Are you prepared for a recession? You better be. The politicos, the Federal Reserve members and the media still talk about a potential recession. If you are not bound to hold any party lines ahead of an election, it should be pretty clear that the U.S. economy has already entered a recession. The reality is that all recessions are different from the prior recession. That is definitely the case in 2022. Perhaps the only real statistics holding up a formal admission of recession are unemployment and consumer spending. Consumers are still spending more (with a serious asterisk) and employers still have twice as many job openings as there are able and willing people to fill them.
Recessions impact nearly all aspects of the economy. That’s what broad-based and widespread economic contraction means. There are many articles that point out over and over that collectibles in general may have some defensive characteristics and may be non-correlated to equity and bond market trends. This is proving to be quite true, but the other reality is that it likely does not apply to all collectibles universally.
Collectors Dashboard evaluates high-end collectibles as an alternative asset class. Please note the wording there — high-end collectibles. And does that mean that any of these high-end cards, comics, fine art and so on cannot drop in value? How about a resounding “Aww, Hell no!” The view here is that this recession has been upon us for a short while now while many consumers, politicos, companies and so on want to deny that a recession is here.
There may still be some good news. The public might not have to hit the panic button because this recession (as of now) is looking quite different than prior recessions. Many are still even debating whether it is a recession. The bad news is that you must pay attention to the real situation rather than what you are being fed in three-second to five-second soundbites on whatever media source you choose.
The collectibles market has many facets to it and that’s not just sports. There are comic books, fine art, wine and whisky, gold and silver, digital and so on. Despite the sports collectibles market having seen two $10+ million sales in the last 60 days, the modern market for cards has suffered. And those base cards with potential populations of 250,000 to 500,000 have an even greater risk — and each year Topps, Panini and so on will only keep printing more and cards for the newer waves of players coming into each sport.
Are collectors getting rich off of modern comic books? Most of the reported mega-sales have been happening in original issues from the Golden Age and Silver Age of comic books. Are all of the million-dollar coin sales happening in brand new coins and commemorative coins or are the happening in select pristine key date and other scarce/unique coins from 100 years ago or longer? Are the record prices in fine art being seen in new artists no one has heard of or are they concentrated among 20 to 30 well-known names? And what about the mega-prices that are being seen in whisky and fine wine? New players or well-established names?
Hopefully the point is clear enough here. High-end collectibles are likely to still see many record prices ahead. At least within reason. That may not be the case at all for many of the lower priced collectibles that have vast populations and which will continue to be mass produced every year ahead. Collectors Dashboard will be publishing data from more recent auction trends and price data as an asset class (which was again still positive) shortly in a dedicated piece to high-end collectibles.
If you have read Collectors Dashboard you should know that the term “recession” is nothing new in 2022. The economy already hit the old classic definition of a recession in July when the government’s report on GDP (based about 70% on consumer spending) showed two negative quarters in a row (negative economic growth). And the inflation reports and consumer spending trends this summer were showing that higher spending is actually higher costs for the same goods in flat to lower quantities. As for food, gasoline and energy prices, those have already spoken their own warnings.
The Federal Reserve’s rapid interest rate hikes in 2022 have already proven to be too late. Many in the financial community have started to be more vocal about a lack of credibility at the top starting with Fed Chair Jerome Powell. Most of the economic indicators have had incredible softness and many recession signs were already present before the Fed’s rapid-fire hikes. This is a quick breakdown of the trends that the Federal Reserve and the Treasury’s money printing campaigns have been communicating to the public:
- 2019/20 “we want to juice inflation above 2%”
- 2020/21 print print print
- 2021 “Inflation is transitory”
- 2021 “no one thinks inflation will stay”
- most of 2022 “we have to fight inflation and aim for a soft-landing”
- August 2022 “Some pain ahead for US households and businesses”
- September 2022 “Getting inflation back to 2% may require higher unemployment and a recession.”
The above bullets are all paraphrasing (but if you can stay awake reading past Fed/Treasury transcripts it will be a miracle).
