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The coming recession

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CPisHere

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The stock market's current levels are crazy high, and we're already past-due, historically, for a recession. It is obvious to me that this bubble will pop and we will have a very large correction in the next few years (if I had to guess I'd say 2019 or 2020). What's not apparent yet is "the needle" / what mechanism will cause this to happen.

Student loan debt looks like one potential piece of the puzzle. But the implications for the economy of it caving in on itself are unclear.

I believe this will be much worse than "the great recession" of 2008 since asset values will fall from much higher peaks. And given President Trump's un-orthodoxy, it's tough to say what the political response will be.

How do you prepare? What can you do to protect yourself? Are you "anti-Fragile"?

If you were in business in 2008, how did it affect you? How long did it take to rebound? What did you learn from it? Were there any good threads on this forum from the time?
 
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Scot

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I know there are cycles, but I dont really see anything that is bubbling right now. The market is high in some aspects, but not all. 2008 was due to real estate being over inflated.

What parts of our economy are the bubble right now?
 

CPisHere

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I know there are cycles, but I dont really see anything that is bubbling right now. The market is high in some aspects, but not all. 2008 was due to real estate being over inflated.

What parts of our economy are the bubble right now?
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.
 

WJK

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How do you prepare? What can you do to protect yourself? Are you "anti-Fragile"?
If you were in business in 2008, how did it affect you? How long did it take to rebound? What did you learn from it? Were there any good threads on this forum from the time?

The market has up and down cycles -- with decided crashes. In the early 1970s -- it was the oil embargo where we stood in line to gas our cars. In the early 1980s -- inflation hit and bank interest rates went to 21%+. The world stopped lending and spending for a while. In the early 1990s -- everything crashed again from personal computers, on-time delivery, the stock market crash in Japan, etc. We didn't even start to recover until the late 1990s. My mantra during that one was "Stay alive until 1995." 1995 came and the recession went on... That one also caused the demise of the Savings and Loan industry, which spanned the real estate crash in 2008 -- by wall street taking over underwriting the the real estate debt market.

I have been self-employed for 41+ years, so yes, I know a lot about how to survive.

First, I always go contrary to the market. When everyone else is buying, I'm selling. Humans are herd animals. I don't run with the herd. Close is good. I don't try to perfectly time the market when I buy and sell, because it turns on a dime. Valleys and peaks are determined in history, not in the trenches.

Second, I'm very conservative and careful with my money. Over extending ones resources is stupid. I'd rather walk away from a good deal than loose everything from stretching the rubber band too far.

Third, I talk to everyone I can find and ask tons of questions. And I read EVERYTHING. With experience and a body of information, you can feel the earth starting move under your feet. Tremors in the market can be felt as they develop.

And that's just for starters...
 
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xoxojbelle

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What parts of our economy are the bubble right now?

I am also curious to know if anyone has the answer to this
. I know that real estate has been white-hot recently, but I don't know if that counts as a bubble.

Also, student loans have been a huge problem for so many. But without the ability for people to declare bankruptcy on these loans, can this really be a bubble that can burst? The most harm that they can do I figure is to slow down the economy.

The stock market has been super inflated as well, but how could a burst happen?
 

WJK

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I am also curious to know if anyone has the answer to this. I know that real estate has been white-hot recently, but I don't know if that counts as a bubble.

Also, student loans have been a huge problem for so many. But without the ability for people to declare bankruptcy on these loans, can this really be a bubble that can burst? The most harm that they can do I figure is to slow down the economy.

The stock market has been super inflated as well, but how could a burst happen?

The problem with real estate is that the payments that people make don't have much relationship to the debt. The American dream was to pay off the house during one's working years. Who do you know that does that today? When I started in 1976, we only had FHA, VA and conventional loans, and the payment paid off the loan for the real estate.

The student loans have a become a huge problem. They are like overdue child support. They will dog you to the grave. The only thing to do is pay them off.

The stock market is a big problem. The number of shares traded have contracted by about 75%. We have a much smaller market with a lot more money chasing the shares left. That's a lot more concentration of wealth... which makes that market a lot more touchy.

