The coming recession

[MJ DeMarco]

So, Dalio timed the market wrong last month. Now he changed his mind.

Everyone says there needs to be a "bubble" impetus, like loose credit (housing crash), or the tech bubble, or something.

At some point, the deficit spending and the national debt will be that impetus. This can't continue.

Hard assets cannot be stressed.

 

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[CPisHere]

Everyone says there needs to be a "bubble" impetus, like loose credit (housing crash), or the tech bubble, or something.

At some point, the deficit spending and the national debt will be that impetus. This can't continue.

Hard assets cannot be stressed.

Considering we can print as much money as we want, I don't see how that is a hard asset, nor what would cause it to not be able to not continue.

 

[MJ DeMarco]

I don't see how that is a hard asset, nor what would cause it to not be able to not continue.

I don't consider money a hard asset.

A house is a hard asset.

If the dollar becomes worthless, the home has intrinsic value.

 

[CPisHere]

I don't consider money a hard asset.

A house is a hard asset.

If the dollar becomes worthless, the home has intrinsic value.

I'm not sure I follow your point then.

How are hard assets tested via the national debt (if that's what you are saying)? What makes you think the national debt is unsustainable/will cause a recession?

 

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[G-Man]

If the dollar becomes worthless, the home has intrinsic value.

That was the philosophy of my great grandmother who raised a family during the depression. She owned her little home, had a basement full of veggies canned straight from the garden, and even an old fashioned hand pumped well. She loved to remind us that you couldn't eat dollar bills, even though we found thousands of them stuck between the pages of old magazines after she died.

I think the old-timers had a better idea of what it means to be free than most of the rest of us. They also never expected life to be anything but hard, which gives a person a certain fearless outlook on the world.

 

[Deleted52409]

Another thing to keep in mind is that social relations are at an all time low. If a big enough recession or even another great depression is to happen than business owners (and people in general) better be prepared to heighten up their level of security.

Radicals from multiple different interests groups are starting to pop up all over the country and things could get crazy. Especially if they're broke, unemployed, and not receiving welfare and/or affirmative action.

 

[MJ DeMarco]

I'm not sure I follow your point then.

That was the philosophy of my great grandmother who raised a family during the depression. She owned her little home, had a basement full of veggies canned straight from the garden, and even an old fashioned hand pumped well. She loved to remind us that you couldn't eat dollar bills, even though we found thousands of them stuck between the pages of old magazines after she died.

Exactly. You can't eat worthless dollar bills, nor will dollar bills provide you shelter or warmth, unless you burn it in a fire.

How are hard assets tested via the national debt

When the national debt is erased by rapid inflation or a reset (Hey, for each $1000 of old USD you have, you can trade it in for one World-dollar, the new currency!) I want to hold assets that will move with the reset.

That's hard assets because they have intrinsic value, the biggest being a house, preferably off the grid and self-sustainable.

 

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[socaldude]

I love discussing the us dollar because it exposes what money actually is. Its a lesson in debt and perception of value.

If the dollar becomes worthless you are better off buying tons of coffee or tons of corn.

This is one of the reasons i didn’t take out a mortgage in the US.

Fiscal Independence as much as possible.

I laughed when i was taught in school about the “risk free rate” or full faith of us govt

 

[MiaMills]

If the dollar becomes worthless you are better off buying tons of coffee or tons of corn.

Or cigarettes. Or matches. Or ammo.

 

[YoungPadawan]

That was the philosophy of my great grandmother who raised a family during the depression. She owned her little home, had a basement full of veggies canned straight from the garden, and even an old fashioned hand pumped well. She loved to remind us that you couldn't eat dollar bills, even though we found thousands of them stuck between the pages of old magazines after she died.

I think the old-timers had a better idea of what it means to be free than most of the rest of us. They also never expected life to be anything but hard, which gives a person a certain fearless outlook on the world.

Exactly. My dad has similar stories growing up on a farm in a large family (12 kids). They avoided going to the store as much as possible because back then, money was scarce. they had a large garden and canned a lot of stuff. They were very self sufficient.

He always told me that civilization is six meals away from a revolution.

 

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[ValueGenerator]

Can you elaborate on this or is this private?

.

I have no idea what Curtis was talking about, but here is my two cents:

Dr. Chris Kresser is starting a movement to address this situation. He is spearheading a movement of health coaches working with doctors to address the inefficiencies in the current system. His take on the current state of healthcare:

“Making a few small tweaks to our current system and expecting that to work is like rearranging the deck furniture on the Titanic as it inexorably sinks into the ocean. Too little, too late.”

