NOTABLE! The Coming Recession (2019-2020?)

[JScott]

MODERATOR NOTE:

THESE POSTS WERE EXTRACTED FROM A CONVERSATION ABOUT "BUYING A HOME."

BECAUSE THEY DICUSS THE POTENTIAL FOR A RECESSION, THEY WERE COPIED AND EXTRACTED INTO A NEW THREAD.

Why?

Real estate indicators don't make it seem we're necessarily at a top, but in most recessions, real estate doesn't lead the downturn -- it's a lagging indicator. 2008 was an exception, and because of it, many new investors incorrectly believe that real estate is typically the *cause* of the recession, and generates leading indications of an economic downturn.

But, that's not generally the case (hardly ever, in fact)... Typically, it's the business cycle that gives way first, leading to increased unemployment and wage depression, which ultimately leads to a turn in the real estate industry. Real estate starts to turn a few months after the rest of the economy.

With that said, how is the rest of the economy doing? All indications are that the business cycle we're currently in may be coming to an end. Some of the most reliable indicators:

- Full employment
- Flattening yield curve
- Rising interest rates
- Consumer credit at a peak
- Reduction in GDP (especially immediately after a tax break)
- Wage and real inflation increasing

(Note that the first two -- full employment and an inverting yield curve -- are almost perfect indicators for recession in the United States.)

And if you just look at the statistics, we're currently in the second longest business cycle in recent history, so just based on timing, we should be expecting a turn in the near future.

I know a lot of people disagree with me on this, and I'm the first to say I don't have a crystal ball, but I'm confident enough in my assessment that I have completely reorganized my real estate business based on the current economic conditions and my perceived implications of them.

 

Don't like ads? Remove them while supporting the forum. Subscribe.

[JScott]

No doubt, the economy will turn at some point in the future but I'd bet it won't be nationwide, various indicators in my city for example show that people keep coming here, we're in a housing deficit, and house prices are skyrocketing. This would be different compared to California, or the midwest. What's your thoughts on that?

Regardless of how good housing is looking, at the end of the business cycle, housing will get hit. Recessions (downturns in the business cycle) aren't localized -- while some areas may not get as hard as others, the factors that contribute to the end of the cycle (credit, wages, inflation, etc) have always been pretty uniform nationally.

As an example, in 2008, Atlanta was still growing (and never stopped). They were increasing population both in terms of employment and immigration. Yet, despite the population increase, Atlanta housing was devastated (perhaps the hardest hit market in the country). The reason was that housing demographics changed -- people started to double/triple up, people moved back in with their parents, people moved from houses to apartments, apartments to mobile homes and mobile homes to sleeping on a friend's couch.

Population increased, but housing got crushed. That's because housing is driven by a lot of factors in addition to population. It's driven by wage growth/reduction, it's driven by inflation, it's driven by credit factors, it's driven by property class, it's driven by topography/geographic constraints, etc.

I'm certainly not saying that the next downturn will be anything like 2008 (my guess is it won't), but that doesn't change the fact that the end of the business cycle nearly always impacts real estate, and will impact real estate nationwide. Some markets may not get hit as hard as others; some may emerge relatively unscathed. But, all markets will likely take some hit.

As for when it will happen, again, I have no idea. I've made some big bets on sooner rather than later (both in my real estate business and by buying options), but I could certainly be wrong. But, it's going to happen at some point, and real estate will not be immune...in any market.

All that said, I'm not an economist and I've been wrong before, so feel free to ignore absolutely everything I said above...

 

[Guest3722A]

- Flattening yield curve
- Rising interest rates

Do you think Powell is going to actually raise in 2 weeks? Ever since his seating, he's been aggressively stating that this was going to occur. Right now, as I type this, this is how the curve falls:

Left side - FFR 1.75, 2 yr 2.38, 10 yr 2.83, 30 yr 3.015 - Right side

Two weeks ago I was very much bullish on this. The right side broke through key resistance levels, auctions improved and a steepening occurred. Last week, Powell changed his language from aggressively hawkish to moderately dovish and both sides came down hard, breaking support. This how nervous this market has been. And then it comes right back.

