If you search for “next recession” numerous ideas pop up. Many believe there will not be a recession soon.
Condition Comparison
Conditions are radically different than in 2007 and 2000.
The Fed re-blew a housing price bubble but the number of jobs tied to construction, sales, CDOs, agents and even the impact on banks is a shell of what happened then.
Technology is bubbly, but not like 2000. This is how I see things.
- We will not have bank failures in the US.
- There will be major bank failures or bail-ins in Europe.
- Housing will not have a major role but will strengthen the recession.
- Millennials simply cannot afford houses so housing will not lead a Fed attempt at a recovery even if interest rates plunge.
- Low interest rates will keep zombie companies alive for a while longer .
- Proliferation of retail stores, Walmart, Target, everything requires minimum staffing levels no matter how poor sales become.
- Unemployment will not rise much like last time. Instead, expect to see hours cut.Also expect for many of those currently working two jobs to lose one of them.
- Retail sales will plunge with the reduction in work.
- The impact of the above is very weak profits but not massive labor disruption
- Stocks will get clobbered as earnings take a huge hit.
- Junk bonds also get clobbered on fears of rolling over debt.
- This malaise can potentially last for years.
Zombified Economy
Japan is in a state of zombification and Europe is on the verge.
The US may not and likely will not go through Japanese-like extremes just yet. However, the demography setup is poor, the student debt problem is a huge overhang, boomers unprepared for retirement is a huge overhang, and pensions are a huge overhang.
Democrats may win the next election and massively hike taxes. That will not help either.
Finally, the Fed only has room to cut by 240 basis points or so. Negative interest rates don’t help as proven by the ECB and the Bank of Japan.
Mike “Mish” Shedlock
Have we ever had a recession with the unemployment rate this low? Seems like layoffs and closings would have to proceed a recession.
If you work 1 hour you are counted as employed. Dont let the UE rate fool you. Shadowstats still shows unemployed calculated by the original method as being in the high teens. Discouraged workers arent counted along with others who gave up or forced retirement. Inflation is also running around 6%. This economy isnt what it seems and most people with a macro view of history know it.
Unemployment was low and had barely started ticking up at the official start of the last 2 recessions.
The Soviets had the “ultimate” recession, despite never having any unemployment at all.
Labor is a lagging indicator and it typically only falls after the recession has already been going on
“Negative interest rates don’t help as proven by the ECB and the Bank of Japan.”
Yet they still exist, despite not working.
Just like the Mafia. And cancer. And progressivism…. Now, how could that be?
NOT working for the common man on the street but works ‘fine’ with Banks holding those Neg rate Sovereign bonds! B/c they are considered’ SAFE’ for their capital ratio requirement!
Historically, business recessions were caused by companies over-expanding and running out of available labor. In a global economy, it’s hard to see that happening. I think it is possible to see a few months of slow or no growth, but I don’t see an actual recession with mass unemployment unless someone wants one. Maybe the Fed decides too many Americans are employed and keeps jacking up interest rates. Or the ChinComs want to teach their local capitalists a lesson and tighten up credit standards. But it will be by choice.
It sounds like what you’re saying is: It’s different this time.”
Unfortunately, the landing will be hard, as the big driver, govt largess, will continue to consume an ever larger portion of the economy, starving the real economy. While the US will be the last to feel the effects, due to global capital flows seeking the RELATIVE safety of dollar-based assets (especially, blue chip stocks), the impact of rising rates and taxes will take their toll on pensions and growth.
The growth of govt (taxes & regs) since the 50’s has resulted in a steady declining economy across the west. As govts panic, due to the rise in interest expense and pension liabilities, they will shoot themselves in the head by raising taxes, fees, penalites, and civil asset forfeitures in an attempt to save themselves. The Yellow Vest movement is the tip of the civil-unrest iceberg.
How will rates rise when no one can afford to pay higher rates?
Rising risk of sovereign defaults, and the Fed needs to raise rates to postpone the pension crisis, as the majority of pension holdings must be invested in Treasuries, which is why pensions are so underwater after almost 10 years of near-zero yield. Last but not least, the Fed will be raising rates to try and stop the run-away stock market, once the implosion in Europe and Japan gets afoot, leaving no other place for global capital to hide. Of course, raising rates will only attract more capital into the dollar, which is the basis for the big reset.
Rates will not rise as long as liquidity preferences rule. Read some Jeffrey Snider, he addresses a lot of the myths you believe Blacklisted.
I guess anyone who would expect you to predict the future would find out from this post that yer just as crystal-ball-less as the rest of us. 🙂 All we can surmise is that good times dont last forever, and the credit bubble started in 1982 would have to eventually come to an end. We were supposed to have a recession not long after 2008 (every 6-8 years or so, right?) I think the Trump surge is because all the credit removed in 2008 was restored, and people went back to borrowing with reckless abandon. This all is gonna reverse eventually.
