate to sell over 500,000 of their cars by year end 2018. . .

Real estate loans year-over-year have been cut in half from their 2016 peak of almost 8% to the present rate of 4.6%. This is roughly a 40% decline from a year ago. 

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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