Over the last few weeks I've seen alot of scared money running in and out of flight to safety positions in the treasuries. There's also been alot of short covering outside of the obvious levels.

The part that gets me is that the right side steepened after reaching a more enticing yield at the last auction, which was stronger. And now after last week's language changed, what I'm seeing is a possible double top forming in the 30 and a possible head and shoulders forming in the 10. I think that's the clock to watch for.

 

[Guest3722A]

Current graph of the 10 yr

 

[JScott]

Do you think Powell is going to actually raise in 2 weeks? Ever since his seating, he's been aggressively stating that this was going to occur.

Honestly, no idea...

He's been saying a lot of things that would lead me to believe he's preparing to do another hike, including direct references to hikes not having to hurt the global economy and inflation potentially spiking for some period of time. But, I have to imagine there's a lot of pressure not to do this now, especially with mid-terms around the corner.

I've been tremendously bad at predicting rate changes over the past couple years, which is why I like to look at the current conditions rather than speculate on where things are going. Historically, the Fed has been pretty immune from politics...that's no longer true after the past 10 years...

 

[JScott]

With that said, how is the rest of the economy doing? All indications are that the business cycle we're currently in may be coming to an end. Some of the most reliable indicators:

- Full employment
- Flattening yield curve
- Rising interest rates
- Consumer credit at a peak
- Reduction in GDP (especially immediately after a tax break)
- Wage and real inflation increasing

Over the past week, we can add to this list:

- GDP forecast revised down for Q2 (to 2.2%)
- Debt-to-GDP ratio now forecast near 110 this year and near 120 by 2023
- Home sales dropping
- Fed warning of increased inflation
- Real unemployment at 8.6%

I could certainly be wrong, but I'm comfortable enough with my speculation that I just bought a whole lot of QQQ/XHP/SPX LEAP PUTs...

 

[Guest3722A]

Over the past week, we can add to this list:

- GDP forecast revised down for Q2 (to 2.2%)
- Debt-to-GDP ratio now forecast near 110 this year and near 120 by 2023
- Home sales dropping
- Fed warning of increased inflation
- Real unemployment at 8.6%

I could certainly be wrong, but I'm comfortable enough with my speculation that I just bought a whole lot of QQQ/XHP/SPX LEAP PUTs...

Yeah with me I personally don't care which way the market goes as I just trade futures contracts usually short term. I will say that after a long string of winning trades I did get burned two weeks ago on some short contracts on the 2yr where I was up on the day before Powell abruptly flipped his language and I've been on the sidelines ever since. I'm waiting for the geopolitical confusion to settle and show a path.

What is interesting though is that some prominent traders down at the CME are baffled at the current price action and then 2 days ago, the bond king himself, Bill Gross, took his largest one day loss ever. Which is odd. So there's all kinds of records being broken at this time. One more that comes to mind is, I'm not sure if you remember the Dow's largest one day point loss back in February, but Goldman just came out stating that they had their largest one day point gain at 200 million on that day.

From a technical perspective, I see the DJIA wedging, and the Nasdaq wedging and both are right about at the point. The next few days they have to break out, up or down. The Nasdaq has been holding strong though and really seems like it wants to put in a new all time high, especially seeing that this current earnings season has been a blowout. But, nothing surprises me with these markets!

 

[JScott]

Yeah with me I personally don't care which way the market goes as I just trade futures contracts usually short term. I will say that after a long string of winning trades I did get burned two weeks ago on some short contracts on the 2yr where I was up on the day before Powell abruptly flipped his language and I've been on the sidelines ever since. I'm waiting for the geopolitical confusion to settle and show a path.

I'm not a technical trader, so I can't even begin to surmise how the markets will react short-term to all the geopolitical posturing, short-term economic news and other contributing factors. My take is that the market is more sentiment driven than ever right now, and the only thing allowing it to maintain the current plateau (which we've been in for almost 6 months now) is trader optimism.