I have zero affiliation with him. I only know this because I am very much into healthy eating and lifestyle. I did consider being a part of the health coach training. However, I decided against it because it was not Fastlane enough for me

 

[Supercar]

When someone coined the phrase "cold hard cash" I bet they were not referring to paper money.

 

[RobD88]

The great Jim Rohn once said the next ten years will be a lot like the last ten years. Every economic expansion is followed by a recession and we always return to the mean at some point. I believe the market is bound for a crash in the near future but it won't be any worse than any other in history. It won't affect every aspect of our economy. It will have little impact on the masses as a whole. We will all continue to move forward.

I think the best thing we can do as entrepreneurs is to diversify our business strategy and make sure we are not too reliant on any one customer segment or market segment. As long as we are providing value we will stay afloat.

 

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[Real Deal Denver]

I think the best thing we can do as entrepreneurs is to diversify our business strategy and make sure we are not too reliant on any one customer segment or market segment. As long as we are providing value we will stay afloat.

You would think so.

But that's not true.

I was in a business in November of 2007. I remember it well because ALL of my customers went out of business within 30 days. I am talking about small business operations that employed from 4 to 50 people. All of these good people lost their jobs overnight through no fault of their own. These were hard working, honest, respectable people just trying to make a living and support a family. The ripple effect was immediate, and put many more people out of business, including myself.

It could happen to anyone. Don't rest easy.

 

[ZF Lee]

You would think so.

But that's not true.

I was in a business in November of 2007. I remember it well because ALL of my customers went out of business within 30 days. I am talking about small business operations that employed from 4 to 50 people. All of these good people lost their jobs overnight through no fault of their own. These were hard working, honest, respectable people just trying to make a living and support a family. The ripple effect was immediate, and put many more people out of business, including myself.

It could happen to anyone. Don't rest easy.

ALL went out of business?
What really happened with the economy? How did everyone went out of business. It wasn't even 2008 yet.

 

[Mattie]

I think the old-timers had a better idea of what it means to be free than most of the rest of us. They also never expected life to be anything but hard, which gives a person a certain fearless outlook on the world.

I have to agree with you. I hung out with the traditionalists as a nurse aide.

The last month I keep reflecting and trying to remember many conversations I've had with them on their life stories. I didn't really think about it at the time, I was just working and listening to them, but when I look back, I can say they were pretty much laying it all our for me in certain ways.

Investments
No credit Cards/Loans: They paid for stuff by saving and than buying a car, down payment for house, and if they did have loans, it was nothing like it was after their generation. The one's I knew worked together in the community to build the area, networked, partnered, found investors.

Food: They grew themselves like you stated, animals, crops, making their own food, sharing it in the community (Farmers Market) or local stores.

Clothing: I know they were persistent in me taking care of their clothes, pressed, cleaned, hung up, and only washed if they wore the same outfit a few times and it was dirty.

House Cleaning: Everything in order, folded correctly, put away in the same place.

Friends/Family: Valued, Networked, Spent time together playing poker, bridge, or other physical games, board games, block parties, food, and were more friendly, family oriented, welcomed everyone. Not saying they didn't argue or fight, but they had more sense of a community and helping one another out.

Finances: Not materialistic and commercialized. I took care of one lady who had a 1950's dryer. I laughed because I had plugged it into the wall, but she believed in paid for insurance and having some guy fix it than buy a new one. Now that thing ran great. But it was ancient. A lot of them were like that, I would go to their homes, and find some ancient artifact, but they knew it was built to last. Quality of a product was more important, and how long it lasted. They never liked wasting anything.
Some of them were also pack rats. They would save everything, recycle everything, and sometimes I cringed walking in their house, because it would be stacked everywhere.

I think they sometimes feared the the Depression would come back, and they wanted to make sure they had everything they needed. Several were like this, but always fun going through the antiques and looking at them.

All of them hid their money, jewels, artwork, or precious items. Some of them were afraid it would get stolen.

Guns: Hide them under the furniture. Almost got shot one time, because it was under a piece of furniture and they forgot.

Wealthier ones they'll talk about investments, their business stuff if you take interest, and they trust you, but that's after you've worked for them for quite awhile.

I can't really list a lot of things, because of the H.I.P.P.A laws, but I love that generation.