“I will go out on a limb and say we will see both political and economic crises in the next 6 years. “
I expect a pension crisis and a junk bond crisis in due time. Not sure what a “political crisis means” here although the UK is in one now.
The UK, France, Italy, Turkey, and others, including the US have one thing in common – equally split political groups that will NOT accept the outcome of the other group, no matter who wins. Whether one calls it a “political crisis” is meaningless, as the end result is severe civil unrest, growing separatist movements, and distractive wars.
This is what I see as a political crisis: Democrats are playing with fire.
I inclined more towards junk bond crisis, car loans and students loan crisis. Political crisis, no so much we will have more clowns joining joining the ranks of politicians (one cannot tell the difference now) but we are seeing right now. So, if we have debt crisis then I don’t see high interest rates in the future…Until the debt issue is solve….Another reason for low interest, when crisis developed in Emerging Markets or Europe, investors are more likely to buy our T-bills, gold and to a lesser degree the German bonds.
As long as I keep reading articles every day that the next depression is right around the corner and it will be a disaster, I’ll stay long the stock market.
Market is at all-time highs. No one is talking about this (besides Hussman). I don’t see bearishness, I see complacency. Schiller is like “I dunno, things aren’t too extreme.”
“Life has become better, comrades, life has become more cheerful”
Stalin 1935
Agree on most of your points, Mish, but I don’t see stocks getting clobbered, or anything close to that. With a lot of help from cheap money and PPT, they’ve done a remarkable job of shrugging off bad news and should continue to do so. I could see a modest decline but I don’t think they will allow anything more, as the Fed seems hellbent on propping them up. Stocks haven’t reflected reality in a while.
Unemployment is a tricky one. Actual unemployment could increase dramatically as retail suffers, but officially it will be fine. Former workers will quickly become “discouraged” in the eyes of the BLS and will be eliminated from the equation. I don’t foresee an official number anywhere near the almost 10% we saw in 2009.
Most of all, I agree strongly with your last point. Unfortunately, this crash won’t be allowed to run its course so the zombified economy could last another decade or more. At this point the only way it ends sooner is if widespread unrest occurs, but we don’t seem close to that either. There’s a lot of grumbling but we’re much more unhappy with each other than we are with the Fed.
Yikes, you probably tried to short this bull market and got burnt, right?
Ha! Not that much, my worst mistake was some physical gold and silver several years ago before they fell. Then again, I had no intention of selling in the short term, so it may be fine.
I do admit to hugely underestimating the ability of the Fed to paper over the 2008 crisis. The level of intervention and their collusion with other central banks has been something to behold.
First rule about owning physical gold. Don’t tell the Internet that you have it.
It’s a modest amount. Anybody that takes the time to track me down will be disappointed, for real.
How stocks behave will all depend on current earnings. If they start a serious downwards spiral, valuations won’t hold up.
You’re thinking in terms of a free(er) market. Tengen’s point is that the Fed (PPT) will prop up the valuations. Reality has no meaning in such a manipulated world.
The PPT was created to deal with temporary illiquidity, as in a crash. They are not intended to address, nor could they address, a bear market. In other words, it can dampen extremely sharp occillations, but it can’t affect the ultimate value.
The PPT (does such a thing even exists?) couldn’t. But as long as The Fed credibly stands ready, like Draghi, to “do what it takes” to keep zombies elevated and it’s constituency flush, few aspiring bears will want to fight them.
PPT is just one of the tools in their arsenal. More importantly, everybody and their dog knows the Fed will start slashing rates at the first sign of trouble. This time the Fed claims they could feasibly cut all the way to -4%. As soon as they go negative, we’ll live in very interesting times.
It all sounds bonkers, but I don’t doubt the tenacity of the Fed anymore. If they’re frightened enough I think they’ll give negative rates the college try.
I will go out on a limb and say we will see both political and economic crises in the next 6 years. The next recession will cause a debt crisis that the Fed wont be able to paper over because it will be public debt at the heart of the issue. The wealth gap will come to a head. The wealthy are already fleeing to places like Puerto Rico in anticipation of a crisis. Stocks, bonds and everything else will decline over half a decade and spend the rest of the decade trying to recover. A war will likely occur too because we are overdue for one. Multiple countries are trying to bring down America and they will succeed.
One important dynamic is about to change for the stock market. Baby boomers have been socking away money as fast as they can into 401k and IRA accounts, much of or most of which ends up in the market. Over the next five years, most baby boomers will retire. Once they retire, the flow will reverse, as they strop contributing, and gradually begin withdrawing from their retirement accounts.
To quote Dr. Seuss: “Won’t look like rain. Won’t look like snow. Won’t look like fog. That’s all we know. We just can’t tell you any more. We’ve never made oobleck before.”