Have you noticed that the market is no longer responding to monthly/quarterly financial releases? GDP forecasts are revised downward, and there is no real impact. Record low unemployment is announced, and there is no real impact. Retail and home sale data is released and there is no real impact.

Nothing is being driven by data anymore. Instead, everything is being driven by daily political/geopolitical rhetoric -- Trump threatens a trade war, the markets drop. Trump gets announces a sit-down with North Korea, the markets go up.

Everyone in the market seems to be trying to figure out how the daily geopolitical maneuvering is going to affect the economy, and nobody seems to be paying attention to the actual economy!

Personally, I think that the above will continue to play out as it has been the past year, UNTIL there is some really important piece of economic data that wakes up the market. We've already seen that sentiment can change very quickly (as we've gotten a glimpse of a couple times recently when we've seen some of the largest single-day point drops in history) -- and I have a feeling that one of these days, a single bad piece of financial data is going to be released that will cause a domino effect in the market.

Will it be tomorrow? Next week? Next month? Next year?

I have no idea. And I have no idea what that single piece of data will be. But, I have a feeling it's coming. And when it happens, I don't think it will be a gradual decline...

But again, I've been wrong before, so don't please don't make any financial decisions based on me!

 

[JScott]

Imo, wages are stagnating even though the beige book shows growth but they can't keep up to at the least, fuel prices. So this report will show where wages are going and how the market will react.

Wage growth has been interesting to watch. Apparently up 2.7% last month, which is finally inline with what I would be expecting...

Here is how I expect this cycle to play out over the next few months (based on basic economic theory and history):

1. We are at full employment;

2. Companies can't find as many workers as they need to fill their open positions, so they start to offer more money to lure workers from other companies. It took longer than I expected, but we're now seeing this wage growth starting last month;

3. This wage growth is good for employees (they make more money), but also increases costs for companies, so companies raise prices on their goods and services. We're starting to see this, and the Fed is warning it will get worse;

4. Increased prices means inflation (literally). Products and services costs more. And typically the real inflation from wage growth is higher than the wage growth itself, as employers have to pay additional overhead costs when they pay salaries (FICA taxes, insurance, etc). So, employees find that their paycheck isn't going as far as it previously was;

5. This leads to increased debt, lower spending by consumers and reduced earnings by companies. Which leads to layoffs, higher unemployment, lower GDP, etc.

 

[MJ DeMarco]

This has turned into an interesting economic discussion...

But I'm also leaning toward a significant event downward. My prediction is it begins at the end of August with October being absolutely brutal.

As such, I've reduced my option sales and short exposure, assuming my dates are off.

Among other things mentioned by @JScott, I come to this conclusion based on that 1) the market has been unable to recover the February correction and 2) Large up days in the S&P is accompanied by below average volume (no conviction) and 3) Netflix is a 350 stock with a 250 PE.

 

[MJ DeMarco]

and 3) Netflix is a 350 stock with a 250 PE.

And I will add that Lululemon (a freaking Yoga pants company) is now a $125 stock with a PE of 55.

 

Don't like ads? Remove them while supporting the forum. Subscribe.

[HyperX]

Wage growth has been interesting to watch. Apparently up 2.7% last month, which is finally inline with what I would be expecting...

Here is how I expect this cycle to play out over the next few months (based on basic economic theory and history):

1. We are at full employment;

2. Companies can't find as many workers as they need to fill their open positions, so they start to offer more money to lure workers from other companies. It took longer than I expected, but we're now seeing this wage growth starting last month;

3. This wage growth is good for employees (they make more money), but also increases costs for companies, so companies raise prices on their goods and services. We're starting to see this, and the Fed is warning it will get worse;

4. Increased prices means inflation (literally). Products and services costs more. And typically the real inflation from wage growth is higher than the wage growth itself, as employers have to pay additional overhead costs when they pay salaries (FICA taxes, insurance, etc). So, employees find that their paycheck isn't going as far as it previously was;

5. This leads to increased debt, lower spending by consumers and reduced earnings by companies. Which leads to layoffs, higher unemployment, lower GDP, etc.

