Guest Post: 3 Likely Triggers Of The Next Recession

Tyler Durden's picture




 

Submitted by Lance Roberts of Streettalk Advisors

3 Likely Triggers Of The Next Recession

Recently I was watching my kids break in our family pool for the first time this year. All four of them stood motionlessly, side by side, staring at the clear blue water with their toes just over the edge of the coping. Knowing that the water is still cold from the winter months the anticipation and trepidation of the "cold shock" kept all four of them glued to the edge. "Who is going first?" I asked. The oldest began to lean over. Knees bent, hands on his knees to maintain stability and an intense concentration to prepare himself for the plunge. It was just at that moment that my younger son screamed "Kowabunga" and shoved him in.

That is where we are in today's economy. The conjecture about the next recession has raged ever since the end of the last one. Will it be in 2012 or 2013 or, if you believe the many mainstream economists' estimates, never? Historically speaking recessions have occurred on average of about every 6-8 years regardless of monetary or fiscal policies, the strength of the economy or global peace - they occurred nonetheless.

sta-eoci-recessionindicator-050212There is really no argument whether there will be a recession in our future — the only question is the timing and cause of it. The latter point is the most important. Recessions do not just happen — they need a push. In 2011 the economy was just a breath away from a recession due to the dual impact of the Japanese earthquake and tsunami and the European debt crisis. Had it not been for the combined efforts of the Fed through "Operation Twist" and the Long Term Refinancing Operations via the ECB, a drop in oil prices and a plunge in utility costs due to the warmest winter in 65 years, it is entirely likely that that we may have already been discussing a "recession." The ECRI launched a debate that was literally heard around the world with their recessionary call in 2011. The weight of evidence as shown by our composite economic output indicator index shows that the ECRI call was most likely correct. However, the restart of manufacturing, primarily automotive, after the crisis in Japan combined with an effective $90 billion tax credit due to lower oil and utility costs, turned the previously slowing growth rate of the economy around over the last couple of quarters. Sustainability is becoming the question now as weather patterns return to a more normal cycle and the effects of the lower energy costs began to dissipate.

In a more normal post recessionary recovery the third year should be closer to a 6-8% economic growth rate versus 2%. While 2% growth is much better than zero — the current sub-par pace of growth leaves the economy standing on the edge of the pool with very little stability to offset any unexpected "push" into the cold waters of recession. The problem is identifying what that "push" could likely be.

imports-exports-gdp-050212Export Shock

With the Eurozone slipping into recession, combined with the economic contraction in China, the most likely event will be an export related slowdown for the U.S. The recent plunge in durable goods, factory orders, and many of the regional manufacturing reports point to early signs of a slowdown. The Eurozone accounts for about 20% of U.S. exports and profits and any slowing of consumption due their economic ills will wash ashore in the U.S.

The chart shows the year-over-year deterioration in exports relative to GDP.  The slowdown in exports would shave a significant chunk off the calculation of GDP by itself, however, it is the ancillary effects that would push the already weak economy into recession. As exports slow the profit margins of U.S. corporations are reduced and they react by ceasing hiring, cutting back temporary labor and increase productivity to suppress wages and maintain profits. Those actions, and outlook, by corporations are reflected not only by the stock market but also by declining consumer confidence. The pullback in consumption causes corporations to get more defensive. This virtual spiral further slows economic growth pushing the economy into recession.

Liquidity Crisis

Secondly, a resurgence of the Eurozone crisis that leads to a "liquidity shock" would likely stall the economy. While the ECB has currently committed funds to provide liquidity to the Eurozone the problem of a single large potential default issue from either Italy or Spain, or even a combination of events through the entire region, could quickly create a liquidity crisis.

We have written in the past the European Financial Stability Fund (EFSF) and the subsequent European Stability Mechanism (ESM) was not large enough to adequately deal with the European financial crisis. While current actions by the ECB through the Long Term Refinancing Operations (LTRO's) have temporarily calmed financial markets around the world — however, it is a temporary solution that will ultimately fade.

The ECB has already stated that they have done enough in this regard and are unlikely to provide further liquidity in the future. This is a potential problem given the difficulty in trying to get European leaders, particularly Germany and France, to cooperate quickly and efficiently. The delays, arguments and political gamesmanship in the future may well lead to an inability to act quickly enough to avoid another financial crisis.

"Black Swan" Event

When considering the many possibilities that could occur from the information that we have readily available we must not discount the possibility of an event that is completely off the radar. It is these seemingly random events that occur without warning such as the Japanese earthquake in 2011, the "Asian Contagion", Long Term Capital Management or 9/11 that can push the economy off the ledge and into the cold waters of recession.

