Hear the Radio Interview
The current business cycle recession was confirmed by the SA Reserve Bank (SARB) about two years and four months after it started in December 2013. This does not mean they were tardy, since almost every country declares recessions way after they start to be absolutely sure of their facts. There is an old joke in investment circles that by the time your reserve bank or government declares or acknowledges a start date for a recession, the worst is most likely already over. We recall informing our subscribers around May 2014 that we had most likely entered a business cycle recession, and it was understandable for people to think we had lost our marbles - the stock market was trending strongly up at the time.
You may be wondering why there has been so little talk about this business cycle recession. The problem these days is that the press (and the government for obviously convenient reasons) keep referring to "Technical Recessions" of at least two consecutive negative quarters of GDP growth. The SARB, like all other Central Banks worldwide, determines reference turning points in terms of the growth cycle definition of business cycles and not in terms of the classical, but now outdated, definition of economic cycles that refer to periods of absolute increase in aggregate economic activity (GDP). We discussed this in an April 2016 TV interview below:
For over two years the stock market continued throwing everyone off the scent, trading in a tight sideways range. In reality, a brutal depreciation of the Rand to the Dollar from R10.54 to R16.85 (a 64% increase in the exchange rate) coupled with the fact that since 2008, the offshore earnings component of the JSE had risen to about 60% of total earnings, resulted in a huge move into the Rand hedge stocks, more particularly the "Big-5" (Naspers, Billiton, SAB, British American Tobacco & Richemont).
As a result, our charting programs were showing a TOP40 index in a sideways pattern when in reality it was only the "Big-5" that were propping things up. In a research note we published in mid-2016, we actually showed that stripping out the Big-5, you were left with a stock market that had long since peaked.
But to the foreign investors pricing the JSE in Dollars, the index did indeed suffer a bear-market class decline of 42%. This is shown aptly in the below chart from "Its Official: 4th Largest Outflows Since 1988" where almost $10 billion in foreign disposals of SA stocks and bonds were literally identical to those witnessed in the 2008 crash.
So what has become abundantly clear (in hindsight for most unfortunately) is that the All-Share index (or the TOP40 for that matter) has zero resemblance to the local SA economy in its current form. It has provided almost no useful information for anybody deploying traditional charting analytical techniques to determine the state of the local economy or if we were in a bear market or not. But it is now clear, when we examine the SA stock market in dollars, and by examining the underlying market breadth (behaviour of the JSE’s over 350 company shares) that we did indeed enter a bear market in SA stocks around mid 2015.
There are some purely econometric models that did however correctly depict a recession, and the behaviour of the Resources index also provided valuable clues to economic recession. In fact, these same tools can be deployed to actually determine if we have exited recession and entered into renewed expansion.
The first such tool is a Business Cycle Index that examines over 20 economic indicators such as ESKOM electricity consumption, new vehicle sales, mining and manufacturing output, retail sales, new residential building plans passed, business confidence and so forth. This index (which lags by 2 months) tied in exactly with the start date of the current business cycle recession as declared by SARB, and as of November 2016 shows 36 months of contraction, the third longest contraction on record since 1960 (albeit a very shallow one):
As can be seen from the first chart above, this has been a shallow, drawn-out recession. Also the bottom pane shows how this recession was totally missed by the stock market Rand-based pricing action.
The behaviour of the BCI rate of change is hinting that we most likely bottomed in November 2016:
In Part 2 next week, we will examine how the behaviour of the resources index provides valuable clues as to business cycle recessions and new economic expansions, and how it ties in with our hypotheses in this article.
Dwaine van Vuuren
RecessionAlert, PowerStocks Research
Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and PowerStocks Research into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.