Guest Post by Tom Williams
Earlier this month, we reported anecdotal evidence of a looming recession with falling gasoline consumption and office space demand. Perhaps less anecdotal, recent PMI data suggest that recession is in the cards. What are PMIs?
The Purchasing Managers’ Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. It consists of a diffusion index that summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting. The purpose of the PMI is to provide information about current and future business conditions to company decision-makers, analysts, and investors. A PMI above 50 represents an expansion when compared with the previous month. A PMI reading under 50 represents a contraction.
The PMI indicators are probably one of the most looked at forward-looking fundamental indicators for market players. They tend to track and predict well eventual GDP results that tend to be lagging fundamental indicators. Let’s take a tour of the Latest PMIs from the US and the Eurozone.
The following are the latest (2022-07-22) PMIs (47.5, a 26-month low) for the US, and learn more here.
The following are the latest (2022-07-22) PMIs (49.4, a 17-month low) for the Eurozone, and learn more here.
The US and the Eurozone represent nearly 40% of global GDP, hence should be considered carefully, as the results will echo around the global economy. The other big economy, China, will report on August 1st, 2022. Two takeaways should be considered when looking at these recent PMIs.
- Both the US and the Eurozone are now in economic contraction, which indicates recession could be just around the corner, if not already.
- The speed of the decline is quite alarming and indicates a potential sudden turn of economic fortunes. No doubt this has been brought on by recent sharp moves in central banks raising interest rates that subsequently stall growth.
Of course, PMIs go up and down all the time. Is there a need to panic this time? Perhaps not on only PMIs, but when you start accumulating debt with low economic growth, it can be a problem. Many people think that debt is linear and do not understand the notion of exponential debt and the horrifying end results. We digress with a little math lesson.
Rates of growth can take many forms. Linear rates of growth remain static and not simply in proportion to the input value – the change at any point in time is a fixed constant.
Polynomial growth is so named because it is reflected in the graphs of polynomial functions. Polynomial growth also increases over time (if the reader is familiar with differential calculus, consider that the derivative of a polynomial of degree at least two is always another polynomial, which increases as x??x??), but not as strongly as exponential growth. Eventually, exponential growth will always overtake both linear and polynomial growth (of any degree). See the difference in the inset graph.
Why do we digress with this small math lesson? When we look at GDP growth over the past few decades, it has been fairly linear (the black line below). Some falsely believe debt has been growing at the same rate as GDP. However, when looking at debt creation, it has been exponential. In other words, trendline debt growth keeps getting steeper and steeper over time (the red trendlines below), creating the exponential arc pattern from horizontal to vertical. See this in the chart below and learn more here.
Note that with the mathematical exponential formula, further along on the X-axis (time), the sharper and quicker will be the movements in debt creation. At some point in time, the Minsky Moment will arrive, and the house of cards comes tumbling down. This is a long-term structural phenomenon, though different political regimes and central bankers can make minor adjustments via policy.
To change the long-term trend would take dramatic action – few politicians would be able to sell the idea to the voting public of a controlled reversal – it would take too long in a political cycle. Hence, most likely, nature will take its course and force the issue when the math final dictates. Depression (1929 style) or a hyperinflation collapse (Venezuela style) – pick your poison. Very soon now, the math will take over, and shall I dare say … a Great Reset is about to occur, whether anyone likes it or not.
I cringe every time someone says that The Great Reset is a conspiracy theory. Perhaps we can debate the shape of it. Perhaps we can debate the timing. Given the state of our geopolitics, divisive local politics, the unbridled violence on the streets, and grand political ideas to save us, God only knows how devastating this will be for Americans and those around the world.
You can stick your head in the sand in a pathetic apathetic stupor, but The Great Reset is going to happen … it is pure mathematics. Are you awake yet?
