Recession coming?

[+ augustus]

9 hours ago, BSR said:

Hmm, I have to disagree.  A recession is the market's response to an overheated economy.  Because interest rates were ultra-low for years and because the government printed $trillions out of thin air, the economy overheated.  Recession was inevitable, regardless of what people believe.

Exactly!   The Government and the Fed sets off the expansion by expanding credit ex nihilo. This sets into play a systematic chain of malinvestments economy wide. Because credit is issued out of nothing, money ends up in the stream of commerce and the real supply of goods and services is consumed at an artificially high rate. Worse, this creates distortions in the capital structure.   Money flows into processes/projects that would never be funded without the false signals sent by the credit created out of thin air. This process ends when the Fed stops expanding credit (because inflation takes off) and that's when the recession occurs as those financially fragile processes/projects are starved of credit.  ECON 101.  This is a law of the universe, a roller coaster we have seen multiple times, totally predictable and XXX.

Moderator's note: politics redacted.

[+ augustus]

We are doomed to a recession, and probably a serious one.  You don't increase M2 money supply by 40% in just 2 years XXX and then not expect severe inflation from that 40% increase in M2 and then not expect that a strong monetary response is needed to bring inflation under control.

PS  Modern Monetary Theory looked so promising.  Who would’ve thought?

Moderator's note: politics redacted. 

[+ keroscenefire]

Pretty strong jobs report this week. 

https://www.nytimes.com/2022/07/08/business/economy/wages-jobs-fed-rates.html

Definitely not looking like a recession yet, but with inflation still high the Fed will surely keep raising rates at a fast clip.

[+ FrankR]

1 hour ago, keroscenefire said:

Pretty strong jobs report this week. 

https://www.nytimes.com/2022/07/08/business/economy/wages-jobs-fed-rates.html

Definitely not looking like a recession yet, but with inflation still high the Fed will surely keep raising rates at a fast clip.

I look forward to comments by Jamie Dimon from JPMorgan and Charlie Scharf from Wells Fargo during their earnings release in the coming week - should give us real insight into how the economy is faring.  Their books of business and crossover between corporate and retail banking (including credit cards and home lending) give them a lot of data to extrapolate from. 

Edited July 10, 2022 by FrankR

[+ Pensant]

On 4/13/2022 at 4:14 PM, jeezifonly said:

Hub and I able to invest in rental properties in a smaller market some years back- glad we diversified when we did. Have made back initial $$. We both have 401k plus some bonds and a few individual stocks. Both retired, 65, one of us collecting SS, other waiting for higher payout at 71. 
All of the rental units have remained occupied 98% of the time. All have increased in value. Fuckin’ lucky, they call it. Will be looking into more bonds in next few years to keep a chunk safer from wild market fluctuations. 

I love real estate. I now have 3 doors in the Seattle area, both of which have more than doubled in value since 2015, and one in suburban Philly, which is up 60% since the end of 2018. I’ve been enjoying significant rent increases as well. I have a diversified portfolio perhaps a bit more weighted into corporate bonds that have done well compared with most bonds, especially the bank ones. I’ve also diversified into warehouse REITs, which are up substantially. Think small shopping centers, Amazon distribution centers. A friend has a hedge fund which I invested in almost ten years ago and which has also done well and another has developed an amazing FX algorithm that keeps churning out profits. Just stay well diversified and sleep better at night.

[+ Pensant]

16 hours ago, BSR said:

  A recession is the market's response to an overheated economy. 

Quite right. Sometimes the economy needs an enema. Business cycles are a fact of life in a market economy.

[NJF]

18 hours ago, BSR said:

Hmm, I have to disagree.  A recession is the market's response to an overheated economy.  Because interest rates were ultra-low for years and because the government printed $trillions out of thin air, the economy overheated.  Recession was inevitable, regardless of what people believe.

If the economy is over heated, there is that sweet spot that it cools down enough to bring inflation under control but not too much to drive it into a recession. So the bottom line is that a recession is not unavoidable. Can Fed handles the monetary policies correctly to land in that sweet spot? Nobody knows right now. 

[BonVivant]

Technically we may already be in a recession. Q1 ‘22 was -1.6% gdp growth (see https://www.bea.gov/data/gdp/gross-domestic-product). We will know about Q2’22 soon. If it’s negative then we have our 2 quarters of negative growth and thus we are in a recession.
 

At the same time, unemployment is 3.6% and the June job growth was ahead of expectations. So we have a solid employment picture.

At the same time, we have high inflation mostly due to supply constraints that can’t meet demand  See oil and gas, as well as food.

My hunch is that we will have a shallow recession while everyone adjusts to the new higher interest rates. Future growth will moderate.  Some sectors will be in a bull market (oil and gas) and others will stall and drop (residential real estate).  Tech with profits will grow and Tech with zero profits already got chopped or will be shot.

Welcome to revenge of the old economy  .

