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Thursday Humor: "It's A Recession, But Not A 'Recession' Recession"

For today's humor of the day we turn to a publication owned by German tabloid conglomerate , Axel Springer, and specifically the following title:

Clicking through we find the following soothing words from, who other, a German permabull, Deutsche Bank's Torsten Sløk who says the "broader economy is decidedly not at risk of heading into recession. In other words, we're not looking at a real recession." He  adds:

"We are experiencing a profit recession without an economic recession," Sløk wrote in an email on Thursday.


"Lower energy prices and a higher dollar are hurting certain parts of corporate America at the moment," Sløk wrote, "but with the China shock fading and the dollar and energy prices stabilizing it is becoming clearer that we are not about to enter an economic recession because the service sector — which makes up 85% of the US economy — is doing just fine.

Rather paradoxically this is completely at odds with what that other far more credible DB's credit strategist Jim Reid had to say just a few days earlier, i.e.:

The system failed in 2008/09 and rather than allow a proper creative destruction cleansing, policy makers have been aggressively propping it up ever since. This has surely led to a large level of inefficiency in the system which helps explain weak post crisis growth and thus forces them to do even more thus supporting asset prices if not the global economy.


So do we think we're now entering a period where central banks are increasingly impotent? The answer is that they have been for a while on growth so not much has changed.   However they can still buy more assets and continue to keep policy loose. Although we don't think QE and zero interest rates does much apart from prop up an inefficient financial system it’s all we've got until we have a huge policy sea change which probably only happens in the next recession.

So - according to the same bank - everything is broken, and the Fed will throw even more liquidity at the busted financial system... but at least we are not entering a recession.

Got it.

Incidentally, those curious what the real recession outlook is, as in "recession recession", here it is from Barclays, as we wrote a week ago: "Barclays analyzed the link between profit margins and recessions for the last seven business cycles, dating back to 1973. In its own words: "the results are not encouraging for the economy or the market."

Figure 2 illustrates the link between profit margins and recessions for the last seven business cycles, dating back to 1973. Figure 3 adds detail by providing a summary of what happened the other six times profit margins declined 60bp in a 12-month period. The results are not encouraging for the economy or the market.



The profit margin decline in 1980 was a signal that the economy had not recovered and a double-dip recession occurred. In 1990, the decline in profit margins predicted a recession and a large decline in the S&P 500. In 2001 and 2008 profit margins fell as the economy entered recessions. This preceded substantial declines in the S&P 500. 1975 was different because profit margins fell after the economy exited a recession and the S&P 500 went up during the subsequent six months. Note that in every period, margins continued to decline.

To summarize Barclays' thinking, the bank says "profit margins have declined by 60bp in the last 12 months. This has happened before. Since 1973 there are six other examples. In five out of six, the decline in profit margins coincided with a recession.

So while 5 out of 6 previous times when margins collapsed by this much, a recession followed. But this time - perhaps because there is a concurrent emerging market crisis, and a global reserve unwind aka quantitative tightening to boot - it will be different, and according to Sløk (not to be confused with his DB coworker who openly admits the system is broken and central bankers have lost credibility), the "recession" recession will be avoided...

Thanks for the løugh.