WHAT BUSINESS GROUPS ARE SAYING
A fresh report from CFO Signals of 112 CFO-level executives showed that 46% see a North American economic recession by 2023. Also, 39% of those CFOs expect a state of stagflation and 73% are more concerned about inflation than a recession.
The National Federation of Independent Business was warning of recession risks even in April of 2022. NFIB’s monthly Small Business Economic Trends report in September showed that small businesses continued to struggle with inflation in August. Some 29% of owners reported that inflation was their top business problem even if down 8 points from the July reading (the highest since 1979). The monthly report also saw the NFIB Small Business Optimism Index increase 1.9 points to 91.8. It also noted that small business owners expecting better business conditions over the next six months is a net negative 42% and despite being up 10 points the group said “it is still dismally low by historical standards.”
The Conference Board pointed out in June (2022) that CEO confidence had already dipped to its lowest level since the beginning of the pandemic, with the majority of 133 CEOs surveyed believing that the Fed’s plan to crush inflation via interest rate hikes will cause a mild recession. The newer survey from August now showed an overwhelming majority of 81% of CEOs preparing for a brief and shallow recession (and only 7% said they do not expect a recession).
Sequoia Capital, one of the top and largest VC firms in the nation, issued a “cut costs now” to its portfolio companies in May (2022). The firm warned executives in its portfolio companies that a pending economic downturn may last much longer and be more severe than what happened at the start of the Covid-19 pandemic. Its view was that companies face a “crucible moment” to focus on profitability and sensible growth rather than growth at all costs back when money was free.
Many more business groups are warning of a recession or are pointing that their business sectors are already in contraction.
CLASSIC GDP vs. MODERN “RECESSION” TWISTS
U.S. GDP was negative for two consecutive quarters (Q1 and Q2 for 2022). What was expected to be 2% growth for the third quarter of 2022 has been coming down, down and down. The classic recession used to be defined by two consecutive quarters of negative GDP. That has already been seen and whether there are three consecutive quarters of negative GDP remains to be see. Let’s just say it may be a very close call with each day’s news before the September 30 cut-off date to mark the end of Q3. A recession is now defined as a broad economic contraction that is worse than just two quarters of GDP contraction — now including rising unemployment rate, falling retail sales, and contraction in manufacturing and earnings for an extended period. But what if we actually get three quarters (or four) of GDP contraction, or what if the expansion that is seen is small it cannot even be counted as growth after considering the impacts of inflation?
The Atlanta Fed’s GDPNow is not an actual prediction nor is it an official Fed forecast. It is considered to be a running estimate of real GDP growth based on available economic data for the current measured quarter. As of September 20, 2022 the latest GDPNow estimate was down to 0.3$for the third quarter (down from 0.5% on September 15). The Fed said:
After this morning’s housing starts report from the US Census Bureau, the nowcast of third-quarter residential investment growth decreased from -20.8 percent to -24.5 percent.
The September 15, 2022 “nowcast” was down from a September 9 estimate of 1.3% for Q3 GDP growth. This was why the sharp fall was shown:
After this week’s releases from the US Department of the Treasury’s Bureau of the Fiscal Service, the US Bureau of Labor Statistics, the US Census Bureau, and the Federal Reserve Board of Governors, decreases in the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth from 1.7 percent and -6.1 percent, respectively, to 0.4 percent and -6.4 percent, respectively, was slightly offset by an increase in the nowcast of third-quarter real government spending growth from 1.3 percent to 2.0 percent.
INFLATION (OR MY-FLATION)
You can read all you want about inflation and higher costs, but the reality is that all that really matters to you is what you are spending for your goods and services now versus 2021, 2020 and 2019 to smooth everything out pre-pandemic. Be advised that inflation this summer was the highest reading 40+ years. Whether your costs were up 8%, 9% or more — that means that if you are not over 60 years old, you have never experienced screaming price hikes like this.
On top of your food costs at the grocery, think about your bills at the restaurant or a drive-thru now. Hamburgers are an American staple, but what used to be $8 to $10 for a burger out is now easily approaching (or eclipsed) the $14 to $15 price. Now add in tax, and now add in tips if you are at a sit-down restaurant. Ditto for the price of most pizzas. Sure, there are still deals where you can buy pizzas for under $10 but it’s not at the the sit-down establishments any longer.