Jscott, would you say it would be wise to possibly hold off on starting to invest in real estate? Primarily small multi-family homes for house hacking? I'd hate to buy something now....when there's a likely chance it'll be worth a lot less in 5 months.

 

[Mr.Brandtastic]

Interest rates around 5% was enough to pop the housing bubble. Although technically it popped around 4%. I believe our economy is so much more out of wack, so much more dependent on low interest rates than ever. People are stretched to the absolute hilt with debt. Any additional moves in interest rates will lead to defaults. Credit card debt, auto loans, student loans, corporate debt, mortgages, and much much more.

Here's a leading indicator: Auto loan delinquency rates are worse now than during the financial crisis

The subprime auto loans are having the worst time ever. Worse than the deep dark pits of the great recession. Subprime loans are generally reserved with those with poorer credit scores who often have to take higher interest rates as well as adjustable rates.

If the people who are typically poorer are struggling more, it's only a matter of time before more middle class people and above cannot pay.

And I will add that Lululemon (a freaking Yoga pants company) is now a $125 stock with a PE of 55.

Absolutely right. The P/E ratios are another great indicator of the health of the economy. In essence a lot of cheap, low interest money is finding its way into the stock market. Much of the high P/E and high stock prices are the result of companies buying back shares. Again, easy money allows them to do this.

This is a great discussion. And this isn't even touching the fact that the government statistics, once broken down, are phony. The books aren't cooked, the methodology is purposely misleading to paint a rosier picture. Unemployment, inflation, savings rate, labor productivity, and gdp growth(which I think has always been flawed) are just some of the examples where the methodology has changed over the past few years and decades.

 

[El Príncipe]

Any thoughts on how this will affect Europe and World economy?

 

[MJ DeMarco]

Any thoughts on how this will affect Europe and World economy?

They're all interconnected- no one escapes, just a matter of how much the impact will be felt among economies.

 

[momomaurice]

Great news to wake up to

 

[GoGetter24]

Any thoughts on how this will affect Europe and World economy?

The first world is going to get fried.

2nd and 3rd world, not so much. They're a bit more insulated. Many people in the 3rd world don't even have bank accounts, for instance.

China is going to be the interesting one. 2008 basically did nothing to them. I disagree with the "everything's connected so we all sink together mantra", this simply doesn't bear out the facts unless you cherry pick the regions you look at. The problem is what's going to happen when they finally get their big recession. They're not going to just peacefully slide into stagnation like the Japanese did.

I know one thing: if there's a recession, I'm completely effed. Which there will be. I got started way too late in the business cycle to build up any buffers. I have no idea what I'll do.

 

[El Príncipe]

The first world is going to get fried.

2nd and 3rd world, not so much. They're a bit more insulated. Many people in the 3rd world don't even have bank accounts, for instance.

China is going to be the interesting one. 2008 basically did nothing to them. I disagree with the "everything's connected so we all sink together mantra", this simply doesn't bear out the facts unless you cherry pick the regions you look at. The problem is what's going to happen when they finally get their big recession. They're not going to just peacefully slide into stagnation like the Japanese did.

I know one thing: if there's a recession, I'm completely effed. Which there will be. I got started way too late in the business cycle to build up any buffers. I have no idea what I'll do.

Interesting. Especially about 2nd and 3rd being insulated.

In your personal business situation, there's gotta be something you can do right? Sell while high? Negotiate with customers/partners/suppliers long term agreements that will ride you through the wave a bit so to speak? Don't know what you do or what space you're in, so hard for me to say.

 

[MetalGear]

1. I'm interested how the different FLF "sectors" would adjust before, during, and after a recession.
2. Some say it is impossible to time the market
3. I would love some wisdom from people that have seen 30 years of business cycles with FLF "entrepreneurial eyes"

• Amazon FBA, drop-shipping, e-commerge
• Social media marketing
• Real estate
• Day trading
• SaaS technology

 

[ZF Lee]

I know one thing: if there's a recession, I'm completely effed. Which there will be. I got started way too late in the business cycle to build up any buffers. I have no idea what I'll do.

