KKR Predicts U.S. Recession By 2019 And An Inevitable Cycle Of Millennial Deleveraging

KKR has just published their 2017 mid-year economic outlook and it includes some rather dire predictions for the U.S. economy.  Among other things, KKR predicts a U.S. recession by 2019 and a massive cycle of millennial deleveraging after a huge expansion of consumer credit in the form of student and auto loans.

Before getting into the details, here's a chart depicting how KKR sums up the macro picture.  In short, pretty much every major economic growth and asset valuation metric in the U.S. is flashing red warning signs relative to historical norms.

Today, almost all our work streams suggest that asset prices across most parts of the global capital markets are somewhere between fair value and expensive. From a cycle perspective, we believe that we are mid-to-later cycle in some of the more developed markets, including the United States.


So, exactly where are we in the economic cycle?  Oh, just about 96 months into the typical 37 month expansion phase...which, for those who like to keep score, is the 3rd longest expansionary period in U.S. history.  Meanwhile, in terms equity returns, the S&P's cumulative returns over the past 8 years have only been exceeded by returns that previously preceded the great depression, the 1987 crash and the tech crash...but it's probably nothing.

Since we arrived at KKR in 2011, we have been arguing for a longer cycle. Several factors have influenced our thinking over the years. First, given how bad the environment was for jobs and growth in 2008/2009, it would only make sense that it would take longer than normal to create a sustainable economic recovery. Second, as the world transitions away from manufacturing towards more of a services-based economy, our research leads us to believe that the cycles have – on average – gotten more extended. Third, the level of monetary stimulus this cycle has been unprecedented, and as such, it will likely take much more time for central banks to unwind what is now a $14.5 trillion global QE experiment.


Though it may not feel this way to some, we are actually now 96 months into an economic expansion in the United States (Exhibit 40). Our base view is that the expansion continues through 2018, and then we run into a soft patch of economic growth thereafter. While economic expansions do not die of old age, they are affected by issues like peaking margins, heightened leverage, and deteriorating credit. For our nickel, we see all three as potential concerns being issues by 2019.


All of which, we would guess, has something to do with the following chart depicting the massive $1.8 trillion rotation out of actively managed accounts into passively managed ETFs and other index-tracking vehicles.  It's not that difficult to see why individual company valuation metrics have become so meaningless in the age of ETF investing as investors have been lured into the false hope that the natural "diversification" of these products provides some level of downside support.  Meanwhile, the only 'valuation' metric that is tracked by these 'investors' is returns, so as long as money keeps flowing in, then valuations keep going up...and just like that you have a perfect feedback loop to fuel an epic bubble.

That said, we suspect it's only a matter of time before these same investors realize that buying a basket of stocks doesn't really provide any of the benefits of 'diversification' if all the names in the basket are perfectly correlated. 

At some point, as we like to say, math and facts win over simplistic BTFD narratives.


Of course, while equity markets are screaming 'everything is awesome', KKR notes that some troubling signs are starting to emerge in the actual underlying economic data.  Take for example auto sales and multifamily housing starts...


And then, of course, there is one of our favorite topics: consumer credit.



As KKR notes, as have we on numerous occasions, this latest expansionary period has been fueled in large part by a massive, bubbly expansion in consumer credit, particularly for autos and student loans.  Moreover, the biggest beneficiary of that massive expansion has been the generation that is perhaps one of the least financially secure in history....which probably helps explain why auto delinquencies are suddenly rising despite improving employment levels.

While aggregate statistics by the government for the U.S. consumer are reporting record low unemployment amidst surging household net worth, we have come to an increasingly more conservative outlook for the U.S. consumer, particularly at the low end of the market. Key to our thinking is that, as we show in Exhibit 76, basic household expenses continue to increase faster than overall wages, which is a growing issue for the large segment of the U.S. market that has not built net worth in recent years. Moreover, debt loads in areas such as student lending and autos has crept up to what we view as concerning levels. Sub-prime credit cards too should be an area of investor focus, in our view. How else can one explain rising auto defaults that now approximate 2007 levels with unemployment below the natural rate of employment?


All of which culminates with KRR's prediction that a recession in the U.S. is imminent.


But, at least the recession isn't coming for another 1.5 years...takeaway: Buy Moar Stocks Now.

The full report can be reviewed here:


Dazman (not verified) Thu, 07/13/2017 - 20:16 Permalink

By 2019????They just keep pushing it out. Let's all agree on this. Some time between now and 100 years from now there will MAYBE be a recession?Until then it's all smoke and mirrors baby!Feel better now?

