The Recession And Bear Market Of 2016 In 2 Charts

 | Dec 21, 2015 04:29AM ET

Good friend Michael Pollaro just sent a couple of charts that show the US economy heading for a brick wall. The first illustrates what happens when business sales (the green line) turn negative. In the previous two boom/bust cycles, when sales started falling the economy either tipped into recession shortly thereafter or (it was discovered in retrospect) was already well into a contraction.

Meanwhile, junk bond yields (the blue line) start rising before recession hits and then spike during the contraction, as falling sales hit the weakest borrowers hardest, causing a wave of defaults.

Now compare the previous two busts with today (far right of the chart). Business sales turned negative a year ago and are now heading south fast. Junk yields bottomed in 2014 and are now spiking. If history is a reliable guide, the US is either in recession right now or will be within a quarter or two.

There is one difference, however. Heading into both previous financial crises short-term interest rates (represented here by the Fed Funds rate, red line) were above 5%, giving the central bank some leeway to cut rates and thus stimulate new borrowing. But not this time. Instead, short-term rates are zero or thereabouts and the Fed has just begun a tightening cycle.