Buffers? How much of a buffer would you need?
Maybe ideally you could have some reserves to last a few months, but even then it may not be enough.

Wage growth has been interesting to watch. Apparently up 2.7% last month, which is finally inline with what I would be expecting...

Here is how I expect this cycle to play out over the next few months (based on basic economic theory and history):

1. We are at full employment;

2. Companies can't find as many workers as they need to fill their open positions, so they start to offer more money to lure workers from other companies. It took longer than I expected, but we're now seeing this wage growth starting last month;

3. This wage growth is good for employees (they make more money), but also increases costs for companies, so companies raise prices on their goods and services. We're starting to see this, and the Fed is warning it will get worse;

4. Increased prices means inflation (literally). Products and services costs more. And typically the real inflation from wage growth is higher than the wage growth itself, as employers have to pay additional overhead costs when they pay salaries (FICA taxes, insurance, etc). So, employees find that their paycheck isn't going as far as it previously was;

5. This leads to increased debt, lower spending by consumers and reduced earnings by companies. Which leads to layoffs, higher unemployment, lower GDP, etc.

In my country, all these things are already checked off the checklist lol.
In fact, not to be political here, but these factors were significant enough to drive my nation into its first change of governing party in the elections.

I'm not sure how all these things will come to a close, or everything might keep building up...
I'll watch this thread as I think this is very relevant to my local biz environment as well.

 

[GoGetter24]

I would love some wisdom from people that have seen 30 years of business cycles with FLF "entrepreneurial eyes"

I don't have that, but from talking to those guys, basically it depends on the nature of the product.

For instance, the recession doesn't affect the rate of people getting broken legs. And if your leg is broken, you don't wait for the recession to end before you get it fixed. Therefore anyone involved in the fixing of legs is unaffected by the recession.

On the other hand, anything in the 'discretionary spending' bracket, be it entertainment, eating out etc, gets nuked.

And services like auto repair actually go up in recessions, because no one wants to buy a new car, so they get old ones fixed. And anyone involved in job-hunting services get a boost (resume-writing, recruiting services) due to unemployment increases.

Supermarkets and bulk retailers also do fine, as people return to them because they can't afford to eat at restaurants now.

So you have to think of what the results of the recession will be.

Amazon FBA, drop-shipping, e-commerce: would depend on the product. If you're selling nappies, not as much of a problem as selling TVs.

Social media marketing: again depends what you're marketing.

Real estate: follow the effects. Renovation services will stop. Foreclosure work will go up. Downsizing will happen. I.e. short fancy houses and long trailer parks.

Day trading: makes no difference as you only need to get the direction right.

SaaS technology: if your SaaS helps people find a job in a recession, you're fine. If it helps people plan their next overseas holiday, you're screwed.

 

Don't like ads? Remove them while supporting the forum. Subscribe.

[Guest3722A]

I was wondering what happened...

Treasury yields fall after Brazilian markets come under pressure

Attached is a graph of distribution profiles for the last few days of the 2 year t-note. The profile to the right shows an abrupt move that happened around 1pm est today. The reaction was quick on hardly any volume, so, I'm thinking small traders covering shorts. As I write this, traders have found perceived value back in the green. The point with this is to show how nervous things are right now which is exactly why I'm still at 100% cash with this account. Next week I think is going to be a determining factor that will give this market a more focused direction. Wednesday at 2 is the fed decision on another rate hike, but also earlier in the week we have more auctions, which include the 10 and the 30. should be interesting.

 

[JScott]

Wednesday at 2 is the fed decision on another rate hike, but also earlier in the week we have more auctions, which include the 10 and the 30. should be interesting.

Definitely interesting. And I think there is nearly 100% chance of a rate hike given all the public data I've seen...