I'll stick with my low-to-moderate-income rentals. People have to live somewhere. And I like my laundromat. My customers have to wash their clothes sometime soon. We're in a recession here in Alaska due to the oil prices. Yes, the recession disrupted things last winter, but we got things back to stable. Yes, the whole thing can fall apart, but my odds of being successful are pretty good.
 

loop101

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The stock market has been super inflated as well, but how could a burst happen?

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.


Jesse-Livermore%2Btrader%2Bextraordinaire.png
 

minivanman

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I was in business in 2008. I had a residential cleaning business and I thought I was screwed; and in one way I was. See, before 2008, we used to do a lot of clean outs for banks on their repo's. We would send them a HIGHLY inflated price, they would never even look at it and then someone would send out a check. There were many times we would make $500-$1000 an hour profit. We would bid $10,000 on a house that would take 2 workers 5 hours to complete. $8 an hour x 10 hours is basically all we paid out. Sometimes a large dumpster. The house was cleaned, the bank was happy, I was happy and we moved on to the next one. But, that all changed. They had so many repo's, someone must have noticed what we were doing, I'm sure we weren't the only ones, so they put a set price on the work. It's only like $35-$50 an hour now. And nowadays there are all kinds of rules to do those clean outs. So that was the down side but the upside was that when everything went to hell, more spouses went to work which meant they needed someone to clean their house. So while we lost easy money with the banks, we did gain many new residential cleaning customers.

As for getting those clean outs nowadays, one of their rules is that a felon can not be on that property. So if I was still in the cleaning business and doing clean outs, if I put someone in that property and they were a felon and if they committed any type of crime, I would be responsible. What was happening was child molesters were using those houses to take kids to so Wells Fargo was the first to put that rule in to play and now I'm guessing they all have about the same rules.

My question is.... what will happen with my appliance business this time? If people stop buying new, where will I get my washers and dryers? I was actually thinking about that while driving today. I figure if this business can't survive something like that, I will either retire again or find another business to piddle with.
 

hughjasle

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What parts of our economy are the bubble right now?
I'm not sure I'd call it a bubble, but I will call it an extreme stressor on the economy... Health Insurance.

I'm not sure what the answer is here or if/how it will affect the economy, but it is a huge stressor on both businesses and a personal level, especially with the fee/tax for not having it.
 
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CPisHere

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The market has up and down cycles -- with decided crashes. In the early 1970s -- it was the oil embargo where we stood in line to gas our cars. In the early 1980s -- inflation hit and bank interest rates went to 21%+. The world stopped lending and spending for a while. In the early 1990s -- everything crashed again from personal computers, on-time delivery, the stock market crash in Japan, etc. We didn't even start to recover until the late 1990s. My mantra during that one was "Stay alive until 1995." 1995 came and the recession went on... That one also caused the demise of the Savings and Loan industry, which spanned the real estate crash in 2008 -- by wall street taking over underwriting the the real estate debt market.

I have been self-employed for 41+ years, so yes, I know a lot about how to survive.
What is your current sense of what will happen?
 

MidwestLandlord

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What parts of our economy are the bubble right now?

S&P 500 Inflation Adjusted Price to Earnings Ratio:

32.27 (current)
16.80 (historical mean)

S&P 500 Price to Sales Ratio:

2.24 (current)
1.47 (2002-2017 mean)

S&P 500 Price to Book Value:

3.33 (current)
2.76 (2000-2017 mean)

Price to earnings sure looks like a bubble, the other 2 are high, but debatable (I think they are bubble worthy when combined with the PE ratio...I.E the whole picture)
 
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Thoelt53

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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.
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.”
 

TheOwl8

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What parts of our economy are the bubble right now?