 

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[Real Deal Denver]

ALL went out of business?
What really happened with the economy? How did everyone went out of business. It wasn't even 2008 yet.

Yes, in my business, all of them went out of business. I am a real estate appraiser, working with independent lenders. Back in 2007-2008, this business was turned upside down, literally overnight. Maybe tied up and castrated would be a better way to put it. Maybe massacre would be even better.

This was caused by the US government stepping in and, well, to be short and concise, this is what happened... (and still continues to this day)







SO, fast forward to today. Here's some sobering news on the future of appraising...



I could make a mini-series out of this topic, but I will side-step that, and instead, just show you a few of the headlines that convey the point.

Hard to believe, unless you lived it, which I did. Ever have a bad week? How about a bad month? Maybe even a bad year, to go to extremes. Hey, it can happen.

Try a bad DECADE on for size...

 

[RobD88]

It could happen to anyone. Don't rest easy.

Don't rest easy was sort of my point. There are steps you can take to recession proof your business (depending on the market). Entrepreneurs need to constantly look forward and plan for changes. The one constant in life and business is change.

Plan, do, check, adjust, repeat. Adjusting to economic climate is part of that.

 

[OlivierMo]

The 2008 recession was caused by defaults on mortgages (the "needle"), exposing real estate as over-inflated (the bubble) but then crashed the entire economy.

Today, the stock market itself is a bubble. P/E ratios are WAY higher today than they were before the 2008 recession. Real Estate could be a bubble too, but if so it's not as large as it was in 2008.

The Fed pumping tons of money into the economy has caused financial firms to leverage themselves insanely high - mostly into the stock market.

Actually your statement needs to be more accurate. The crash happened because of derivatives tied to mortgages. If those didn't exist or people didn't go nuts with them things would have been a bit less brutal I think. It's true that if students default on their loans and we have the same derivative problem things could get nasty.
I personally didn't suffer the 2008 crisis. I actually did very well. While companies were cutting back they hired people like me aka freelancers. I was even making six digits some years.

 

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[CPisHere]

Exactly. You can't eat worthless dollar bills, nor will dollar bills provide you shelter or warmth, unless you burn it in a fire.



When the national debt is erased by rapid inflation or a reset (Hey, for each $1000 of old USD you have, you can trade it in for one World-dollar, the new currency!) I want to hold assets that will move with the reset.

That's hard assets because they have intrinsic value, the biggest being a house, preferably off the grid and self-sustainable.

I see. Your point is that hard assets are a form of protection against usd melt-down due to unsustainable US debt levels.

I personally don't see the levels as being unsustainable. Stupid, but still safe.

Also, for anybody thinking about preparing for some cataclysmic event, I read a super interesting account from a guy I think in Europe that actually went threw one - his whole country lost electricity, plumbing, the entire economy overnight. He said the key to survival was nearby family to protect each other & that the most valuable thing to own wasn't bullets or anything - it was alcohol. So stock up!

 

[CPisHere]

Actually your statement needs to be more accurate. The crash happened because of derivatives tied to mortgages. If those didn't exist or people didn't go nuts with them things would have been a bit less brutal I think. It's true that if students default on their loans and we have the same derivative problem things could get nasty.

Derivatives removed "skin in the game" which, along with government policies to encourage home buying by unqualified buyers, encouraged poor bank decision-making. That was the key factor in the creation of the environment. But mortgage defaults is ultimately what caused the system to fail.

 

[OlivierMo]

Derivatives removed "skin in the game" which, along with government policies to encourage home buying by unqualified buyers, encouraged poor bank decision-making. That was the key factor in the creation of the environment. But mortgage defaults is ultimately what caused the system to fail.

Right but if the banks didn't "overleverage" themselves using those products, things would have been a lot better. And before that the gov forcing lending. Just a stupid idea to promote the SCRIPTED way of life

 

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[OlivierMo]

This is a point that I think a lot of people -- especially those under 30 -- just don't get. A lot of people only remember the housing crash of 2008 or perhaps back to the dot-com bubble of 2000, and they assume that every recession/depression is the result of a failed part of our economy.

But, that's simply not (necessarily) the case. Our economy runs on credit/debt cycles that are pretty consistent, and in many (most?) cases, recessions are not precipitated by a bubble or one particular over-extended industry.