 

[Ayanle Farah]

I think a war will come before another recession.

Crash of 1907 followed by WWI
Crash of 1929 followed by WWII
Crash of 2008 followed by WWIII?

I hope I'm wrong though.

 

[c4n]

I think a war will come before another recession.

Crash of 1907 followed by WWI
Crash of 1929 followed by WWII
Crash of 2008 followed by WWIII?

Proxy wars yes, they have been going on for years (think: Syria) and more on the horizon.

A WWII scale war or direct large-scale conflict of the superpowers, I don't think so. It would be too devastating and due to technology advances the mainland USA is no longer safe-heaven, politicians know that.

 

[c4n]

The real question is not whether a recession is coming, it is what we can do to protect our business and assets.

The net is full of slowlane ideas if you search Google for tips on how to minimize the effects of the recession and inflation. Cut your budget, save 10% of your income, overpay debt payments, buy a family home...

My goal is to:
1. SaaS: be a cost-effective alternative to competitors. Businesses will look for ways to further cut down expenses.

2. assets: have as much liquidity as possible when sh*t hits the fan and look for investment opportunities, for example underpriced productocracaies in industries that are here to stay.

 

[theresgot2bemore]

Glad to see a thread like this. I remember reading in the book how predictions were made about the 08 crash. I was always curious how something like that would look like.

I guess time will tell how it will look after it happens.

 

[CPisHere]

I started a very similar thread earlier this year. I personally expect it to happen next year... why? Well, I don't consider it a random event.

 

[WJK]

The first world is going to get fried.

2nd and 3rd world, not so much. They're a bit more insulated. Many people in the 3rd world don't even have bank accounts, for instance.

China is going to be the interesting one. 2008 basically did nothing to them. I disagree with the "everything's connected so we all sink together mantra", this simply doesn't bear out the facts unless you cherry pick the regions you look at. The problem is what's going to happen when they finally get their big recession. They're not going to just peacefully slide into stagnation as the Japanese did.

I know one thing: if there's a recession, I'm completely effed. Which there will be. I got started way too late in the business cycle to build up any buffers. I have no idea what I'll do.

From my research, the Chinese did a whole bunch of public works projects and staved off a recession in 2008. But, several of their banks in BIG trouble right now because they didn't take their medicine at that time. Several of their major housing projects under construction are in trouble and have been stopped cold.
They have a two-tier society, where people from rural areas are the "have-nots" when it comes to the childhood education and benefits.
Their top-down business structure is causing some struggles -- similar to the Russian model. China is putting the big-brother-thumb on their people's necks through AI, which can also depress their productivity.
When we catch a cold financially, they catch pneumonia. And their leader thinks that he's omnipotent -- which is pretty scary -- making him reckless with the resources.
All these factors make me less head shy with China.

Also, this juncture feels like the situation with Japan in 1990. They were on top of the world when things came apart for them. They were putting ads in the Los Angeles times bragging about buying Class A commercial buildings in prime areas. Their market shares in the US for manufactured goods fell, and their stock market collapsed. They have been in a semi-recession since then.

As far as interest rates, the housing market was at 9.5% in the mid-1970s. So, today looks pretty good to me.

BUT, I do think that the housing market is going to take a hit because of the tax changes. More people will rent due to them not being able to claim housing deductions. I wrote a blog on this subject. READ MORE. More renters will bring droves of investors to the market. They buy differently from a homeowner. And I believe that will depress the housing market's appreciation rates. The homeowners won't see this change until they file their taxes next spring. And it will take time for them to react in the housing market. I figure it will take a few years for everything to shake out.

 

[Guest3722A]

One more graph I want to put up here is a 6 month of the DJIA up to yesterday's close. I feel it's significant and something to be aware of because imo, it is CURRENTLY showing strength. The S&P and the Nasdaq are also following similar patterns. Obviously, the markets may not always be rational, but they are what they are. Now this can change on a dime, and we know what the economy is facing, but this doesn't change what appears to be building today.