Reading those headlines, apparently many people are trying to skip the Shock/Denial stage of grief and go straight to the Bargaining stage, before the next recession even happens. I don’t think that is going to work. It’s still going to be a bad surprise, much worse than all these muddle-throughers are hoping for.
Agree. It is going to be a tough decade economically and politically. There may be blood in the streets too. I also see another war in the middle east with someone detonating a nuclear device. It is going to be one doozy of a time.
Zombie is a good word. I expect we get a 10 year downward cycle in equities once things peak. There will be a couple of opportunities on bounces but overall the next 10 years wont look like the last 10. Dollar holders will walk away once they realize they arent getting their principal back.
And for the entire 10 years the financial advice industry will tell everybody to keep putting money into (zombified at best) index funds.
Yep. Dollar cost average your way down to peanuts like they did in Japan for 20 years. To me there will be a reversion to the mean return of 3% which has been the return during secular bear markets. As John Mauldin states ” Retirement isnt happening”
You’re not thinking globally. Where do you think the fear capital in Europe, UK, Japan, etc. is going to flee? Govt bonds?
My guess is, based on it’s recent U-turn which came in response to not especially great pressure – Fed reaches for the usual tools of the recent past such as Interest cuts and QE.
They won’t work well except to benefit the Ultra Rich and Mr Market and will mostly further inflate assets, with all the inequality that brings. Yet the Fed seems to know nothing else.
The Fed has rejected MMT that would benefit the vast majority of people (but is just fine with MMT used to fund eternal wars and massive tax cuts of Rich Gigantic Corporations and the Ultra Rich).
And it Fed is against that which is sorely lacking in the economy and would perform wonders – Robust, vigorous govt spending on programs and changes to law that benefit working people.
“And it Fed is against that which is sorely lacking in the economy and would perform wonders – Robust, vigorous govt spending on programs….”
Like Stalin did….. And Chavez…… There’s never been anything like a five year plan or two, paid for with taxes on the income working people work for no doubt, to get to some imaginary Utopia…..
As for laws; working people don’t need them. They never did. Not anywhere. Being productive, all working people need, is to be freed from the shackles of laws put in place to redistribute the value they create; to idle, negative value add, expendable leeches too incompetent to create anything besides just such laws.
Besides which, we had massive government spending under Obama (doubled the debt during his tenure) all it brought was more stagnation…
Another story recently out is that CFO’s see a recession by 2020. That, of course, would mean that the Democrats re-take the White House:
Everybody and their dog is guessing a recession in 2020 — or 2021 if they are optimistic. Since when is “everybody” right?
The CFO is one who knows the value of the company better than anyone else. If I expected another severe recession, I would quit and sell company stock. There is more wealth in stocks to preserve than salary earned from staying employed.
eh.. how’s that?
Those conditions above do not equal recession, slow growth of 1% – 3% per quarter is not a recession. Jobless claims still trending lower, the mbaa purchase index and vehicle sales are running well ahead of expectations, but the Media conveniently left that out
You do realize the Fed has been propping things up in asset classes since 2011. No one wants to talk about the elephant in the room.
Yes and the Fed will cut 50 bps this year and 50bps next. Gerald celente of the trends journal got one thing right, although his prediction for gold to go above$1300 hasn’t happened.
I just really really wish people stop wanting to give freebies to millennials as part of some bleeding heart guilt of the boomers. I mean no one should even entertain the idea of any type of student loan forgiveness with Sub 4% unemployment same with health insurance. 85% of people in the USA are covered by employer paid commercial insurance
Can everyone please stop this bleeding heart nonsense about millennials. Something they are lacking its called personal responsibility. They blow their money on crap, most are in tens of thousands of dollars in credit card and Auto loan debt and those$8.00 coffees and $11.00 craft beers add up quickly.
How many do you know personally? What is your source of information. Or are sources unimportant?
You right now sound like a Millennial who just wants to complain. Stop that crap now. Be a respectable Baby Boomer.
Since when is ‘reckless spending’ NOT equal to business profits and GDP?
What would happen to gross sales and GDP and velocity of money if everyone really cut their consumption spending by 10 percent?
Non-rich Families used to buy 2 cars, often new cars. Millenials often can’t start families, living on 50 cent ramen noodles.
The economy is rebounding. Total vehicle sales back over 17.4 million SAAR, the mbaa purchase index rose for the last 3 consecutive weeks
The Fed will follow Draghi’s motto – Will do ‘with whatever”
Ominous sign as central banks move to take over the oil market,if successful in taking control of oil like they did in stocks,bonds,gold,silver,forex well…..everything,look for 200-300 dollar oil.
Central banks are buying oil futures derivatives contracts? Really?