It is interesting that these "once in a hundred years" events occur with such regularity and yet these are the very things that are dismissed in current analysis. Current growth expectations for the economy are stronger growth by the end of 2012 and increasing economic growth rates in 2013 and beyond. These assumptions are based upon expectations of a continued organic economic recovery even though the recent post recessionary recovery cycle, driven by trillions of dollars of varied stimulus and financial support programs, has been anything but. Each financial injection to support the economy has had a diminishing rate of return and each time these programs have ended the economy has quickly begun to weaken back towards recession. This is not an economy that can grow without massive fiscal support so assuming growth projections well into the future may be a bit shortsighted.

The "Fiscal Cliff"

The impending "fiscal cliff" coming at the end of 2012 where a plethora of tax cuts, credits and incentives, many left over from the Bush era and extended by the Obama administration, will collectively expire. This is no small matter. The simultaneous expirations of these tax benefits will create approximately a 2% hit to GDP which, given the associated fallout across the economy, will be more than sufficient to create a recession.

However, I do not expect that this will happen even though it has lately been a topic of great debate. Regardless of winner of the next Presidential election the economic impact of the "fiscal cliff" is well known. Therefore, it is extremely likely, since no one in Washington wants to take the responsibility of taking away the "government cheese" that another round of extensions for most of the tax benefits will be approved.

The simple fact is that the U.S. is now caught in the "trap" of the debt cycle where cuts in deficit spending, budget reductions, increases in taxes or interest rates cannot be accomplished because the economy is simply too weak to offset the negative impacts. However, at the same time the increase to the debt burden continues to deteriorate the economic prosperity of the U.S. This is the problem that the Eurozone faces today. It is impossible to implement "austerity programs" when the economy is already on the brink of recession. Austerity, as a measure, must be done when economies are growing strongly with a high employment level which offsets the cuts to government spending and support. Today that is not the case either in the Eurozone or the U.S.

A Recession Is Coming

With these ideas in mind it is easy to understand that a recession is coming - recessions are part of the overall economic cycle and despite wishes, hopes and prayers, they will occur with a surprising level of regularity. During economic boom times they are spaced further apart due to stronger economic growth. During debt deleveraging cycles, such as we are experiencing now, they occur much more frequently.

Furthermore, recessions are not a bad thing - they are simply the pause that refreshes the economy. As the economy, or the stock market, grows it creates excesses. These excesses must be reset from time to time through a contraction, or recessionary, phase. What is important to understand is the impact that recessions have on your life and your finances.

The recessions in 2001-2002 and 2007-2008 were very avoidable and we warned in our writings well in advance of their occurrence - just as we are now. The problem for most individuals is that they did nothing to prepare of the event until it was far too late. Preparation such as taking an umbrella with you when you suspect that it will rain can save you from negative consequences. Understanding that a recession will occur and preparing accordingly will save you as well.

The push will come. In what form - I really have very little clue. What I am confident of is that no one will be yelling "Kowabunga" just prior to the shove.

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Wed, 05/02/2012 - 18:06 | 2392359 vast-dom
vast-dom's picture

WTF? Next? We never left the Recession son!

 

We are The Black Swan.

Wed, 05/02/2012 - 19:15 | 2392480 Manthong
Manthong's picture

We are the Black Swan we have been waiting for?

Wed, 05/02/2012 - 20:16 | 2392572 Hulk
Hulk's picture

We are self Black Swanning at this point...

Wed, 05/02/2012 - 20:43 | 2392616 PeeramidIdeologies
PeeramidIdeologies's picture

Black swans will be shot on sight and disposed of (down played). It is the Grey Swan that is the issue. Ever visible, slowly approaching, asking the million dollar question, "Who will be sacrificed? The rich or the poor?"

Wed, 05/02/2012 - 18:14 | 2392374 narnia
narnia's picture

the collapse of Japan is my guess & it won't be a recession it will be a reckoning.

Wed, 05/02/2012 - 18:19 | 2392383 vast-dom
vast-dom's picture

fuckushima will prevent japan from collapsing.

Wed, 05/02/2012 - 18:24 | 2392399 narnia
narnia's picture

like how someone's coke habit will prevent them from having a heart attack?  

Wed, 05/02/2012 - 19:29 | 2392487 vast-dom
vast-dom's picture

i'm a coffee bean roaster and i love what i do.

 

i lose you over half a bill and you still pay me!

 

i love coffee roasting! 

Wed, 05/02/2012 - 19:19 | 2392484 supafuckinmingster
supafuckinmingster's picture

vast-dom: "fuckushima will prevent japan from collapsing."