 

[BSR]

7 hours ago, NJF said:

If the economy is over heated, there is that sweet spot that it cools down enough to bring inflation under control but not too much to drive it into a recession. So the bottom line is that a recession is not unavoidable. Can Fed handles the monetary policies correctly to land in that sweet spot? Nobody knows right now. 

In theory, what you say is true, but in practice I have my doubts.  Interest rates were too low for too long, which allowed companies to borrow like crazy.  Plus we printed waaaaaaay too much money out of thin air.  The crazy borrowing and moneyprinting  were so extreme that I fear that recession will hit hard & deep regardless of the Fed's response.

[BSR]

5 hours ago, BonVivant said:

Technically we may already be in a recession. Q1 ‘22 was -1.6% gdp growth (see https://www.bea.gov/data/gdp/gross-domestic-product). We will know about Q2’22 soon. If it’s negative then we have our 2 quarters of negative growth and thus we are in a recession.
 

At the same time, unemployment is 3.6% and the June job growth was ahead of expectations. So we have a solid employment picture.

At the same time, we have high inflation mostly due to supply constraints that can’t meet demand  See oil and gas, as well as food.

My hunch is that we will have a shallow recession while everyone adjusts to the new higher interest rates. Future growth will moderate.  Some sectors will be in a bull market (oil and gas) and others will stall and drop (residential real estate).  Tech with profits will grow and Tech with zero profits already got chopped or will be shot.

Welcome to revenge of the old economy  .

 

Some countries, like Switzerland, have avoided high inflation because they practiced macroeconomic discipline -- no crazy lending or moneyprinting.  Yes, they have some inflation (~2.5%) because of the factors you cite (supply chain, oil & gas shortage), but nowhere near the inflation rate we're facing.

[Guest]

On 7/9/2022 at 5:05 PM, BSR said:

  A recession is the market's response to an overheated economy.  Because interest rates were ultra-low for years and because the government printed $trillions out of thin air, the economy overheated.  Recession was inevitable, regardless of what people believe

On a technicality, I disagree.   Technically, the recession is the response to removal of the stimulus that caused the economy to overheat.

[Guest]

So, the announcements are out and some say we are officially in a recession and others say we’re not.   Politics aside - what is your impression from your personal situation and vantage point?

[BonVivant]

I think we are in a technical recession, but based on what we are seeing, I think it’s a supply side induced recession stemming from Covid caused supply suppression. E.g. oil and gas is a great example: lots of supply was capped in 2020, and we have ESG concerns on top, so the O&G are just going after profits by keeping supply suppressed. Consumer demand is/was there; lots of money chasing goods. So the Fed is killing demand to meet the reduced supply. But employment is strong… for now. I think we end up in a Stagflation environment.  Slowed economy, low growth, higher inflation. 
 

 

[mike carey]

1 hour ago, BnaC said:

So, the announcements are out and some say we are officially in a recession and others say we’re not

23 minutes ago, BonVivant said:

I think we are in a technical recession, but based on what we are seeing, I think it’s a supply side induced recession...

In the commentary here it's been noted that although the US is in a technical recession, there is a panel in the US that weighs the drops in GDP and other factors in the economy in its determination of whether the country is 'officially' in a recession. (The technical definition is what is used here.)

To BnaC's question, my circumstances are not relevant to your discussion, but there is too much else going on in the economy here for any prospect of us being recession-bound (Q1 was positive, so Q2 (released next month) and Q3 would have to be negative to meet the technical definition). There seems to be too much happening in the US too. My circumstances insulate me from many of the effects anyway.

[BSR]

3 hours ago, BonVivant said:

I think we are in a technical recession, but based on what we are seeing, I think it’s a supply side induced recession stemming from Covid caused supply suppression. E.g. oil and gas is a great example: lots of supply was capped in 2020, and we have ESG concerns on top, so the O&G are just going after profits by keeping supply suppressed. Consumer demand is/was there; lots of money chasing goods. So the Fed is killing demand to meet the reduced supply. But employment is strong… for now. I think we end up in a Stagflation environment.  Slowed economy, low growth, higher inflation. 
 

 

I heard an interesting report about zombie companies, i.e., companies that run at a loss but survive thanks to a steady supply of investor cash.  Apparently ~40% of tech companies are zombie companies.  Everyone's hoping to become the next Amazon (which lost hundreds of $millions before it became the behemoth it is today), and for years investors were willing to keep ponying up.  But all good things come to an end, and easy money is no exception.  If (when?) the money supply tightens, most of these zombie companies will go belly up, and waves of tech workers will be unemployed.

That's the $64,000 question:  will investors (A) panic and decide to cut their losses?  or (B) stay the course, thereby keeping these zombie companies afloat?  Let's hope cooler heads prevail, because if Scenario A happens, we're in a heap o'trouble.

[+ augustus]

1 hour ago, BSR said:

Apparently ~40% of tech companies are zombie companies.

 A recovery based on an economy with excess liquidity, forbearance and government transfer payments. Not good.

