What, no recession??

Stocks escaped with slight gains yesterday bringing stocks within inches of fresh highs. With 2 trading days left in 2023, some investors are getting ready for another zany year ahead.

Just sayin’ My early morning research is broken down into 2 primary sections. The first, early, early morning research takes place between 03:30 and 04:15. I am not yet in my office, but I am already reading headlines in my “other” office, as I get ready for the day . The second part of my research is what you would expect with a pile of printouts, newspapers, many screens, a second espresso, or maybe a cup of tea… in silence with just a desk light. For the record, this morning it is tea as I am still fighting that which has yielded me a total of 4 hours of sleep in the past 2 nights. Enough of that, today, I want to start with my early, early morning research in which I was quickly scrolling through Instagram. There were Formula 1 drivers and Soccer/Footballers enjoying holiday vacations, lots of food pics, more dog memes than you could imagine, and there it was… in the midst of all that time-burning nonsense, a real financial news outlet with some sort of headline like “how did so many economists get recession predictions wrong for 2023?” Sure, I could have just clicked the little “link in the bio”, but I neither had the time (it was already 04:12) nor the gumption. Besides, I already knew the answer, and guess what? I am going to share it with you this morning.

A recession happens when the economy contracts… that is the opposite of when it grows . Of course, to get the official moniker of a “recession,” there are a few other more minor things that have to occur, but the economy shrinking is the most important one, without which the party cannot even start. If you want the answer, quickly browse over the 3 following charts, then follow me to the close.

The first chart is Personal Consumption. I shared this chart because consumption makes up the bulk of economic growth. That is essentially what ordinary folks like you and me spend on… just about everything. This makes up about 2/3 of GDP and my regular readers must have that number memorized by now, because I so often refer to it. If consumption is strong, so is the economy… pretty much. The pandemic’s sharp decrease and increase makes the scale of these charts tough, but the point of this first chart is to recognize that consumption was relatively normal after the abnormal up/down of the pandemic. You can look back to the 2007-2009 Great Recession (in red shade) to see what a declining consumption pattern looks like.

The Fed aggressively hiked interest rates to get consumers, amongst others, to spend less money – consume less, in order to cool down demand and inflation. The rate-hiking was so aggressive, that many economists expected a rapid decline in consumption. Additionally, and not covered on these charts, was businesses, which were also expected to spend less and lay off workers resulting from higher borrowing costs and… less consumption-driven revenues. Given all this, one would expect economists to attempt to figure out how the economy would NOT enter a recession. Given the level of inflation and the aggressiveness of the Fed hikes which rivaled only the late-1970s/early 1980s, one would naturally assume that a recession (like back then when we had no fewer than 3 recessions) would be looming. The fact is, that consumers maintained their confidence, despite the Fed’s best efforts to scare them. You can see that on the second chart of consumer confidence. While it was not quite as high as it was prior to the pandemic, it remains comfortably higher than it was in the many years prior to 2017. Consumers are confident, my friend. But there is one more thing.

How can people afford to keep buying and buying… and buying given that incomes are not necessarily skyrocketing, and inflation is out of control? There is only one way to spend more money than you earn… er, two ways. One is to spend your investment profits, which did not exist in 2022 . Another way is strike gold or oil in your backyard, which is also not highly likely… for most of us. So how can consumption continue to defy logic? Oh wait, there is another way. CREDIT! Chart 3 shows outstanding Consumer Credit. You can see on this chart, without even looking at the numbers, how it goes from the bottom left to the top right. Most importantly, you can see that I scribbled in the point where the Fed started raising interest rates which caused borrowing costs to spike. You will note that credit continued to grow after my scribble. I didn’t show you that chart going back to 1967 when the Fed started compiling these numbers. If I did, you would see that the amount of total US Outstanding Consumer Credit is at an all-time high… by a lot. Now you know why economists got it wrong. Keep consuming, my friends .

WHAT, IF ANYTHING, IS GOING ON THE PREMARKET

The answer is… very little given the date . I could tell you that Tyson foods announced some sort of partnership with an insect protein company, and you would probably not be surprised to learn that food company’s stock is down slightly in the premarket. I could report that Vertex Pharmaceuticals is working on a painkiller drug that does not have addiction as a side effect. You would expect that news to make the stock trade higher, but alas, it is slightly down in the premarket. Would you be surprised that the highest volume premarket stock is Tesla? Of course, I told you yesterday that Tesla typically holds that top spot. It is slightly higher this morning following yesterday's news that it is ahead of its delivery schedule. Index futures are flatish to slightly lower. Cryptos are up a lot and crude is down slightly. Finally, Treasury yields are a bit higher. AND THAT IS IT. There will be more actionable stuff in this section by this time next week, so stay tuned .

YESTERDAY’S MARKETS

NEXT UP

• Initial Jobless Claims (Dec 23) is expected to come in at 210k, slightly above last week’s level of 205k.
• Pending Homes Sales (Nov) may have inched up by +0.9% after slipping by -1.5% in October.