Will the rising tide of prices help or hurt non-correlated assets? That remains to be seen, but so far we are seeing strong prices continue in the rare and scarce collectibles and we are seeing continued softness in base and common collectibles.
PRODUCER INFLATION (TO BE PASSED DOWN AHEAD)
Producer Prices (PPI) are sky high, which likely means that consumer prices have to remain higher as those costs have to filter into the economy. There is usually a lag, and sometimes businesses cannot pass higher costs on. After the higher prices that businesses are paying (and on top of the sharp rise in wages), businesses are and will pass these price hikes on to Joe Public. The old mantra was to hold off passing costs because of high competition and choices. Now businesses are able and willing to pass those costs on to you.
August PPI was up 8.7% versus a year ago. That rate is down from annualized gains of 9.8% in July and 11.2% in June, but the stronger than expected consumer prices (CPI) indicate that the pressure remains.
THE JOB MARKET MASKS THE RECESSION
The biggest mask over the current recession is the jobs market. Nonfarm payrolls rose by 315,000 in August (beating Bloomberg’s 298,000 consensus), and July saw a slightly lower revision to a still-strong 526,000 gain. The official unemployment rate rose to 3.7% in August from 3.5% in July (versus flat expectations), and the labor force participation rate rose to 62.4% in August from 62.1% in July. The reality is that the economy’s job market is back to where it was pre-pandemic. The Wall Street Journal stated in 2021 that the workforce was still missing 4.3 million people. That figure may be closer to 3.4 million in the latest 2022 projections, but the jobs numbers are still strong.
The biggest issue about employment and outright mass layoffs is that this is a lagging indicator. Businesses generally want to wait to announce big layoffs until it’s undeniable that they have to cut costs. And after the pain has set in, those same businesses generally want continued confirmation that a recovery is set in stone before they begin mass re-hirings. This has been seen over and over through time. As for now, we have already seen many layoff announcements starting out of corporate America (see below).
Personal income is still rising due to wage pressure and as businesses struggle to attract talented workers. Hourly earnings gained by 0.3% in August (vs. 0.4% expected), which translated to an annualized gain of 5.2% versus August-2021. Personal income is not keeping up with the formal inflation rate. That said, until corporations and small businesses are able to tell their workers that they cannot afford any more pay hikes this inflation risk tail will continue even if commodities and transportation costs level off (but FedEx just hiked their rates and the 2022 hike in postage is likely to be followed by another postage price hike in 2023. Better buy those forever stamps!
HOUSING IS ALREADY IN RECESSION
We have seen the mortgage and housing market in 2022 go from gangbuster to a crawl. Housing is now in a recession according to most builder groups and most real estate agent groups. Home sellers are now facing a surge in home inventories that are competing for a sale. Sellers are being told that the time to sell is now much longer and that they may have to be very aggressive on their selling prices. Mortgage rates were sub-3% not that long ago versus 6% or more now. With the average price of a home’s gaining so much over the prior two to three years and with a traditional 20% down, an actual monthly mortgage payment may be close to double what it was before the pandemic.
The latest data from Redfin showed August 2022 was -19.5% for traditional homes and -28.1% for luxury homes versus a year ago. Think about that for a moment. Redfin’s warning even includes that the high-end house hunters are facing sticker shock. It’s like that old realtor from the Wall Street movie saying “Even the rich are bitching!” Imagine what that means for people who are saving for a home who have never owned a home and might have some job insecurity.
The National Association of Home Builders warned of recession risks even back in April, but housing affordability fell to its worst since the Great Recession over the summer. Their view was more recently (August) of an ongoing housing recession with some markets already seeing price declines. Large homebuilders like Lennar and KB Home have warned of slowing orders in the last week despite prices helping their earnings.
The National Association of Realtors reported this month that existing home sales were down again, for the seventh consecutive month (that’s also longer than two quarters). The realtor group also pointed out that August 2022 existing-home sales were down 0.4% from July and were down 19.9% from one year ago with the escalating mortgage rates.