I consider a bubble to be a large discrepancy between price and value:
  • Student loan debt. Pay $100,000 for a degree that is worth $20,000
  • The stock market. Pay $35 per share for $1 of earnings. Look at the S&P P/E ratio. It is at one of its highest levels ever. If you factor in lower corporate tax rates it helps, but if stock prices are based on earnings as a whole it appears overvalued to me
  • Health insurance premiums. Pay $500 a month for a doctor to take 30 seconds to write a prescription to mask your symptoms
  • Crypto currencies. No explanation necessary
And last but not least, the one that no one has mentioned. SOCIAL SECURITY!!!
 

Paul Schuyler

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Just a wild guess, but I'd suggest that the US Healthcare system is a bubble. What a mess. Neither side of the political spectrum seems all that interested in reducing spiraling costs. One side wants everyone to share the costs, the other side wants it all paid privately. But no one seems to have a plan for actually reducing the costs themselves. Fees for everyone in Health care are through the roof. I go to my kid's pediatrician; they make you wait for 45 minutes, then see you for 10 minutes. You may have a co-pay (or not), but what's interesting is the bill that goes to the insurance company. Its usually $2-300 for such a visit. 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.
 
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mThree2K

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Mine rivals my monthly mortgage! I know many ppl who are now paying more on their health insurance premium than they do on their monthly mortgage.
Saw some comparisions last week between the healthcare system in Europe, mostly with spanish examples, and the US.

I was pretty shocked, you guys are being robbed because a socialized healthcare system is viable. Or at least a cheaper one.

Enviado desde mi Mi Note 2 mediante Tapatalk
 

Yoda

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I'm bullish on the economy for another couple of years, at least. While I think a lot of people are preparing for it, there's no real substance just yet.

Healthcare, to me, is probably the biggest strain on everyone, but there are already disruptions happening which a lot of people aren't seeing yet. I think these private injections (pardon the pun) of new capitalistic ideas are going to crush the national medicine doctrine we have, and bring about a much simpler system. I'm already a part of it.

Student loans are a drag, yes, but that's a slow melting iceberg. If younger folks default on their student loans, their still going to pay their rent and eat food. It's not a major "loss" of a tangible item (like a house), but rather a drain on cash flow. While this does affect how they spend/invest, it's more of an opportunity cost, not a direct loss.
 
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Patrickg

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I'm bullish on the economy for another couple of years, at least. While I think a lot of people are preparing for it, there's no real substance just yet.

Healthcare, to me, is probably the biggest strain on everyone, but there are already disruptions happening which a lot of people aren't seeing yet. I think these private injections (pardon the pun) of new capitalistic ideas are going to crush the national medicine doctrine we have, and bring about a much simpler system. I'm already a part of it.

Student loans are a drag, yes, but that's a slow melting iceberg. If younger folks default on their student loans, their still going to pay their rent and eat food. It's not a major "loss" of a tangible item (like a house), but rather a drain on cash flow. While this does affect how they spend/invest, it's more of an oppwnuortunity cost, not a direct loss.


I agree, I think "on demand" economics is already starting to have an impact on health care. Which will drive down costs. Good for consumer but not for the people currently over charging for services.

Look at telemedicine for example.
 

Supercar

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Cryptocurrency looks like a bubble. But there are published opinions on the internet that it is instead a needle, the one that will pop the dollar bubble. It certainly will happen, pretty soon, but I do not know if it will cause the coming recession/correction, make it much worse that it would have been otherwise, or maybe cause the recession soon after the one that is coming.

The government cannot keep borrowing, and the Fed cannot keep printing money indefinitely. There result is always inflation, hyperinflation, and/or stagflation. Investors and other countries will keep dumping their dollars, buying things that do not depreciate. Cryptocurrencies have that promise. Gold has it.

I am wondering what you guys will think about this Dow to Gold ratio chart:
Dow to Gold Ratio - 100 Year Historical Chart

One conclusion that one can make is that if this ratio is above 10-15, and is going up, then it will keep going up a bit more. On the other hand, at this point, it is becoming safer to invest into gold rather than stocks.

On a personal note... Back in 2008 my employer went bankrupt and I lost my day job for 8 months. I had a business that slowed down a bit, but I started running it full-time, taking on income bringing projects that I otherwise wouldn't touch. I had a small stockpile of cash in my bank accounts and an equal credit card dept (credit was dirt cheap, often free, it made no sense to pay off debts back then). That got me through. I got my job 8 months later, paid off the credit cards, and bought a new house. The job became better, and my business slowed down further.

