Refinance your house right now; American consumers are holding up the global economy. But for how long?; David Berman on consumer spending and retailers; How the Recession of 2020 Could Happen; A recession is coming. How bad will it be?

By Whitney Tilson

Monday, August 19, 2019

1) The crash in interest rates is terrible for savers, but for anyone with a mortgage, it's great news, as mortgage rates are at or near an all-time low. Here's what my friend Steve Sjuggerud of Stansberry Research had to say in his latest True Wealth newsletter:

"How are things, Jeff? I bet business is good with these low interest rates..."

Jeff is a friend I've known for many years. He also happens to be a local mortgage banker. We were both eating dinner at the same restaurant earlier this week.

"Business is great," he answered. "I just locked in a 30-year mortgage today for a client – at a rate of 3.375%."

"3.375%!" I said. "Lucky client..."

To see just how crazy this is, you need to understand one thing... That number is about the all-time record low for a mortgage rate – in U.S. history. Seriously...

Looking back at the last century, the best mortgage rate you could have gotten for a house was just under 5% – back in the late 1940s.

In this century, mortgage rates bottomed out in 2012 and 2016 at around the same 3.375% level Jeff locked in for his client this week.

In short, mortgage rates today are as good as they get.

So what should you do? You should do the obvious thing in this case... and refinance your house – right now.

2) The recent gyrations of the market have been driven by concerns about a possible recession. I don't have a strong opinion but if I'm forced to guess, I think there's enough momentum from the past decade for the economy to hang in there at least another year...

Here's the first of three good articles I've read on this topic: American consumers are holding up the global economy. But for how long? Excerpt:

No single bit of negative news is likely to dramatically change the outlook of consumers, whose spending drives about 70% of the U.S. economy. But collectively – and combined with other financial anxieties – they could prompt a cycle of fear that leads consumers to pull back. That's especially true for the tens of millions of Americans who have painful memories of the Great Recession, which lasted from December 2007 through June 2009.

One of the most reliable warning signs arrived Friday, when the University of Michigan's consumer confidence index fell to a seven-month low, and the index measuring Americans' outlook for the future dropped even further.

It was "the first indication that the U.S. consumer might not save the world economy after all," Paul Ashworth, chief U.S. economist for Capital Economics, wrote in a note to clients...

... Economists warn that the tariffs that remain will have an outsize impact on consumers. Previous rounds of tariffs mainly affected industrial products and raw materials such as steel...

Other challenges are also on the horizon. Historically, consumers have been spooked by a falling stock market and a decline in hiring. The job market has been red hot, but there are signs of a hiring slowdown. And growth in paychecks, which had been quite robust last year and early this year, is slowing as well.

Also, the boost from Trump's tax cuts may be fading...

Consumer spending could also prove fragile since so much of it is reliant on debt. American households have again taken on large debt loads to fuel consumption, with consumer debt hitting $13.9 trillion in the spring, more than a trillion dollars above the prior peak, reached just before the 2008 financial crisis.

3) For insight on consumer spending, I turned to my friend David Berman of Durban Capital, who specializes in retail.

He's the only person I know who not only tracks the macro numbers, but also analyzes every retailer every quarter. He spoke at my shorting conference last December and absolutely nailed the group as a short.

We had a quick chat this morning. Here are his thoughts:

We are at a unique point in time with the 10-year bond at 1.53%, which makes absolutely no sense. Compare this to the 2.9% yield at Coke (KO).

The consumer is strong, yet with most portfolio managers on the beaches, they're making a huge mistake seeing the huge weakness at retailers like Macy's (M) as a barometer.

In my report three weeks ago, I nailed the upcoming retail earnings disasters that have crushed the stocks in the group in the past week, particularly Macy's. I expect more carnage in the next two weeks among smaller retailers as they report earnings – though I think Target (TGT) will be fine.

But don't get confused – the economy is still solid. As I detailed in my report last month, the biggest retailers like Walmart (WMT), Costco (COST), and Amazon (AMZN) are doing fine, so no alarms just yet on the topline.

We still have strong employment and GDP numbers, albeit partly due to an inventory build. And we have an accommodative Fed, which seems to have been influenced by an angry Trump, on the margin, using more investor-friendly words.

Consumer confidence is still near the highest it's been since 2004. This is the best of times. It's unprecedented to see such huge fiscal stimulus, through lower taxes and increased government spending, in times when the economy is already so strong.

We continue to be bearish on most retailers, however, for three reasons:

Amazon continues to grow at an amazing clip;

Inventories are a lot higher than in prior quarters, relative to sales; and

We have slowing sales growth, albeit still strong, but mostly a function of tougher comparisons.

4) Some wise thoughts here from the New York Times: How the Recession of 2020 Could Happen. Excerpt:

These three things are all true: The United States almost certainly isn't in a recession right now. It may well avoid one for the foreseeable future. But the chances that the nation will fall into recession have increased sharply in the last two weeks.

That is the unmistakable message that global investors in the bond market are sending. Longer-term interest rates have plunged since the end of July – a shift that historically tends to predict slower growth, interest rate cuts from the Federal Reserve, and a heightened risk that the economy slips into outright contraction.

This is happening in an economy that, by most indicators, is solid. The United States economy is growing at a roughly 2% rate and keeps adding jobs at a healthy clip. There is no sign of the kind of huge, obvious bubbles that triggered the last two recessions, the equivalent of dot-com stocks in 2000 or housing in 2007.

So if there's going to be a recession in 2020 – if the pessimistic signals in the financial markets prove correct – how would it happen? There are plenty of clues, in the details of recent economic reports, in signals from the markets, and in the recent history of recessions and near recessions.

5) There's some interesting data in the Washington Post on the 11 recessions we've had since World War II. Some have been very mild... A recession is coming. How bad will it be? Excerpt:

On average, after around two quarters of a downturn, the stock market also begins to recover, following a haircut of about 7% (based on the monthly average value of the S&P 500). In the worst recessions, the stock index has been slashed in half. In others it slipped only a few percentage points — the kind of loss that can be reversed with a few good days or weeks.

Jobs take longer to bounce back. Unemployment tends to rise for 15 or 16 months before the labor market bottoms out. The unemployment rate increases about 2.4 percentage points, on average, over that time. The effect has ranged from a five-point jump during the Great Recession to a two-point rise in the recessions beginning in 1961 and 2001.

So for most Americans who might remember the Great Recession painfully, the next recession, if it follows a more average path, could feel mild...

It's hard to know what will finally end this expansion. It could be a death by a million cuts – tariffs, slowing global economy, a hangover from the Trump-tax-cut sugar high, a slowing labor market. If it's this slow decline, that might end up feeling like a shallow recession, with a small rise in unemployment and a volatile but not terrorizing decline in stock values.

But if businesses and consumers in the United States and around the world start to panic, or freeze over uncertainty about what might happen next in trade or other global affairs, the outcome could be much worse.

Best regards,


Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to more than $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor's degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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