Why Talk of a Coming Recession Might Be Wrong
Or So Says Someone Whose Data Rarely Is...
We're going on at least a year, maybe longer, where predictions that a recession is 'imminent' have been seemingly everywhere...
But if we have learned nothing else about the markets and the economy, it's that the consensus isn't always right... In fact, it's often wrong.
That's because herds are just that – herds. Everybody wants somebody else to tell them what will happen next... and if that somebody seems credible, people assume they know what they're talking about.
What I know is that nobody knows, and we wouldn't still be talking about a recession – whether we're in one, we were in one, or we're headed for one – if they did.
This is why the really smart folks simply follow the data...
And when it comes to economic activity, that often means following the freight.
And nobody knows freight like Donald Broughton of Broughton Capital. He's a longtime transportation and freight analyst and consultant who keeps his own sets of data and proprietary algorithms, which according to him "are the only ones in the industry proven to be statistically significant when historically backtested."
That's why I quoted him back in the May 31 Empire Financial Daily, headlined, "What One Obscure, Overlooked but Accurate Recession Indicator Is Saying." As I explained, Broughton focuses most on "freight flows" – calling them the "steady Eddie" of predictors.
Last time around, they weren't predicting a recession... And he doesn't think they are this time, either – in part because while rates and volumes are lower than their post-pandemic highs, they're well ahead of where they were pre-pandemic.
Consider that...
Spot truckload volumes are down but are still 2.5 times higher than they were at their pandemic lows and higher than any level pre-pandemic, including 2018 peaks. The "spot" market refers to on-demand request for trucks, which is statistically a significant proxy for broader demand.
Spot pricing is down more than 30% from the 2022 post-pandemic peak, when the supply chain was going nuts, but is still higher than any pre-pandemic level.
Contract pricing is off 5% from its 2022 peak, but still more than 35% higher than pre-pandemic.
And remember all those container ships stuck waiting at ports and container prices skyrocketing? There is now substantial excess capacity, causing prices to plummet by more than 90% back to pre-pandemic levels.
All of this prompted Broughton, after an appearance last week on CNBC, to write on his LinkedIn account...
Recovery in freight is already well underway! The future is not in the rear-view mirror...
The rate of economic growth has slowed (there was no way it could continue at the '21 pace), but it is still growing. All the "chicken littles" calling for doom and gloom are about to be proven wrong.
That's his story, and he's still sticking with it. And right now his record is better than most.
Moving on to the mailbag...
My Empire Financial Daily essay on Friday about how chatbots might disrupt software development as we know it today prompted readers to write in...
"Hello Herb, 20 years ago I was supervising the IT department in banking amongst other things and I used to tell the IT guys: you're so busy killing your own job. Now it's coming for real." – Fabian H.
Herb comment: Fabian, it very well may... but as John B. says below, that may cause an entirely new set of issues.
"Hey Herb, a couple of items about using AI for software development.
"First and foremost, the business that the software is being written for still has to specify what they want! This is perhaps the most difficult portion of the entire software development process and the one that gets changed as much or more often than the software. A lot of times in the 11th hour of the project. This is where the majority of bugs are introduced as the development team struggles to incorporate the changes on the same schedule (don't even get me started with the insanity of this mentality but I've lived it way too often).
"As a former IT professional who is retired, I cannot tell you the number of times that the business area changes their minds on what they want and how they want things to look, want it changed prior to the release of the software and want the same scheduled (you said it would only take 'X' amount of time OR when you push back as a newbie of the company, we've always had done it this way!).
"Second, how is it going to be tested? This is an area that has grown in complexity faster than the complexity of the software itself. From everything I've read about AI, it still isn't perfect. So can we assume that buggy software will be written faster? (Remember the old joke about a computer [that] can mess things up faster than a human?)
"And the real test of AI will be can the software that AI is producing be debugged in order to find the defect? Or will the software be readable enough to make changes/enhancements to the current software, because it can't all be rewritten?
"Third, who will be to blame when the software is too buggy to use after it's been released to the public? Or better yet, decisions made during the writing of the software become obsolete and it needs to be rewritten/modified to conform to a new law?
"I'm glad I'm retired because this can of worms is just beginning to be opened and I'm glad I won't have to deal with it! " – John B.
Herb comment: Admit it, John, you miss it!
(This originally ran at Empire Financial Research, where I also write two investment newsletters, Empire Real Wealth and Herb Greenberg’s Quant-X System. For more information, click here and here.)