THE INVERTED YIELD CURVE CONTINUES
The Treasury yield curve is supposed to be where short-term rates are lower than long-term rates in normal economic conditions. Treasury yields have inverted in 2022, and this is a classic sign of a recession warning. It means borrowing costs for short-term rates are higher than long-term rates, and it generally means that credit conditions are tighter. Since the Fed has raised rates 5 times (including three instances of extra-large 75 basis point hikes,
As of September 23, 2022, the 2-year Treasury yield 4.21% was 52 basis points higher than the 10-year yield of 3.69% (was only a 41 basis point spread a day earlier). That is troubling and is reminiscent of what happened in 1989 (albeit at higher yields back then). The recession arrived in mid-1990. Then the Dot-Com bubble bursting in 2000 brought an inverted yield curve as ridiculously high stock market valuations led to a significant drop in stocks. The recession of that time was not recognized until early 2001, but it was an obvious recession if you worked in anything tied to technology. And then the 9-11 terror attacks in 2001 only added fuel to a fire.
FOMC RATE HIKES INTO A RECESSION
Long-term bond yields may remain lower if economic readings remain weak. With the target Fed Funds rate now 3.00% to 3.25%, Jerome Powell and the FOMC on September 21, 2022 formally gave two warnings in the statement. The first is that the Fed “anticipates that ongoing increases in the target range will be appropriate.” The second is that it will continue reducing its massive balance sheet of Treasuries, agency debt and mortgage-backed securities.
What is worse is the FOMC’s economic projections. The Fed has cut GDP growth expectations for 2022 to 2024 (potentially even negative for 2022 for the first time). The Fed has also increased its unemployment rate expectations to rise back above 4% in 2023 and beyond while it has increased its annual inflation expectations for 2022 to 2024. The so-called dot-plots (future Fed Fund rate projections) are now calling for a peak of 4.4% to 4.9% in 2023, up from 3.6% to 4.1% in the June projections. For Fed Funds at the median levels, that implies another 125 basis points to another 175 basis points of expected rate hikes over the next six to 12 months or so.
If the long-term rates are not going to skyrocket as well, and if the FOMC really raises short-term rates another 1.25% or 1.75% over the next six to twelve months, then that is a signal that an even greater yield curve inversion should be expected. And that’s just not a good thing.
OIL (PRICES AT THE PUMP)
The surge in oil prices after the Ukraine’s invasion by Russia was atrocious. oil has come way down (down over 10% from July to August alone) but within the last week the national average was still $3.71 for regular gasoline. Higher octane and diesel remain much higher. The good news is that oil has broken back under $80.00 again. As of September 23, 2022 the 5.6% drop (-$4.70) took WTI crude oil futures back to $78.78 per barrel. That’s the first time it has been under $80 since early January (2022).
The incident of falling oil prices is supposed to be a good sign for future pump prices and inflation. The bad news is that this is not because of over-supply. This drop is on continued global demand destruction due to weakening economies. As Russia escalates its fight against Ukraine and as China persists with shutdowns and fights contraction simultaneously, the demand destruction is likely to persist.
The stock market was supposed to have bottomed out in June when the S&P 500 went as low as 3,636.87. Stocks posted a massive 18% rally shortly thereafter. But with all of the Fed warnings of more rate hikes into weakening economic data and persistent inflation, the last look showed that S&P 500 back down to 3,690. Even for those of us who have been saying we are already in a recession that the public doesn’t want to admit that is disappointing. Equity markets are supposed to discount months and months into the future. Maybe that Efficient Market Hypothesis where markets adequately discount all known news and events continues to be a fallacy.
As of this reading, the S&P 500 was down over 23% from its peak and that is considered worse than the “bear market” threshold of -20%. The tech-heavy NASDAQ (dominated by Apple, Microsoft, Amazon and Alphabet) was last seen down right around 10,875.00. That is down an even worse 33% from its peak in the last year and in an even deeper bear market. The one-year candlestick chart of the S&P 500 (SPY ETF) is provided by Stockcharts.com.
