I’ve heard a similar sentiment several times. As a thought experiement, I thought it would be good to step back and conceptualize what that would look like.
What are the key drivers?
What are the sensitive points in the market?
What would be the trigger?
This belongs in investments. That said: one trigger (potentially) is the end of QE. Monetary policy has a 6-12 month lag in terms of impact on the real economy and no one really knows WTF the implications of ending QE really will be.
Presumably it means that recessions come along about once every 8 years and since the last recession started in 2007, and we’re almost at the end of 2014, “we’re due for a recession.” Not really great analysis, but it sounds impressive to the uninitiated when said with confidence by a well dressed financial type.
However recessions that are driven by credit collapse are different than recessions that are driven by production gluts, so the clock may tick differently here. I would think that the bigger danger is in revealing that banks have more risky assets than we think they do, and a Republican congress won’t bail them out (we hope).
A lot of things can cause a recession but I think it’s plausible that the lack of a robust recovery from the 07-09 U.S. recession may push off the inevitable recession for some time. Many U.S. companies are repurchasing shares and paying dividends with relatively less capital investment so there’s been less capacity additions in various industries. Companies for the most part have been cautious.
I think companies haven’t been aggressive adding capacity through capex and have kept inventory levels pretty lean for the most part. Outside of perhaps oil and gas, biotech, silicon valley, there’s not been a lot of excesses built up or malinvestment in the U.S. economy in the most recent expansion. Perhaps that means the (weak) expansion may last a bit longer than expected?
I personally think the yield curve is a nice forward indicator. If we start to see some inflationary pressures (wages), short-term rates will begin to rise and the yield curve may flatten out…to me that’s a sign a recession is looming but we’ve got an upward sloping yield curve that is generally a healthy forward indicator.
I just don’t see a lot of excesses in the U.S. or an economy that’s overheating to worry about a recession forthcoming in the next 18 months. I do think monetary policy has made capital readily available and bad firms are getting capital they’ll likely use poorly – I worry about that – but I’d bet no recession in the U.S. in the next 18-24 months.
Yield curve is not a bad indicator in normal times but with all this fed intervention, the front end of the curve isn’t exactly free to float up, and the long term rates would have to get below 50 bps before you could even consider the curve “flat”, much less “inverted.”
I don’t really see the recession catalyst. But if I had to play. . .from my perspective, the low rates are creating problems. Some projects that are viable at these interest rates simply don’t make sense under normal rates (and if they reprice upward at renewal, likely won’t cover the increased cost). I think this is most evident in the leveraged loans: http://dealbook.nytimes.com/2014/11/04/a-recent-surge-of-leveraged-loans-rattles-regulators/?_r=0
But it’s occuring in plenty of ‘high yield’ assets. If rates rise quickly, you could see asset quality of the banks weaken.
Let’s say a recession is defined by negative GDP growth. That whole 2008 thing was a big deal. It took trillions in printing, easy money, and years of “everything is going to be fine” propaganda, just to hit 1% “real” growth. It seems more rational to me to be concerned about essentially 0% growth into perpetuity, and the impact of govt/fed actions on global financial markets, rather than negative GPD growth rates. US GDP 1998-2007 3%, 2008-2013 0.7%.
BChad,
I know using time passage as an indicator for a recession’s likelihood is bad analysis. I was simply saying that hearing the expression got me thinking about the topic.
This explains many of the PE valuations out there.
I figured as much. Just remember that just because someone said it on CNBC or wherever doesn’t mean they did good analysis. (Though I imagine that you know that too).
i personally think the last 600 points on the S&P 500 are a direct result of Japan’s Abenomics. when a PM says i’m making it a policy to devalue the hell out of my currency and buy the crap out of Japanese and U.S. equities, foreign investors flee Japan and deposit in the currency that is most likely to gain (i.e. USD) and much of that money found its way to U.S. equity markets, partially due to the Fed’s QE3 eating up plenty of new bond supply but also due to Japan’s statement that it will buy more foreign equities.
i think the next U.S. recession will be the result of a European and/or Japanese recession. i think Japan will fail as Abe will not be in power forever and his successor will likely overturn his policies and Europe is inevitably due for another sovereign debt crisis or outright depression (more so in a price level sense, not necessarily severe 1930s-like economic contraction). i think it’s much easier to bet on this catalyst for the next U.S. recession than some untold/hidden information within the U.S. corporate landscape.
It probably is true that exports helped a lot in recent GDP figures, and that a collapse of exports due to a strengthening USD and just recession abroad could create a mild recession here in the US.
I hadn’t really thought of that aspect, MLA. Really good points.
