RISK of COLLAPSE: DONDE ESTAMOS y
ADONDE VAMOS
By JP
Morgam
IF big
Corp & Bamkers said it, it means that is time to pay attention to middle clases
to deflect a chaotic transition or REV in the post-neoliberal agenda. Hugo
Adan
"We have consistently argued
that one should not expect the next US recession ahead of the presidential
elections, but the odds of one might go up significantly post the event, in our
view. "
JPMorgan repeats that it has
"consistently" argued that one should not expect the next US
recession ahead of the presidential elections, it then spoils the ending, and
in previewing what happens after next November, says that "the odds of a
recession might go up significantly."
We will spare readers the
cheerful side of JPM's year ahead forecast as it is a repeat of many themes
covered here previously by the "bullish" JPM and instead focus on the
gloomier aspects of the bank's year ahead predictions, as those are decidedly
new and represent a reversal to JPM's years of relentless optimism.
The first notable item is the US election road map
See Chart:
2020 US
Election road map
This will be add to my report
on: “Middle Classes &
Rev in America”
As JPM notes, "we might end up with two candidates who are potentially on
the extreme ends of the political spectrum. The exhibit above compares the
policies of a select number of Democratic candidates and president Trump, based
on our interpretation of published policies and public comments. The divergence
of policy proposals between the different Democratic candidates is
probably as extreme as the comparison between Trump’s policies and that of any
of his Democratic adversaries."
See Chart:
Candidates
Policy Vectors
The risk of trade uncertainty escalating again, post
the current truce
JPM's base case over the past
months was that Trump will be compelled to move towards a truce with China,
given what were the rising risks to the economy, and in particular to the US
consumer. The risk is that the current improving
sentiment with respect to trade doesn’t hold for too long, and that potentially
re-elected Trump resumes his aggressive stance.
An inflecting credit cycle
See Chart:
G4
credit standards , as reported by Banks
Notably, G4 credit standards
appear to be tightening for both the businesses and for the consumer of late.
One typically sees tightening standards ahead of the downturns.
Corporate leverage is surging
US
corporates have been levering up over the past years, with median US company
net debt-to-equity ratio at the record highs.
See Chart:
Median Net debt to –equity for
US
Why is this a risk? Because "if the
credit markets weaken, this could reduce the pace of corporate buybacks."
Because where would we be without buybacks...
See Chart:
S&
P 500 announced buybacks
Economic indicators are looking decidedly late-cycle
The US
cycle is now officially the longest one since the WW2, and some of the cycle
indicators appear to be rolling over. One such indicator is that job opening
rate appears to have peaked. This is what usually happens ahead of the
downturns.
See Chart:
US job vacancies
rate
Earnings have significantly overshot the trendline
Another
key JPMorgan concern is that US profits are now starting to appear stretched vs
their long term trend-line.
See Chart:
S&P
500 vs trend
Here Matejka notes that one of the arguments that kept him bullish all this time was
the finding that US profits don’t tend to peak for the cycle before they
significantly overshoot their long term trend. The size of these overshoots was
on average of the order of 20-30%. The current overshoot is at 19%
See Chart:
S&P
500 EPS vs trend at peaks
Profit margins have peaked, which typically bodes
negatively for the longevity of the expansion cycle
As we noted recently when
discussing real, operating profits, one doesn't usually have a recession before
US profit margins, as measured by NIPA, peaked. The
lead-lag between margins peak and the next recession was sometimes very
significant.
See Charft:
US
Corporate Profit margins
However,
as of this moment, JPM finds that "we are now in unchartered
territory", with US
profit margins appearing to have peaked in Q3 ’14, leading to the longest
lead-lag on record, and counting...
See Chart:
Putting
it together, JPM concedes that while "the
time is likely approaching when one should be contrarian again", this time
around through turning bearish vs presently growing consensus bullishness, the
bank still thinks that "one should not cut risk-on trades too
early, as the bear capitulation, which is currently
under way, could have legs." The only question is when does someone, or something, pull the rug from under the
market's melt-up, triggering what even JPMorgan now see as a coming, and long
overdue, day of reckoning for the markets
….
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