Utilities are supposed to be the most defensive sector in the market due to the public’s endless needs for electricity, water, and heating/air-conditioning. The S&P utilities index was down about 9% from its peak on last look. Now we are hearing rumblings and warnings of another lost decade for the stock market (Barrons). Will that be true? Who knows, but it would be a rare instance. And Goldman Sachs now sees the bear market persisting (see below).
BITCOIN & DIGITAL
The price of bitcoin and digital assets continue to crumble. This has so far not lived up to any of the continued bullish expectations of 2021 and prior years. The ProShares Bitcoin Strategy ETF (BITO) just put in yet another all-time low since its late 2021 introduction. In fact, since the November 2021 digital asset peak, Bitcoin is down almost 75% from its peak. This has washed out many of the strongest hands in crypto. The Ethereum Merge was supposed to mark a great day, but so far that has yet to be seen. Where the level for “digital gold” will go from here remains to be seen. After the $20,000 and higher recovery prices failed to hold, Bitcoin was last seen under $19,000.
Collectors Dashboard still views anything digital (Bitcoin, Ethereum, NFTs and so on) within the real of collectibles. It’s definitely an alternative asset class on its own but has so far proven to have leveraged stock market correlation. Where that goes is anyone’s guess, but it will continued to be covered as a collectible rather than as the asset class of the future.
LAYOFFS/WARNINGS FROM BIG COMPANIES
Most companies have continued to keep job postings up for anything and everything they could imagine. That said, many major corporations have warned of hiring freezes and are starting to demand that workers reemerge from their homes and come back into the office. Others have announced layoffs which still seem quite early and light into a down-cycle. Here are the major companies that have announced layoffs already in 2022 (with “ish” representing a small number) — Netflix, Tesla (unspecified), Re/Max, Redfin, Compass, Robinhood, Coinbase, Stitch Fix, Snap, VF Corp, Gap, Wayfair, Shopify, Peloton, Ford Motor, Rivian, Twitter, Meta (ish), Microsoft (ish), Amazon (ish), LoanDepot, Warner Bros Discovery, Carvana, Vroom, Noom, Twilio, Funko, QVC, US Steel, 7-Eleven, JPMorgan and Wells Fargo (home lending dept.),
The biggest and most dangerous warning came on September 15, 2022 from FedEx. The shipping giant warned on revenues and earnings, and it warned that an accelerating softness in shipping volumes in recent weeks was the cause. FedEx warned that it expects a continued volatile operating environment, lower capital spending and cost reduction efforts (including FedEx Office closures and deferring staff hiring. Looking forward, even the recession deniers will probably have to admit that September 15 was the date that the event horizon of the recessionary black hole had been touched.
It seems dangerous to assume that the FedEx warning is just an isolated event. Weakening transportation trends is a leading indicator of economic activity rather than a lagging indicator.
FRESH SERVICE/MANUFACTURING DATA
The United States is just in a better place than Europe right now for services and manufacturing data. Germany is having to idle businesses because they cannot get enough power for some businesses to operate. That’s not the case in the United States. The United Kingdom’s new regime is kicking off a pro-growth “trickle-down” economic strategy. China keeps entering new shutdowns because of Covid or other reasons, and Russia’s war against the Ukraine appears to be escalating after the Ukraine forces have regained much land. And the United States is in a much tighter regulatory framework with promises of higher taxes ahead. It makes forecasting the global picture much more difficult ahead.
The S&P Global Flash Composite Output Index was 49.3 during September in the U.S. That is up from the 44.6 level in August but represents economic contraction under the 50.0 reading. That is a combines manufacturing and non-manufacturing report. Their view, outside of the pandemic crisis, is that this is the worst reading since the global financial crisis. The flash readings showed that the services index was 49.2 in September versus 43.7 in August. The manufacturing activity was better with the purchasing managers index at 51.8 in September versus 51.5 in August.
BANKING & FINANCIAL WARNINGS
There truly is a mixed bag of what to read into banking data and interpolating it into real-time economics. It’s truly a case of “it depends on who you listen to and ‘exactly when’ they said it.”