For example, I keep hearing real estate people talk about all the real estate indicators (interest rates, occupancy rates, inventory, housing starts, etc.) when discussing the trajectory of real estate over the next several months/years, and what they are missing is that real estate likely won't be a leading indicator of the next recession. In other words, the recession will start independently of what's going on in real estate, and real estate will be dragged along with it (trailing indicator). The real estate industry could have strong fundamentals (I don't believe it does, but it could), but increased unemployment, reduced wages and inflation could decimate real estate.

In other words, every part of our economy is connected, and it doesn't have to be one thing that precipitates a recession, but a culmination of some generate things (debt, inflation, etc.). And once the recession ball starts rolling, every industry will be impacted to some degree.

Personally, I think the biggest risk right now is interest rate hikes leading to GDP contraction. While a half or three-quarter point increase in rates won't have a big effect on real estate, inflation or investments, it would likely impact the ability for businesses to invest in expansion, which will ultimately lead to GDP contraction...which will snowball.

And with consumer debt at a decade high, most Americans can't afford to take even a modest hit when it comes to wages, inflation and unemployment.

No bubble popping and no major event leading up to it... In fact, we likely won't even realize that it's started until several after it begins. While people think I'm nuts, I've been saying since the beginning of the year that I believe that we'll look back and say that January/February 2018 was the start of the upcoming recession...I believe we're starting to see the cracks forming.

Personally, I've sold off all my real estate that I don't plan to hold long-term, I've sold some business interests, I've shut down a business, and I'm basically stopping all investing/working for the time being (other than crypto, which I don't believe is highly correlated to most parts of our economy). I think there will be some great opportunities in the near future, and even if I'm a little early in my prediction of a downturn, I'd rather be too early than too late.

Coming from a socialist / statist country I can just say that massive entitlements and welfare with an increased % of gov in the GDP will always make things worse, especially at the size of the US because it cannot scale. May be fine for Norway or 10 million people who have that engrained in their culture but not in a country where individualism runs deep. It may not tank brutally. France has almost 100% GDP debt ratio and hasn't exploded per say. But no growth will become a slow death with a lot of mediocrity. And what comes with it is less individual freedom because the State has to rule your life to maintain its livelihood. France is a police state where speech can lead you to huge fines, if not prison for example. This is partly why we increasingly have the Dems and the GOP think the same way. All they care about is maintain that power and the money that comes with it.

 

[Real Deal Denver]

For example, I keep hearing real estate people talk about all the real estate indicators (interest rates, occupancy rates, inventory, housing starts, etc.) when discussing the trajectory of real estate over the next several months/years, and what they are missing is that real estate likely won't be a leading indicator of the next recession. In other words, the recession will start independently of what's going on in real estate, and real estate will be dragged along with it (trailing indicator). The real estate industry could have strong fundamentals (I don't believe it does, but it could), but increased unemployment, reduced wages and inflation could decimate real estate.

Superb post JScott. Loved every word of it, even though it scares me.

Speaking of decimating certain industries, I've always wondered how the fringe luxury business establishments survived. In MJs world, how did the Lambo dealers hang on? Or the luxury resort people? The high end restaurants? On and on this list goes. So many products and services that are absolutely not necessary.

You seem to have a very good handle on the situation. What do you think about that?

 

[GetRichODT]

A crash happens when enough people who use to think the market is not over-valued, suddenly change their minds to believe it is over-valued. Historically they do not crash for one reason, but many reasons.

Jesse Livermore made a $100M in 1929 by correctly predicting that market crash. He noticed all the different market sectors where weakening independent of each other, and predicted people would panic when they realized there was no safe place for their money. He spent a year building his short positions, and only stopped taking profits when JP Morgan personally asked him to.

Dude also shot himself inthe head in 1940 when his fortune "dwindled" to $5m

 

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[#nowhere]

This is a point that I think a lot of people -- especially those under 30 -- just don't get. A lot of people only remember the housing crash of 2008 or perhaps back to the dot-com bubble of 2000, and they assume that every recession/depression is the result of a failed part of our economy.

But, that's simply not (necessarily) the case. Our economy runs on credit/debt cycles that are pretty consistent, and in many (most?) cases, recessions are not precipitated by a bubble or one particular over-extended industry.

For example, I keep hearing real estate people talk about all the real estate indicators (interest rates, occupancy rates, inventory, housing starts, etc.) when discussing the trajectory of real estate over the next several months/years, and what they are missing is that real estate likely won't be a leading indicator of the next recession. In other words, the recession will start independently of what's going on in real estate, and real estate will be dragged along with it (trailing indicator). The real estate industry could have strong fundamentals (I don't believe it does, but it could), but increased unemployment, reduced wages and inflation could decimate real estate.