Matt, good stuff on your last post. I do think it’s reasonable to believe Shinzo Abe’s policies will be not be materially successful on economic activity and that he’ll be replaced, at which point I sure as hell don’t want to be long Japanese equities. The potential impact of that on global equity markets…that’ll be interesting. Thanks for your thoughts.
i forgot who said it, but sum legendary investor talked about more elongated cycles (a month or 2 ago) due to increased uncertainty. Byron, Bernstein or Gundlach maybe. Not really to sure but i’ll buy that story. Also tommy is right about companies not spending crazy capex when compared to like sales or something due to uncertainty. flatter rates causing a ruckus was talked a lot about, but rates have gotten flatter and still no negative reaction. Prolly flatter cuz more uncertainty, but stock market still higher cuz well everyone aint taking risks. but yep, i’ve read recent reports talking about recessions occuring when everyone gets paid more, which makes sense. there was that ray dalio video that talked about human behavior where more income will lead to ppl borrowing more money until everyhting gets fueled by credit then everyone gets busted.
overall i dont see any reason for a recession. like everyone said its typically credit induced, credit is still tight. and we still got high unemployment. weakness in china and europe is a good thing cuz that just means there is fuel to the fire when they get better. oil is cheap. commodities are still falling. party on.
The numbers are small compared to the US equity market ($21T) though. Something like $120B by pension fund, a few $B here and there; I think I calculated about $250B max.
Then again, it’s marginal investors that set the price, so you may be right.
Here’s a recession prediction with thought thru triggers… --------------------------- The Jerome Levy Forecasting Center, is again more worried than its peers. Its half-dozen analysts attach a 65 percent probability of a worldwide recession forcing a contraction in the U.S. by the end of next year. “Clearly the direction of most of the recent global economic news suggests movement toward a 2015 downturn,” chairman David Levy told clients. Levy argues the U.S. and many advanced economies still have balance-sheet excesses exposing them to renewed financial crisis. There is limited room for policy makers to reverse any slump, and low inflation risks tipping into deflation in many parts of the world. While the U.S. is doing relatively well, Levy is worried that at about 13 percent of gross domestic product, U.S. exports represent their largest share ever. American companies also are getting a historically large proportion of earnings from abroad and households are vulnerable to any bear market because their ratio of stocks to disposable income is higher than at any point aside from the start of this century, he said. “Without first strengthening substantially, we think it highly unlikely that global financial stability will hold together long enough for the Fed to signal and execute a rate increase,” he said. http://www.bloomberg.com/news/2014-11-10/predictors-of-29-crash-see-65-chance-of-2015-recession.html
Don’t forget the dumb Chinese.
and i think Abenomics pushes global corporations to pivot to the U.S. versus Japan. we’ve seen plenty of Japanese, and German, corporations take interest in U.S. corps over the past 2 years mostly due to my next point, that the USD has entered a long cycle of strength due to Yen depreciation under Abe. by Abe mapping out just how much he will devalue the Yen, it reignited the carry trade and forces more hedgies and PMs to hold more U.S. dollars which needs to be invested in something denominated in U.S. dollars. this might be a major reason for the crazy low rates in the U.S. despite strong economic growth and rising U.S. equity markets. so even if very little money from the carry trade directly finds its way to the U.S. equity market, its effect on the U.S. bond market pushes marginal U.S. bond investors into equities or equity-like securities, which in turn pushes marginal equity-like investors into equities, and the effect of low rates also continues to help corporate profits in the meantime.
it was basically a wave of money hitting U.S. shores. why do you think the U.S. has outperformed to the degree it has over the past 2 years? it’s pretty clear in my mind. if it all unwinds, watch out below. last polls show that abe’s approval rating is at a low. i don’t know japanese politics well enough, yet, so i’m unclear whether there is a contender who could handily take the reigns from him. that said, as a very-much-not-advanced student of economics, i can’t see any way that Japan’s policies will be successful. and if they happened to be successful, it could only be at the expense of other major hard good exporters like Germany and the U.S., among others. it is currency war at its best. their goal, as per their policies, is to steal growth, not incubate it.
http://www.reuters.com/article/2014/11/10/us-japan-politics-poll-idUSKCN0IU13A20141110
the article has a lot of ranting but it is interesting to think of Abenomics as the trigger that could get Japan closer to the inequality that exists in the U.S. would they just be trading off long-term deflation for long-term stagnation? if all the money from Abenomics ends up in the hands of corporations and the upper echelon, will the Japanese vote with their feet, and how quickly will they do it? i was unaware that wages have been declining there for 2 years (though i see that wage growth has been slightly positive after this article was written but still well below inflation) despite rapid energy and food price inflation. how has nothing trickled down to wages when the unemployment rate is 3.6%?
http://www.zerohedge.com/news/2014-06-05/abenomics-legacy-greatest-misery-33-years
another question i pose is, what happen’s to the yen when this all unravels? will it appreciate and go back from whence it came? or will it depreciate b/c the outlook is so poor? a lot of questions and a lot of uncertainty. yuck.
Beers with Geo, MLA and Bchad would be interesting.