Are You Ready For The Next Recession?

Tyler Durden's picture

Submitted by Brendan Brown via The Mises Institue,

Some optimists are touting the hypothesis that the weakness of the economic expansion since the last cyclical trough (June 2009) means that the next recession will be mild.

In fact, such a tendency has never been observed in the 140 years of US business cycle history examined famously by University of Chicago Professor Victor Zarnowitz. The only reliable rule which he found was that “the worse the downturn the stronger the subsequent upturn” — a rule that has famously broken down under the onslaught of the Great Monetary Experiment in the present cycle.

So how can we best decipher the future of this cycle including its peak and subsequent trough? In broad terms the best guide is King Solomon “there is nothing new under the sun” on the one hand and the Austrian school and behavioral finance theorists on the other. The latter warn in combination against pseudo-scientific hypothesis making and the perils of making judgment on the basis of those small sample sizes available from the laboratory of history.

Three Reasons We're Told not to Worry 

To be fair, the optimists on the shallowness of the next recession are not citing a past historical episode to back their case. Rather they make three claims: (1), because investment spending has been so anemic, its scope to fall is correspondingly limited; (2), the likely tumble in asset prices will not this time cripple the US banking system which is now unusually resilient; and (3), the new tools which the central bankers have tried out during the experiment so far can now be sharpened and adapted to better combat the next recession when it hits. All these claims are unfortunately bogus and they fail to acknowledge a potential recessionary shock from the side of the consumer.

Weak Business Spending, Declining Consumption, Popping Bubbles

The weakness likely has much to do with the uncertainty generated by the monetary experiment. Business decision-makers and their shareholders in thinking about the future can see that the Fed (and central banks abroad) have generated a dangerous asset price inflation disease which will likely end up badly. This will include much evidence of mal-investment, a crash across many asset markets, and a big pull back in consumption as households realize the mistakes of their past credulity.

Given so much fear about the end-destination of the monetary experiment, the road to raising shareholder equity is often not via undertaking long-term investment projects. Rather, companies are paying out cash to shareholders and leveraging up to do so. This tendency to eschew long-run commitments is also attributable to awareness that present equity values contain much froth which may well have vanished by the time the business owners (including executives with share-options) would hope to cash out.     

Yes, the areas of mal-investment during the economic expansion do emit boom-like signals. The speculative stories and the high leverage found there are characteristics of the Hunt for Yield as induced by the income famine conditions prevalent under the Great Monetary Experiment. The eventual plunge of investment in these areas can be large overall in macro-terms even though overall business capital spending across the economy as a whole is sub-normal. We have seen that already for the energy boom and bust in the US. The same may be true further ahead for all the suspect areas of mal-investment, whether commercial real estate construction, Silicon Valley, apartment construction, and any activity related to the biggest bubble of all — private equity.

Why We Should be Skeptical of Claims that There is “No Potential US Banking Crisis”     

The widespread collapse in speculative temperatures which would mark the late stage of asset price inflation disease would cause — in the US and globally — a huge loss across a wide range of financial institutions whose purpose is to provide income for retirement. The reckless reaching for yield as these institutions have pretended to meet their commitments under income famine conditions would come home to roost as high-yield debts and dividend-rich equities fell sharply in price and the liquidity of even the investment grade corporate bond market seized up. 

The alarmed clients of these institutions would pull back their present spending in alarm that their rosy expectations regarding future income had blown apart. This may already be happening pre-emptively as indicated by the “surprise” weakening of US retail sales during July and August. 

The dimensions of the overall seizing up of credit markets would be tremendous even though US banks may continue in relative safety at least in the early stages. Near-zero or negative interest rates has caused the normal credit alarm system to hibernate. Delinquency or non-performance occurs in silence with no evidence of non-payment. But alarm mal-function will not prevent the dud nature of bad credits to finally emerge or sudden fear of these to cause a shudder in market prices.  

Italian government bonds, whose 10-year yield is now (mid-September) barely 1.30 and significantly below T-bond yields could be the canary in the mine. A sovereign debt crisis and banking crisis in Europe worse than that in 2010–12 is a mainstream scenario for the end-phase of this global asset price inflation disease. Indeed, Europe could be the tinderbox where a US stock market crash led initial recession shifts into full slump mode with feedback loops to the vaunted safety of US banks.                 

But Surely the Federal Reserve Would Pre-Emptively Exercise a Mega-Yellen Put?

The advocates of the Great Monetary Experiment would have us believe that the central bankers could put a floor under the next recession and at least provide the basis for a new weak but long economic expansion as the present one. The bad news for the experimenters (and their political chiefs) is that next time the Federal Reserve may not be able to lift asset prices by turning on the music of “nowhere else to go” and stimulating a “Hunt for Yield.” The experience of loss may have tamed the hunters and emptied the audiences, with no one believing the central bank narratives about the wonders of their tool box and the potential to fix long-term interest rates.

The good news for economic prosperity and freedom is that the failure of the grand experimenters next time to ignite asset price inflation early on in any incipient economic upturn might lead to their dismissal (if not effected earlier!).

Why let them continue to nurture the monetary virus which at some point will reach escape velocity and start to re-infect global markets, thus producing anemic economic outcomes? Would it not be better to install a sound monetary order? That is the main hope for curing the global curse of the Federal Reserve and its grand experiment. But its fruition depends crucially on the next US president reacting to the recession and its likely severity by firing the present Fed chief, choosing wisely her replacement, and joining with Congress to legislate a framework for monetary stability.