In other words, every part of our economy is connected, and it doesn't have to be one thing that precipitates a recession, but a culmination of some generate things (debt, inflation, etc.). And once the recession ball starts rolling, every industry will be impacted to some degree.

Personally, I think the biggest risk right now is interest rate hikes leading to GDP contraction. While a half or three-quarter point increase in rates won't have a big effect on real estate, inflation or investments, it would likely impact the ability for businesses to invest in expansion, which will ultimately lead to GDP contraction...which will snowball.

And with consumer debt at a decade high, most Americans can't afford to take even a modest hit when it comes to wages, inflation and unemployment.

No bubble popping and no major event leading up to it... In fact, we likely won't even realize that it's started until several after it begins. While people think I'm nuts, I've been saying since the beginning of the year that I believe that we'll look back and say that January/February 2018 was the start of the upcoming recession...I believe we're starting to see the cracks forming.

Personally, I've sold off all my real estate that I don't plan to hold long-term, I've sold some business interests, I've shut down a business, and I'm basically stopping all investing/working for the time being (other than crypto, which I don't believe is highly correlated to most parts of our economy). I think there will be some great opportunities in the near future, and even if I'm a little early in my prediction of a downturn, I'd rather be too early than too late.

Hi J,

economics 101, eh?! What I want to say: thank you! You make it very comprehensible...

Do you think these opportunities can only be executed with a big amount of cash to spend or anyway? Along your reasoning housing prices will go down, what will be good for investors.

And else?

Thank you very much

#n

 

[GoGetter24]

I agree with DeMarco that the next big one is going to be a sovereign debt (and therefore currency) crash.

The maths are crystal clear. Nothing has changed in the Eurozone since the Eurozone crisis. Nothing has changed in the US (has the anti-spending Trump got the US budget balanced yet? If he wouldn't, who will?). All of that ends the exact same way it always has.

 

[ironman150]

That’s not the whole picture. Tons of money is fleeing Europe to park in the US where there’s a lot less volatility. This is reflected in the Dow.

The Fed is going to raise interest rates soon, which will only put more pressure on Europe and cause further inflows of money to the US, resulting in an even higher markets.

All of this of course will be blamed on “the rich.”

Don't forget the tons of money coming from Asia (China to be exact) as they are panicking about a trade war, and some from the middle east looking for higher safe returns.

 

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[Elif]

I mean seriously, do high-end lawyers even charge $1,500/hr? Same pattern is across the board in the Health world. Monthly premiums that rival my yearly home insurance rates. Deductibles that keep going up. Totally nuts. I'm all up for free market competition and its not the numbers per se that are scary. Its just how they've gone up so far relative to other staples in life (food, housing, etc.). Something just seems way out of whack...like housing in 2008.

 

[OlivierMo]

I mean seriously, do high-end lawyers even charge $1,500/hr? Same pattern is across the board in the Health world. Monthly premiums that rival my yearly home insurance rates. Deductibles that keep going up. Totally nuts. I'm all up for free market competition and its not the numbers per se that are scary. Its just how they've gone up so far relative to other staples in life (food, housing, etc.). Something just seems way out of whack...like housing in 2008.

When the gov gets involved, usually scarcity happens and so prices go up

I'm going to mostly avoid the question, as it would just get political. But, consider that, while overall you make a reasonable argument, the fact is that a very large percentage of the U.S. budget currently goes to social security, military, infrastructure, agriculture and debt payments.

While I'm not discounting the amount that goes to entitlements, even if you were to remove all entitlements from the U.S. budget, the same problems exist. Perhaps the cliff is a bit further out, but we'd still be nowhere near a balanced budget, and the out-of-control spending over the past 35-40 years has put us in a bad spot.

I am not denying the level of spending but the US has a social welfare state now that is almost comparable to European levels. The per capita spending in welfare is around 600 dollars a month vs 800 in France for example. Problem is: more money in the US is pissed away because US federal and local governments are highly inefficient and greedy. (Compared to French civil servant salaries, US gov salaries are super high.)

I also ran into this interesting video the other day.

View: https://www.youtube.com/watch?v=KIgsmm2uR8M


Social security and medicare are running out of money within 10-20 years anyways.