Another thing that was tempted to do is withdraw the cash, declare bankruptcy like many others did, and then live on cash. But that would have been way more painful and way more risky.

What I REALLY should have done back in 2008 is buy some bitcoin. :)
 

karakoram

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Supercar

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I used to think that the way the Fed has been printing money for the past 8 years or so would lead to hyperinflation. John Mauldin said no it would not because the velocity of money was so low. Ray Dalio explains it more detail here:
How the Economic Machine Works [Animation] by Ray Dalio
Thank you, that was very educational. But this video promotes kensianism, which is a bubble all in itself.

What I got out of it was that spending cuts, debt reduction, wealth redistribution, and money printing are the methods to reduce the debt burden. It is always going to be the money printing, IMO.
View: https://www.youtube.com/watch?v=PHe0bXAIuk0&t=1154s


The whole thing smells of socialism. Additionally, I could not find this chart anywhere on the internet:
View: https://www.youtube.com/watch?v=PHe0bXAIuk0&t=998s
 

karakoram

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Thank you, that was very educational. But this video promotes kensianism, which is a bubble all in itself.

What I got out of it was that spending cuts, debt reduction, wealth redistribution, and money printing are the methods to reduce the debt burden. It is always going to be the money printing, IMO.
View: https://www.youtube.com/watch?v=PHe0bXAIuk0&t=1154s


The whole thing smells of socialism. Additionally, I could not find this chart anywhere on the internet:
View: https://www.youtube.com/watch?v=PHe0bXAIuk0&t=998s

Possibly Dalio put together data going back futhur. Not sure. A search revealed the FRED chart going back to '66
Federal Debt: Total Public Debt as Percent of Gross Domestic Product

and this chart going back to '35
United States Gross Federal Debt to GDP | 1940-2017 | Data | Chart

I think Dalio is a socialist, but I'm not certain about that. I agree that there is a socialist "flavor" to the video.
 

ruzara5

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How do you prepare? What can you do to protect yourself? Are you "anti-Fragile"?

If you were in business in 2008, how did it affect you? How long did it take to rebound? What did you learn from it? Were there any good threads on this forum from the time?

Time portaling back to 08. Associate invested heavily in real estate for five years prior to 08. When it happened he got hit hard. With a diverse 'egg basket' you can come out a little shaken. With a way to ride the surf board to a better wave. Certain people got hit harder than ever on that one in 08. Next one will likely have better tiered options with those that are more moderate in their leveraging. Being fragile is part of life. Being prepared is all about the next big step. Making it a big up step. Always living in interesting times.
 
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Supercar

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Dalio is a capitalist. He's one of the most successful hedge-fund managers in history. His entire job for the past 40 years is allocating capital.
I do not know Dalio personally, but being good at what one does does not make him/her a capitalist. There are a plenty of socialist billionaires out there, you know. Warren Buffett, Bill Gates, most of the Silicone Valley...
 

justonemore

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This is a great thread. I've been having the same thoughts. A recession has to be around the corner(0-2 years?). I agree with the OP, it could be very bad.
To me, the Dow could fall from 24,000 to 14,000 and still not be 'cheap'. The Dow was expensive before the crash when it was ~14,000 and the only thing that's changed is low interest rates.

I'm currently all cash. My debate is whether to buy rental properties during the next downturn or buy stocks.

I'm also studying a second profession to add marketability.
 

karakoram

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I do not know Dalio personally, but being good at what one does does not make him/her a capitalist. There are a plenty of socialist billionaires out there, you know. Warren Buffett, Bill Gates, most of the Silicone Valley...

I did not mean to imply I was making a judgement about Dalio. I should have mentioned that this was something either he said or someone else said about him or his firm (being socialist). I don't recall now. Anyone who wants to know Dalio better might want to get his recently published book. I started reading it myself.
 

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