Jamie Dimon of JPMorgan Chase is not the only banking CEO in America, but if he is probably the one name that the public can immediately identify. Dimon has warned in May-2022 that there were economic storm clouds forming on the horizon. By the investor conference in early June, Dimon warned that the public should prepare for an upcoming economic “hurricane.” His warning said, “We Don’t know if it is a minor one or Superstorm Sandy. You better brace yourself!”
BofA was the flip-side of the coin. In July’s earnings report for Q2 the bank noted that customers have increased their spending while maintaining elevated deposit balances. They showed a 17% surge in credit card spending and higher loan balances but still keeping up with debt payments. That spending, however, was more on services than goods (41% more on travel/entertainment vs. a year earlier).
Elsewhere in credit card trends… American Express reported its August credit trends data on September 15, 2022. Consumer loans were up to $65.9 billion, and the 30-days past due as a total percentage ticked up 0.1% from the prior month to 0.8%. Its net write-off rate was static at 0.8%. This is not anywhere close to a red-zone reading yet. Capital One, another large credit issuer, showed August’s net charge-off rate at 2.02% and 30+ day performing delinquencies at 2.76%.
Goldman Sachs, which caters almost exclusively to institutions and high net worth individuals, formally lowered its S&P 500 year-end (2022) price target at the end of September to 3,600 from a prior 4,300 target. That’s bad news if they are correct because that’s down even a tad worse than current levels. Again, major equity indexes are supposed to be predictors of what the economy will look like ahead.
WHAT GOT OVERLOOKED?
There are many other aspects to consider about the current recession, or risks of a recession if you are still in that camp. I have no reservations in admitting that a lot of things were not included in this review.
Bank executives have said throughout the summer that consumer credit and savings remain strong, with only minor weakness seen so far. Frankly, the verbiage felt sugar-coated.
Retail warnings have so far been limited mostly to inventory issues and supply chain issues, but they have also indicated that the higher prices are limiting the items that can be purchased.
Travel groups insist that travel spending and demand remain strong as the world enters the post-pandemic area.
Two major macroeconomic issues — What happens if Putin decides to pause or end his war in Ukraine, even if mobilization and a draft do not indicate that at all? And what happens if China ends its zero-Covid lockdowns? On the flip-side, what if China escalates its Taiwan stance further?
What happens if oil prices continue to come down?
What about the potential winds if student loan forgiveness really does take place? It would be a win for millions of consumers while it is also controversial and only adds more fuel to the inflation side of the equation.
What happens if and when Jerome Powell figures out the rate hikes are causing more harm than aid? And what happens when the U.S. debt servicing costs after these rate hikes become so large of a budget issue that it cannot be managed (an issue likely in 2024 or 2025)?
The semiconductor supply shortage has now reversed into a very weak demand for chips and anything tied to PC sales is hurting. The Semiconductor Industry Association reported in early September that global semiconductor sales in July 2022 rose 7.3% year-over-year, but that was slower growth and July’s sales were actually down by 2.3% on a month-over-month basis. You have seen chip stocks plunge since then, with all major chip companies issuing weak to soft sales forecasts.
Restaurants continue to pose a large threat due to commercial space rentals and such a large number of workers needed for each location. Darden, owner of the Olive Garden and LongHorn Steakhouse, posted disappointing sales growth that is sub-inflation while its expenses are up (16% in food and beverage prices and labor costs up 7.9%). The tale is much more mixed at independently owned dine-in restaurants.
Car sales are seeing mixed numbers on monthly and annual data based on comparisons to endless buying and chip/parts shortages from supply chain issues. That said, higher rates make car payments higher.
Will higher interest rates finally crimp consumer credit card use? And what about Buy Now Pay Later trends?
Consumers are expected to be much more measured this holiday season around Christmas spending. But what if consumers decide instead to go ahead and splurge this Christmas?
Again, many more aspects can be considered about the state of the economy at the end of September. We also have to see if there is any follow-on impact on even the high-end collectibles market that has so far resisted punishment. The view here is that September 15th’s warning by FedEx will have confirmed what you have already been hearing from Collectors Dashboard. And that message is that the recession was already here even if no one wanted to fess up about it. Then again, admittedly, this view could be wrong. And if it is not wrong then hopefully this will truly be a mild recession.