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BuddyEffed's picture

Some optimists are touting the hypothesis that

Typo, should have read HYPNOthesis, I think.

back to basics's picture

Next recession??? When did we get out of the first one??? 

NoDebt's picture

I sure am glad none of this can affect the price of my stawks because that sounds absolutely grim.

 

Stainless Steel Rat's picture
Stainless Steel Rat (not verified) NoDebt Sep 20, 2016 8:20 PM

The Great Collapse.

oops's picture

Too bad America is NEVER getting better. http://wp.me/p4OZ4v-3z

Nekoti's picture

I think it was supposed to be "next depression".

Paul Kersey's picture

What we have is worse than are recession, or even a depression. What we have is a paradigm shift in which labor capital is becoming even more worthless than actual capital. Over the next 20 years, it is said that automation will take away over 80 million U.S. jobs, and there will be parallel situations in the EU, China and even in countries like Vietnam.

In the future, a vast majority of the world's people will be working for even less money than they are working for today. The financial engineers, who have already sucked most of the wealth out of the world's economy, will have a huge serf-like servant class begging to do their bidding. "Sound money" will not change this, because the vast majority of real wealth will be held by a relatively small number of international plutocrats.

Creative_Destruct's picture

The financiers will all have to retreat to a LEO spacestation ala "Elysium" to avoid the chopping block.

Archibald Buttle's picture

i hope they opt for this. once fuel cells start decaying on old ass satellites, and orbits begin to decay or fuel runs short for corrections, the inevitable carnage will be there in the sky for everyone to see and cheer on. popcorn time writ large.

Creative_Destruct's picture

T'would be abeautiful blazing sight, indeed!

consider me gone's picture

Damn that's depressing but probably reasonably accurate. 

dogismycopilot's picture

I have been thinking the same as well. We are in a boundary phase transition and I think this is only the very start of the troubles. People are becoming less valuable each day....almost as fast a big screen LED tvs that are pumped out by the millions. 

Creative_Destruct's picture

No one with a brain thought that the shit that the fan keeps spraying on us had ended or was going to end...

CHoward's picture

There will be no next recession for the United States.  One step lower and we'll be tipping our toes in what used to be called a depression.

HedgeJunkie's picture

The Greater Depression

Chuckster's picture

I sure like your posts!  This time I think depression would be a step upward.  Sept. 21 Sept. 27 Oct. 1 might be big big days.

koder's picture

Nothing in the US will change till Food stamps dont post on the third of the month. So....

thinkmoretalkless's picture

Yeah and you had better have already done your shopping before that occurs...because that will make Black Friday look like a walk in the park.

CheapBastard's picture

The wealth discrepancy is astounding and with zero yield on savings accounts and zero COLA the gap is widening rapidly driving many into the pits.

The desire to destroy the American middle class by Obama and the Fed has never been greater.

Mass_hysteria's picture
Mass_hysteria (not verified) Sep 20, 2016 7:40 PM

i just want communists to die.

Aubiekong's picture

How do you prepare?  Money in the bank can be taken.  A paid for house can be taken.  Gold and silver can be taxed and taken.  food in the pantry can be taken. There is no escape for the sheeple.  Live life large while you can...

wisehiney's picture

Ready?

Hell, I have ready fatigue.

May as well enjoy the wait. (burp)

chosen's picture

I'm looking forward to the next "Great Recession".  Home prices are too high.  They need to drop by about 60% in California.  It would help a lot if Trump would really deport 11 million illegals, especially in California.  Rents will drop like a rock, and maybe some unemployed Americans could find a job.  Of course, half the elementary schools would close.

RedDwarf's picture

"Next" recession?  We've been in a recession if not outright depression since 2008.

dealmakerman's picture

Here is a paper on how savers and investors can actually profit from the War on Cash and Negative Interest Rates based on a variation of Gresham's Law. https://bunky1787.wordpress.com/2016/09/04/can-you-profit-by-saving-an-extreme-money-overture/

UnschooledAustrianEconomist's picture

Hey buddy, we got a troll here that rents out his underage daughter and her friend and makes 10k a week with that. Probably he spends it all on crack, but that's just a guess of mine.

So hurry up, and pimp your story, otherwise nobody will even notice your existence.

Creative_Destruct's picture

Are you ready for the next recession? - Joe-Blow & Mary Schmo: "no".

ClownBaby's picture

Yes, I am ready. Thank you for asking.

Stormtrooper's picture

Very few people understand the role of gold and silver as "sound" money.  Most people have been programmed to think of PMs as "investments" which does not make them "sound" because investor speculation would cause widely varying valuations, like Bitcoin, and with todays' widely fluctuating fiat currency FOREX markets.  From the mid-1700's-1861 (thank you Mr. Lincoln for destroying sound money) the price of gold was $20.67/ounce with silver at nearly a 15/1 ratio in price.  Inflation and deflation were caused by commodity/product scarcity (bad crops) as well as wars.  On average, inflation/deflation was very low during that period (download the Cole report in Excel format to do your own evaluation).  Gold was just a commodity that retained value, was easy to divide into smaller valuations, had high purity and was thus easy to value and made a great unit of value.  And, most importantly, governments, and now private banks disguised as the Federal Reserve, couldn't counterfeit.

Until we are a few years into the total system collapse  and people can understand that using gold/silver as an easy to value commodity instead of trading chickens for shoes even when you don't need shoes makes more sense than basic barter.  Hence, sound money will be re-invented.

tarabel's picture

 

 

<checks watch>

<taps foot impatiently>

<checks watch again>

JailBanksters's picture

When did the last recession end ?, I must have dozed off

CRM114's picture

Born Ready.

 

Bring It On!