Sunday, June 23, 2019

How Can The Market Be at An All Time High and There Be A Freight Recession - Part II

In my previous post I outlined why I believe freight is slowing.  Certain signals in the marketplace are telling us employment adds are decreasing, inventories are increasing and the PMI is decreasing.  All of these are signs of a slowing economy.  (For the record, I do not believe by any stretch the economy will contract - it is just we should not get used to GDP growth rates of 3% into the future).  This slowing has resulted in less loads per truck and prices going down.

So, how can the stock market be hitting an all time high?  I believe it is due to 3 reasons (Warning, I know a lot more about freight than I do about investing but here goes):

  1. The alternative investment (10yr as a proxy)
  2. % of the economy which has nothing to do with goods
  3. The Fed.
What is happening:

Let me start off by showing what is actually happening:

This chart compares the Dow Jones Transportation Index to the DJ30 and the S&P500.  This is a one year return graph and ends on June 21.  As of June 21, the DJ30 is up 6.66%, the SPX is up 7.1% and yet the DJT is DOWN 3.91% Bottom line is investors are shunning transports yet still embracing the overall economy.  Why?

The Alternative Investment:

Investors are going to invest.  That is what they do and they have two macro alternatives.  First, they can invest in the "risk" markets (i.e., stocks) or they can invest in what is generally considered the "risk free" or "near risk free" investment.  I will use the 10yr as a proxy for this second grouping.  What we have seen recently is not only a 10 year treasury at multi year lows but we are also hearing the Fed discussing lowering the rates even further.  This will drive investment dollars away from the "risk free" and into the markets. 

It is no coincidence towards the end of last year when the Fed was not only raising rates but also calling for 3 rate hikes in 2019 the stock market tanked.  Investors were deciding to move away from risk assets as the risk free was looking pretty good.  Not so much any more as the 10yr is now bouncing around the 2% level.

The graph to the left is the graph of the 10 year treasury rates as of Friday, June 21.  This movement of rates down has caused money to flow back into the risk asset markets and specifically look at the major move down since mid May.  This is when the Fed made it pretty clear the only action they likely will take is a move down in rates. 

% of The Economy Which Does Not Have Anything to Do with Shippable Goods:

This one is a bit nuanced.  Let's just look at 30 years ago and think about what it meant for the economy to be growing at 3%.  It was intuitive that the growth had to have much to do with autos, real hard electronics, housing etc. etc.  These are all very "hard" goods which drove the economy. 

Today, when we the economy grows at 3% more of it has to do with finance, services and the infamous FANG stocks (Facebook, Amazon, Netflix and Google - Alphabet).  Only one of these, Amazon, ships anything.  The rest make their money in the "virtual" world.  Very important to the economy but not so important to trucking.  The graph below illustrates this:

Non Shipment Economy
The inverse of this graph is to ask how much of GDP is due to MFG:

Both of these graphs tell the same story.  GDP can grow at a high rate and not have shippable product tendered to carriers.  - Economy grows yet a freight recession sets in. 

The Fed

What else can I say?  The Fed has made a huge 180 degree turn around in the last few months and whether that is due to political pressure or real economics I will leave it to the real economists to figure out. But, reality is, the Fed has signaled rates are going down and they have somewhat backed themselves into a corner as it would be outright lying if they did not do this.  This means more money will continue to go into inflating the asset bubble and less money will go into bonds. 

I hope I have now explained (sorry for the two part length) why the freight recession likely will continue however the economy, as measured by the markets and GDP, will continue to do quite well.  

  1. Economy is slowing
  2. Investors have to invest in the market to get any kind of return due to the "risk free" paying so low.
  3. Investors are shunning the transports
  4. This drives the market to records
  5. Less and less of the GDP has to do with "shippable goods"
This is a link to Part 1 of this posting (for those reading on a reader)

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