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The United States Recession Of 2016 Is Already Here

250px-Bulle_und_Bär_Frankfurt (1)On March 18th of this year, the Dow Jones Industrial Average (Dow) was finally in positive territory for the year at 0.3%. For most of the quarter, investors had witnessed massive losses in most equity markets in the United States and globally. The domestic GDP (Gross Domestic Product) slowed further to below 1% after a steadily declining performance in 2015.

Although the United States narrowly escaped negative growth for the quarter, business profits were already in recession. They are likely to remain there for the first half of 2016. This situation became evident in the 3rd quarter of 2015, when growth in profits for the Standard and Poor 500 (S&P) dipped to negative 0.8%. It was after two quarters of positive growth of 2.2% and 1.3% respectively, for the first half of the year.

The difficulty in registering profits worsened further in the last quarter of 2015, when profits dropped further to negative 2.9%. The first quarter of 2016 saw profits for the S&P plunge by an additional 6.9%. Estimates for the second quarter are better, but still below zero at negative 1.9%.200px-Philippine-stock-market-board (1)

If one measures a recession as two quarters of back to back negative growth, the United States entered a recession for profits already at the beginning of the year.

It will be extremely difficult for American corporations to rack up profits, due to a slowing domestic economy. There is also an ever expanding portion of the world economy dipping into recession as well. Many global leaders are already in serious economic trouble, are are experiencing major difficulties associated with growth.

As the world's leading Reserve currency, the US dollar was central to the 2010–2011 outbreak of currency war.

As the world’s leading Reserve currency, the US dollar was central to the 2010–2011 outbreak of currency war.

In addition there is the problem of an ongoing worldwide currency devaluation, brought about by negative interest rates and endless rounds of quantitative easing in many leading economies. The specter of a full blown currency war, becomes ever more likely as individual nations become desperate for a return to growth.

The United States went through the worst period ever, for the stock market in the first quarter of 2016. Investors are becoming increasingly unenthusiastic, as the Dow is approaching 18,000 once again. It is now less than 600 points from the all time high but, with a dearth in profits it is likely to be unsustainable at these levels.

The American energy sector which had been a major contributor to growth previously, is now undergoing major restructuring. Job losses and declining output, are the result of a glut in supplies of oil and natural gas both domestically and world wide.

Many smaller firms are already bankrupt or soon will be. Larger firms are downsizing at an accelerating rate, no longer able to absorb prices that are below the cost of production in many cases.

The Federal Reserve Bank of New York has over $2 trillion in assets.

The Federal Reserve Bank of New York has over $2 trillion in assets.

The current rally in the United States equity markets is being fueled by a Federal Reserve Bank (Fed), that has now put off further interest rates hikes indefinitely. As recessionary fears in the larger economy fade somewhat, investors have cautiously returned to stocks as the only place to realize a decent return.

The question is how long will money flow into markets, where an ever greater share of companies can no longer deliver profits?

The reason why the Fed and other world central banks are not raising interest rates, is that producer priced inflation is at a historical low rate and the world economy overall is still in decline. Most other countries are still lowering interest rates. The United States alone, was attempting to move in the opposite direction. Of course, this effort seems to have been mostly abandoned for the moment.

US-FederalReserveSystem-Seal.svgAfter not raising rates since 2006, the United States Fed did finally move last December and had forecast 4 additional increases in 2016. This was reduced to 2 and now there is discussion, that there might well be no hikes at all this year. It is hard to justify increasing interest rates when economic growth is still slowing, both domestically and internationally.

There are some analysts who are now predicting that the current low prices in crude oil will bottom out and the United States Dollar (USD) will cease to strengthen globally in the second half of 2016. This would reduce the headwinds for many American corporations in posting profits.

The problem for the American economy remains that so many trading partners are in recession or are still slowing down. Brazil, Canada, Japan and Russia for example are in the former mode, China and Europe in the latter. The result is, many multinational companies will find the search for profits in 2016 elusive.

Countries by real GDP growth rate (2014).

Countries by real GDP growth rate (2014).

As a whole, global growth has been in decline for a couple of years. In 2014, it was at 2.6% and in 2015, it dropped further to 2.4%.

Many American businesses have therefore resorted to other methods, to maintain earnings per share value. Massive amounts of capital are being used in infinite rounds of share buybacks, that will provide little long term profitability for growth. This is especially the case, if the stocks being repurchased are actually declining in worth.

Another practice is leveraged buy outs of competitors or companies that provide greater vertical integration. Although this might make sense in a time of expansion for a business, it provides little value if the shares being sought, are being purchased at a premium. Nor can it be justified if the firm being acquired is not a good fit for the original company.

U.S. Securities and Exchange Commission headquarters in Washington, D.C., near Union Station.

U.S. Securities and Exchange Commission headquarters in Washington, D.C., near Union Station.

The increasing levels of debt will be hard to manage when interest rates eventually go back up. This kind of corporate indebtedness is approaching all time high in the United States. It is the same situation overseas as well. Leverage is at a 12 year high globally with a total value of $29 trillion USD.

Debt in many world companies are 3 times earnings and that is before interest, depreciation, taxes, and other business expenses. The rate is at the highest level going back to 2003 and up more than 200% from last year alone.

As a result, credit rating downgrades account for the largest proportion of rating actions since 2009. Most worrisome near a third of all companies are not generating enough income on their investments to cover the cost of these loans. The now 7 year old model of growth being fueled by cheap credit and central bank excess liquidity, is approaching the end of a cycle.

Given market fundamentals it is far more likely, that the United States and other world indexes are in a bear market rally. That is a gain of more than 5% following a correction of 10% or more, that fails to reach a new market high.

Stocks in the United States have now increased 13% from the market lows from mid-February. The Great Recession of 2007-2009 and the ensuing financial crisis was the last time there was a 20% correction in the major indices. At this point it is not if there will be a recession but how soon? Are we still a year or more away, or just months from a major downturn

A recent winner in stock valuation.

A recent winner in stock valuation.

Corporate shares are now selling at prices relative to earnings that are above long term valuation levels. The momentum in declining company profits seems likely to continue. Winners in the market now are mostly defensive stocks and sectors such as consumer discretionary related and utilities. This is not a good sign.

Typical bull market sectors like finance high technology and have not been part of the recent equity rebound. Long term government bond yields are still falling in the United States, clearly a sign of more upcoming marketplace turbulence.

Is a recession for later this year imminent? The constraints against further equity expansion continues to mount and central banks are rapidly losing their ability to influence the broader economy. Additional stimulus spending by individual countries has also reached the end, as heavy sovereign debt makes more government spending unlikely. The second business quarter will likely give investors the clarification they are looking for.

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