 

Explain please?

Wed, 05/02/2012 - 19:36 | 2392485 vast-dom
vast-dom's picture

u ever heard of god-fucking-zilla supa? BoJ is glowing in the dark and dispensing new kind of mutated hopium cesium gaseousness over there.....very rich bold umami flavors......

Thu, 05/03/2012 - 02:52 | 2393111 PersonalRespons...
PersonalResponsibility's picture

BUT WHAT ABOUT THE REST OF IT?

 

 

PAPRIKA (2006)

 

Wed, 05/02/2012 - 18:15 | 2392375 youngman
youngman's picture

I love these guys that say we can never cut because we have a weak economy.....to get to a strong economy you need to live within your means...that means cutting....yes painful....and yes a few politicians will lose their jobs..and yes a few windows will be broken in the big cities...but it has to be reset....and it will be...it can be an orginized reset...or an out of control one...

Wed, 05/02/2012 - 20:29 | 2392585 dbomb12
dbomb12's picture

It will certainly be an out of control one

Wed, 05/02/2012 - 20:33 | 2392593 crawldaddy
crawldaddy's picture

no, you need to allow companies and banks to ge bankrupt, you have to allow risk, you have to allow capitalism to have losers.

Sorrow austerity is not going to work, Check out europe if you think otherwise.

For the economy to start working again, we need losers to lose, crooks to go to jail, fascist to be hung, and large too big to fail banks to be busted up.

Its called accountability.

Thu, 05/03/2012 - 02:46 | 2393110 Ek Onkar
Ek Onkar's picture

Hear Hear!

Wed, 05/02/2012 - 20:41 | 2392609 duo
duo's picture

The economy will be perpetually weak because it consists of wealth extraction, speculation, and transfer payments instead of mining, manufacturing, and agroculture (you know, things that create wealth).

How to reduce the FIRE economy back to 10% of GDP instead of 40% like it is now is the real question.  Usually it doesn't happen without economic collapse or revolution, and in many cases there are a lot fewer people left over to rebuild the economy.

Thu, 05/03/2012 - 03:22 | 2393127 cynicalskeptic
cynicalskeptic's picture

We don't CREATE wealth anymore.  Wealth is created by taking ore out of the ground, turning it into metal and turning that metal into products. It is created by cutting down trees and turning that wood into furniture or houses, by growing grain and turning itinto flour and that flour into food.   It is created by ADDING VALUE.

Instead the financial sector has quadrupled in the last 40 years - to over 40% of the US economy.  These guys EXTRACT wealth, slicing, dicing and repackaging and reselling paper representing what exactly?   Instead of the financial sector serving productive enterprises and providing capital to enterprises that MAKE things of value, this sector KILLS off those enterprises.

You can't have a 'service economy' if NOBODY is actually creating wealth anywhere in that economy.  You can't have an ecopnomy based on BORROWING money to spend on crap made elsewhere.

Quoting another - FDR borrowed money from Americans to put other Americans back to work so they could buy goods made by other American sputting  more Americans back to work.  Today we borrow money from foreigners to pay Americans NOT to work so they can still afford to buy goods made by other foreigners......

At least under FDR we put peopel to WORK CREATING THINGS OF VALUE - parks, roads, bridges - even murals in schools and post offices.  By simply handing out money (to individuals and - by the trillins - to corporations) we only cause inflation and add to the national debt.

 

I expect the merde will be hitting the fan soon.    The PTB are losing their grip and are running out of things to try.  Exopect WWII in the Middle East as the US Empire tries to conquer energy it can no longer afford - and put its people to work against evil 'terrorists' (instead of having them revolt agoinst their inept leaders).   But that will only last for so long too..... Expect another Dark Ages after this Rome falls.... China is no bright and shining light - they are playing their own games too......

 

 

Wed, 05/02/2012 - 23:08 | 2392875 Breaker
Breaker's picture

Yup. From the article: "It is impossible to implement "austerity programs" when the economy is already on the brink of recession."

No it's not. We'll have two very bad years, things will reset and we will be back. What is ridiculous is that the term "austerity" means not running up 1.5 trillion dollars a year in debt. LOL.

Eventually reality will force "austerity" or serious inflation. Our politicos (and the folks who elected them) have had their whoppee. Reckoning is on it's way. The sooner we bite the bullet and accept that, the less painful it will be.

