Trump and markets could be set for a brutal reckoning

Two "long-cycle" leading indicators are pointing towards a US recession.  They are auto sales and housing starts.  For most people these are the largest big-ticket items they'll ever buy, and if they start to have doubts about the economic future, or are themselves starting to feel the economic pinch, they  pull in their horns.  They're also important to the economic cycle because although even together, they're not a huge chunk of the economy, their swings are large.  If they go on falling, we're in for a recession, for sure.  I think they will go on falling.

Car sales lead the peak of the cycle by many months, but the lead is shorter at the trough

In this last chart I have combined housing starts and auto sales into a single composite index.
The decline so far is indicative of a recession, which is consistent with several other longer-leading indicators

My concerns are now being shared by mainstream analysts:

America's manufacturing industry suffered the sharpest slowdown last month since the depths of the global financial crisis, prompting calls for emergency rate cuts to avert a spiral into recession.

IHS Markit's momentum gauge [the PMI] fell to the lowest level since September 2009 as America's fortress economy succumbed to fading fiscal stimulus and mounting damage from trade wars with China, Europe, and Mexico.

Chris Williamson, the group's chief economist, said US profit margins are being squeezed. Manufacturers are cutting output and laying off staff. "Surging order book growth just a few months ago has now turned into contraction, the first such decline seen in the series' 10-year history," he said.

Michael Darda from MKM Partners said: "There is still time for the US Federal Reserve to right the ship, but time is running out."

Mr Darda said the yield curve for US Treasuries is inverting across every relevant maturity, flashing a red warning sign. "Long-cycle" indicators such as housing and car sales are already slipping into a deepening downturn. "It's time for the Fed to take out an insurance policy with a 75 to 100 basis point rate cut," he said. "If the Fed sits on its hands and a full blown recession gets under way, taking rates all the way back to zero may not be enough to revive growth. An ounce of prevention beats a pound of cure."

The M1 money supply has stalled over the last eight months yet the Fed is still engaged in quantitative tightening (reverse QE). This is draining dollar liquidity at home and across the world.

"The US is now on recession watch," said Edward Harrison from Credit Writedowns. "I don't think the Fed will pivot aggressively. It will end up over-tightening and creating a credit event. Trump's policy moves are potentially the thing that tips this into recession."

The Powell Fed gave no indication in its minutes in late May that it would soon come to the rescue. The hawkish text suggested that the US economy is in rude good health despite "transient factors" and that some voting members are even itching to raise rates.

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