[+ augustus]

The government has made our economy so weak and inefficient that it cannot even withstand interest rates at a nominal level of only about 3%, and which is over 6% BELOW the current rate of inflation (thus a negative real rate of interest of minus 6%+).  All it has taken to cause a recession is interest rates to have increased from near zero to only those very low rates.  This is not good!

[+ keroscenefire]

We may be in a technical recession but let's put things in perspective:

GDP decreased by .2 percent in the 2nd quarter followed by a .4 in the first. Overall a .6 percent GDP decline is significant but so far a fairly mild recession. The great recession of 2008-2009 saw GDP fall nearly 3 percent and it fell more than 9 percent in the pandemic. There were a few small GDP declines in 2010 and 2014 that are more in line with what we're experiencing now. Though it is concerning that it's now been two quarters of declines. 

Other aspects of the economy are doing quite strongly. The unemployment rate is at 3.6 percent nationally...that is historically very low. And we're still seeing strong job growth with 372,000 jobs added in June. Wages are also up 5.1% for the year.

Of course all of this strong employment picture contributes to higher inflation as well as the many international crises (war in Ukraine, China's COVID lockdowns, continued shipping problems) causing higher inflation. This is exactly why the Fed is raising rates. 

And gasoline prices are down .78 cents a gallon from their highs just a month ago...that in itself is a big contributor to inflation. We're also truly starting to see shipping get back to normal and many stores are now offering huge discounts after realizing they overstocked thinking shipping delays would continue.  I was just at Target the other day and got clothing and home goods at huge discounts. 

Overall, while the GDP decline is troubling, until we see that affecting employment, I don't think we should freak out. Inflation really may be turning a corner as well and we could be on our way to that "goldilocks" economy like we had in the late 90s where unemployment was low and inflation was moderate. 

[Guest]

6 hours ago, mike carey said:

my circumstances are not relevant to your discussion

Actually, that’s the point of my question.  The economy is the sum of all of our aggregate circumstances.     So maybe the question is “how are you personally faring in these uncertain economic times?”

The more stressed the responses are, the more likely we are in a recession. 

[mike carey]

6 minutes ago, BnaC said:

Actually, that’s the point of my question.  The economy is the sum of all of our aggregate circumstances.

You're right, the economy is the sum of our individual circumstances, but I'm not in the same economy as you, and that was the point of my comment. My circumstances in Australia are not relevant to a US recession.

[Guest]

The NYT poses this question this morning:

“The big question is not whether the U.S. is in a recession. It’s whether the economy will soon worsen.”

 

[+ nycman]

12 hours ago, BnaC said:

what is your impression from your personal situation and vantage point?

We’re fucked. 

And trying to talk about the economy without talking about politics is 
like trying to talk about male strip clubs, without talking about dicks.
Although technically possible, it misses the point entirely.

[EZEtoGRU]

Technically we are in a recession.  However it really doesn't feel like a recession.  As others have noted, employment is strong...people are out and about doing things and spending money.  Restaurants are full.  Airplanes are full.  

I think inflation may well have already peaked.  Gasoline prices are falling quite a bit and that will put downward pressure on prices for other goods and services.  All other things being equal, I believe it will be a short/shallow recession.  Perhaps 2-4 quarters.  Of course various things could go pear-shaped to screw things up.  Pick your crisis:  Ukraine/Russia/Iran/COVID/Monkey Pox.  Those are difficult to predict.

Personally, I have made no changes to my investment strategy this year.

[+ FrankR]

When you are facing a recession, you want a strong middle class consumer at your back. That worries me the most - we no longer have that. The uber wealthy wont save you from a recession.     Blaming “the government” is an easy answer but rather short sighted.  Its like blaming the toothbrush for your cavities. There were recessions before there were governments, just like there were cavities before there were toothbrushes. 

Edited July 29, 2022 by FrankR

[+ Vegas_Millennial]

3 hours ago, FrankR said:

When you are facing a recession, you want a strong middle class consumer at your back. That worries me the most - we no longer have that. The uber wealthy wont save you from a recession.     Blaming “the government” is an easy answer but rather short sighted.  Its like blaming the toothbrush for your cavities. There were recessions before there were governments, just like there were cavities before there were toothbrushes. 

The size of the Middle Class has indeed shrunk since the 1980s.   But the size of the Lower Class and Lower Middle Class have stayed the same.  Where did all those Middle Class people go?  They became Upper Middle Class.

In the 1950s to 1980s, we saw a shrinking Lower Class and growing Middle Class as low skilled employees' wages rose.  From the 1980s to today, we saw Middle Class income rise to Upper Middle Class with the increased incomes of highly skilled citizens.

We may feel like we can't keep up with the Joneses as we watch more and more people around us buy more luxurious cars; bigger homes with central air conditioning, multiple bathrooms and garages; vacation homes; smart telephones; and, computers.  All these things were impossible for the Middle Class a generation ago.

Edited July 29, 2022 by Vegas_nw1982
Corrected the punctuation of the plural possessive " employees' "