Last October – I wrote an article titled ‘I Now See An 85% Chance Of A Global Earnings Recession By Late Summer 2019’. . .

In it, I detailed how I use Bayes Theorem – a very powerful and simple statistical method for determining ‘conditional probability’ (which is the chance of one event occurring with some relationship to one or more other events) – when forming a hypothesis.

Bayes Theorem is quite intuitive – but in summary – I form a hypothesis that has a ‘base assumption’ of 50-50. And I continually add all new relevant evidence and information to revise my original hypothesis value.

So – if more evidence comes out adding to my hypothesis – then I would increase my hypothesis value accordingly. And if evidence comes out against my hypothesis – I would decrease my hypothesis value (or scrap it all together).

(I’ll write more about Bayes later – but for now, that’s all you need to know).

I first formed my “there will be a global earnings recession in late 2019” hypothesis when I saw the South Korean Export Growth indicator (aka SKEG) plunge in May 2018.

And ever since then – I’ve continually added new evidence and information – re-calculating the value of my hypothesis.

By October – I firmly believed there was an 85% chance there would be a global earnings recession over the next six-through-twelve months.

And by December – this number was at 90% (giving me a 10% margin for error).

So – what’s the value now?

It’s at 95%. . .

Now – I don’t usually put a hypothesis value so high (I prefer to have a thick margin for error). But all the information and evidence is hard to ignore.

For instance – the recently updated SKEG chart (which I wrote about two weeks ago) shows that South Korean export growth has collapsed much more since May 2018’s sharp plunge.

(note the red-line highlighting current South Korean Exports Growth year-over-year).

Thus according to SKEG – which has held accurate yet again – global earnings could sink -20% over the next year. (Remember – over the last 25 years, the direction of the SKEG has almost perfectly preceded global earnings within a 12-month lag.)

Also – keep in mind that since I first published my article discussing the potential earnings recession (May 2018) – corporations world wide have already seen their earnings deteriorate. . .



Just take a look at the following charts:

First – the Bank of America Merrill Lynch (BofAML) Global EPS Model indicates a sharp year-over-year drop for global earnings growth. . .

Second – Morgan Stanley Research highlighted sharp earnings revisions downwards across major equity markets. . .

Third – Thompson Reuters DataStream via Macro-Ops further showed a collapse in 3-month regional earnings momentum across the world’s major markets. . .

These graphs indicate that the trend for global earnings (corporate net income) still has much further to drop. And I see no reason to believe things will recover anytime soon (especially as major economies slide into recession).

All this supports my original hypothesis that the world’s headed for an earnings recession by late summer 2019. (And I’m not even covering any of the potential ‘trickle-down effects’ from collapsing corporate profits – such as missed bond payments, cut dividends, etc)

Now – as new relevant information comes out, I will update my hypothesis.

But as of today – my calculations still indicate a 95% chance corporate profits will continue deteriorating. And that a global earnings recession will take hold by late 2019.

Stay tuned.

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