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‘False Alarm’ Or Will An Earnings Recession Cause A ‘Real’ Recession?
Last weekend, we noted that not everybody agrees with Morgan Stanley's Mike Wilson when it comes to
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If the market swoons again, financial conditions will tighten again–and there are, of course, many reasons that could happen.
Also, there is a significant economic/market risk that I have seen almost no one talking about: a demand shock caused by worse than expected tax outcomes for the lower and middle classes. Many of these people will see small tax cuts, no change, or even tax increases alongside withholding that decreased (meaning their year-end results will be worse than normal), and people are not expecting it. If anything, everyone is expecting better outcomes, and spending over the past year has reflected that expectation. Adverse outcomes will negatively impact PCE, and assets held in savings may need to be sold. I did taxes up until last April; this will happen, and it’s beginning to show up in media reports. I don’t how bad it will be, but I do know that it will be worse than consensus expectations, since it doesn’t even appear to be on anyone’s radar.
I’ve been wondering about the surprise “Tax Hike” effect. Q4 Retail Sales were down 1.2%. Q1 most people earning below $200k learned they are paying more in taxes than they realized. Q2 the higher tax payments are due.
Also strange IMHO that the banks seem to magically think consumer confidence will rebound in the near term.
Sorry if you mentioned this somewhere as I must have missed it…but what would cause earnings to magically just that much in Q4?…or is there some catalyst that they are thinking will cause it?
I’m assuming it has to do with magic beans and stealth raids in the land of giants.
The problem for me isn’t the “false starts” from earnings disappointment to recession, it’s the fact that continued credit expansion is required to bring about the recoveries until something finally breaks…again…which is now being reflected in UST yield curve dysfunction (for one) as banks and whales rabidly seek collateral support.
It’s not just exogenous shocks to sweat here, it’s also an investing environment that is daring to be punished. It’s great to see Goldman’s confidence that there will be a bounce back in 6 months or so, but why? Not even Buffet is willing to do anything but sit on a hundred billion dollars that could otherwise contribute to economic virtuosity.