Wed, 05/02/2012 - 18:16 | 2392376 chump666
chump666's picture

no next just the end 

Wed, 05/02/2012 - 18:17 | 2392379 cherry picker
cherry picker's picture

We just managed to survive the last major downturn, and unlike banks, oil companies and the fed, there is nothing left in the well to sustain us through another bout of something we as individuals or as a society wa refer to as Main Street have any control over, unlesss we go out in mass and shock the world by firing Obama and blacklisting companies who pay their workers so poorly, like WalMart, where new hires used to be given instructions on how to apply for food stamps.  In essence we are subsidizing Wal Mart's labor costs while their owners make more than enough to pay adequate compensation and still live like royalty.

Methinks it is time to eliminate "entitlement" programs to those who do not need it, and if they fail, so be it.

Wed, 05/02/2012 - 19:22 | 2392486 tgatliff
tgatliff's picture

Sir... You underestimate the power of the FED.  Now witness the firepower of this fully ARMED and OPERATIONAL FED Markets Group!

Wed, 05/02/2012 - 19:38 | 2392516 RunningMan
RunningMan's picture

+100  This will be a day long remembered...

Wed, 05/02/2012 - 18:20 | 2392389 SheepDog-One
SheepDog-One's picture

We never left the depression....your kids were frozen in the pool all winter.

Wed, 05/02/2012 - 19:27 | 2392392 Yen Cross
Yen Cross's picture

 The recession never ended! Jesus I'll send the Econ. calendars over, for March and April!   CPI,PPI, Farms/Non-Farms, Capex, ect...

  Compare the numbers to 2011. Compare the numbers to 2010.  What is the primary ( numerator)/ denominator? Inflation!

Wed, 05/02/2012 - 18:22 | 2392393 pasmurf
pasmurf's picture

The lack of personal income rise is in recesionary territory.  ECRI also notes that recessions will revert back to the historic norm of recessions every two to three years, one of their charts shows declining peaks of GDP growth would indicate that 6-8% growth are so yesterday. 

Government spending and regulation is such a beeaacchhh. Time to grow my own tobacco.

Wed, 05/02/2012 - 18:29 | 2392403 q99x2
q99x2's picture

Dude there's 50 million in the soup lines. You don't see them because it is electronic. We are at war literally with the NWO. You don't see it because they're taking us out one by one. There are six million in the incarceration machine. You don't hear from them because they've been judged guilty. Critical medications aren't available at the pharmacies. You don't notice it because you probably aren't taking specifically those medicines. Inflation for basic necessities is rising. You don't see it because it probably represents too little to be concerned about. Return on fixed income retirement funds is negative. You don't see it becaue you are probably not retired. Drones are flying above your head and will soon be armed with weapons to kill you with. You don't see them because they fly too high. Obama and Holder are gangsters. You can't see it because they can't be prosecuted. Derivatives exposure is greater than ever ...

I can't go on now I'm in a depression. 

Wed, 05/02/2012 - 18:40 | 2392426 cherry picker
cherry picker's picture

Don't ever get into a state of 'depression' over this.  My mother and father lived through the Nazi occupation and went through very difficult times, but she tells me, "It wasn't all bad, there were times the best in humaity showed itself as well as the worst and yes, we were able to laugh once in a while."

Times such as we are facing will encourage those who are tough to start walking the walk, and they will.

Wed, 05/02/2012 - 18:54 | 2392451 Bizaro World
Bizaro World's picture

Agreed. It really sucks to see scumbag politicians destroy a wonderful country(ies), but remember, even if you are on food stamps in the U.S., you are still living in a better situation than anyone in poverty in a 3rd world country. Trust me, mud huts with no running water is a lot tougher than most reading ZH experience. If you live in a crap hole in the U.S., then MOVE. Take ownership and become as self sufficient as you can. Things WILL get worse before they get better, I only hope there will be enough people of courage to not allow another Nazi (or similar group) occupation.

BW

Wed, 05/02/2012 - 19:49 | 2392533 Shizzmoney
Shizzmoney's picture

Best post I've read on here.

The endgame of what can happen could be ugly.  That's what depresses me....but there are a lot of smart and good hearted people out there.  People who can set aside differences for the big picture. 

At some point, society has to realize that capital can't only be something that should be highly valued, just because it's attached to a lot of worthless green paper. 

Wed, 05/02/2012 - 18:37 | 2392414 ebworthen
ebworthen's picture

Recession never ended, but I think he means an event that all the King's horses and all the King's Men won't be able to ignore or equivocate their way out of.

Remember how many deniers of any problems there were back in 2007?

From a cognitive dissonance perspective FED liquidity, bailouts, non-stop number fudging, and MSM reality obfuscation has deluded many into believing that "things are all better now" and that it is 1982 all over again.

It will take a black swan event of sufficient proportion to awaken the somnolent dreamers.

Wed, 05/02/2012 - 18:38 | 2392420 orangegeek
orangegeek's picture

The weekly Dow shows where recession stopped Q2 2009 and recovery was back on.

Frankly, the recession never ended and we are headed into the next leg down.

 

http://bullandbearmash.com/index/djia/weekly/

 

1929 was the start of the Great Depression.  2007 will be remembered as the start of the GREATEST DEPRESSION.

Wed, 05/02/2012 - 20:43 | 2392612 chistletoe
chistletoe's picture

On August 24, 410 AD, the city of Rome was sacked, symbolizing the fall of the Roman Empire and the collapse of civilization into the first dark ages ....

 

2007 will be remembered as the start of the end of civilization as we know it ....

Wed, 05/02/2012 - 18:40 | 2392425 Pairadimes
Pairadimes's picture

"We have met the enemy, and he is us!"  -  Pogo

Wed, 05/02/2012 - 18:43 | 2392429 CryingBear
CryingBear's picture

Asian Invasion

Wed, 05/02/2012 - 18:47 | 2392433 Yen Cross
Yen Cross's picture

I sure hope so! I'm short ( ¥) medium term!

Wed, 05/02/2012 - 18:53 | 2392450 smiler03
smiler03's picture

It's been well underway for years.

Wed, 05/02/2012 - 19:03 | 2392460 Yen Cross
Yen Cross's picture

 Real " Wasabi" for you.  I won't even begin to ask what, " years are for you"?   Kampo? Postal System?

  FAMILY?

Wed, 05/02/2012 - 19:02 | 2392463 CryingBear
CryingBear's picture

what is wrong with your name and avatar?

Wed, 05/02/2012 - 19:06 | 2392471 Yen Cross
Yen Cross's picture

 Silence is " Golden". I pop in and out.

Wed, 05/02/2012 - 19:25 | 2392492 supafuckinmingster
supafuckinmingster's picture

Cryingbear: "Asian Invasion"

 

And little o'l Ireland is on the front line....

 

http://www.independent.ie/business/irish/sceptics-won-over-as-fanciful-plans-become-more-concrete-3096881.html

Wed, 05/02/2012 - 19:30 | 2392503 Yen Cross
Yen Cross's picture

 Japan and Korea, are Ireland and Eastern Europes BEST friends!  Cherish those trade ideas!

Wed, 05/02/2012 - 18:55 | 2392452 madcuban
madcuban's picture

not only have we not left the recession, the author fails to acknowledge it is a fine line between recession and tipping into a depression....

Wed, 05/02/2012 - 18:58 | 2392455 supafuckinmingster
supafuckinmingster's picture

C'mon TD, at least let us finish this one first? Don't over excite us.

Wed, 05/02/2012 - 19:06 | 2392470 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Exactly Supa!  I read "That is where we are in today's economy. The conjecture about the next recession has raged ever since the end of the last one."  Ha, ha, ha!!!!!!!  Sorry, I do not accept the inference that we are out of the current depression.  TD this is the kind of propaganda we get from the establishment dinosaur media.  Shit!

Wed, 05/02/2012 - 19:04 | 2392465 YesWeKahn
YesWeKahn's picture

1) Bernanke dies

2) Greenspan dies

3) both of them die.

Wed, 05/02/2012 - 19:10 | 2392474 apberusdisvet
apberusdisvet's picture

THE Black Swan event will be the evacuation of Tokyo when it becomes obvious that continuing radiation levels are many times the norm and will eventually kill all within a generation.  A serious problem for the entire planet as well, but nothing in the MSM.  GW's posts on this should not be met with skepticism or disdain; rather they be seen as just another example of alerting us all to the significant danger ahead.  If reactor 4 goes full retard, we will all be at risk.

Wed, 05/02/2012 - 19:17 | 2392481 virgilcaine
virgilcaine's picture

Credit is saying something.. 1.90% for Fed TP. USD .78 and rising like lazarus.

Wed, 05/02/2012 - 19:27 | 2392495 zerotohero
zerotohero's picture

I remember recess when I was a kid in school - it was a break from the constant pounding of "stuff" from the pretty lady at the front of the class. Recessions are a kinda break from the constant pounding by politicians, banks, and Fall Streets to constantly grow.

Wed, 05/02/2012 - 19:35 | 2392509 Yen Cross
Yen Cross's picture

 I remember a " Permission slip" and a " WOODEN PADDLE", with holes in it!!!   I feared my Parents far more, THOUGH!!!

Wed, 05/02/2012 - 19:44 | 2392525 zerotohero
zerotohero's picture

um what ?

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