GUS100CORRINA Dazman (not verified) Thu, 07/13/2017 - 20:47 Permalink

KKR Predicts U.S. Recession By 2019 And An Inevitable Cycle Of Millennial DeleveragingMy response: WRONG!!!!!! U.S. recession will happen a lot sooner than 2019. Figures (and charts) LIE and LIARS can FIGUURE.  People just keep twisting the TRUTH to fit their desired NARATIVE of prosperity forever. More FAKE NEWS using FAKE DATA and FLAWED ANALYSIS.Hard Data is showing recession for America looks to be underway right now. By the way, we just saw this article title today: "The Striking Reason Why The US Just Spent A Record $429 Billion In One Month

In reply to by Dazman (not verified)

Never One Roach GUS100CORRINA Thu, 07/13/2017 - 21:35 Permalink

The energy sector is still dead with hundreds of thousands of energy-related workers unemployed, esp those highly paid STEM people in that field. No recovery in sight. ( read that Houston alone lost 68,000 engineering jobs that averaged $185k per job!).Now add in the >8,800 department store closings this year with thousands of workers thrown out of work. Plus, the trickle effect of restaurants, etc near these stores and then the entire mall goes Dead 9as Dan Bell perfectly shows in his Dead Mall yootoob series).Massive student loan debt, car loans, and on and on.Half the country is already in a recession so these articles must be talking about stawk holders who are still enjoying the new market highs every day, because your average working stiff is not doing well at all already.KKR should say the recession will begin in 2019 for stawk holders and maybe CEOs cause the rest of America is suffering. These people still have no clue why Trump got elected and still has strong support.

In reply to by GUS100CORRINA

JMT Never One Roach Thu, 07/13/2017 - 23:39 Permalink

really?? if the above was even half true then how come new claims for UE have been under 250K (let alone under 300K for over 100 weeks) for the majority of the last 52 weeks??also virtually every retail store has a large Now Hiring sign on their door.. Consumer spending & wage growth is much higher than the hard data is telling us.. back to school shopping & 2017 holiday shopping season is forecast to be the best since 1999 if not the best in history.. a wage -- price spiral has already taken hold and showing up in rents, home prices, car prices, & electronics.   

In reply to by Never One Roach

tmosley Thu, 07/13/2017 - 20:18 Permalink

>Making predictions for two years from nowHahahaha. The algorithm for AGI has already been found and made public by Goodle's Deepmind. The economy will be completely different in two years. Trying to predict how without taking that into account is like trying to predict world politics in the year 2000 when the calender reads 500AD.

Bill of Rights Thu, 07/13/2017 - 20:25 Permalink

Please fucken stop... people with money will always spend money and those without money will keep rolling over their debt and spending Recession my ass...Then again with these assholes you say it enough people start to belive it...

b-sugar Thu, 07/13/2017 - 20:26 Permalink

This is an ego report, kkr is beaten by the s&p since their creation because of their 2015 returns (-26%, s&p +1.5). If you erase that year kkr is +37% and would probably not spend so much time trying to find ways to justify the s&p 

zzzz88 Thu, 07/13/2017 - 20:36 Permalink

definitely do not need to wait 2019. the earliest may be this year.some big countries like braizil, south africa are already in recession,we need 2 more years? no !

mtanimal Thu, 07/13/2017 - 22:11 Permalink

The truth is it will happen whenever the banksters want it to happen.

They own the definition and all the control knobs.

In the meantime, working class is already getting the slow butt fucking.

zzzz88 Thu, 07/13/2017 - 23:42 Permalink

recently,there are a lot more new listings of high end house in my area, and a lot more price reduction,please check your own area too. do not believe so called experts of fed politicans or economists. use your own eyes1-auto sale down2-retail sale downnow it is the turn of house.who can say we are far away from next recession?

JMT zzzz88 Thu, 07/13/2017 - 23:46 Permalink

The northeast region (NY state & New England) is still booming. actually NY state & Massachusetts have led the country in terms of job & income growth for the past five years and job growth in NYC for the past 6 years has been best in history. what i see are --- homes & new apartments being built everywhere. 'For sale signs' turn to 'sold signs' in three days or less.. retail is booming everywhere at virtually everystore any night of the week or  weekend long lines & crowdsrents in NYC still rising.. even outside Manhattan, the median rent for brooklyn is now over $3,000 a month, in Queens once known as a middle class boro, rents now over $2,000  a month. 

In reply to by zzzz88

Falling Down JMT Fri, 07/14/2017 - 00:34 Permalink

NYC and Albany may be doing OK.The rest of New York has been in a perma-recession for the past 30-40 years, for the most part. The six county Rochester metro (where I'm from), continues to lost productive people and well-off retirees to other regions of the country, while it attracts welfarites, old people who need the good health system, and refusegees  Rocheser also has the distinction of having one of the lowest fertility (birth) rates in the U.S. To add insult to injury, Rochester's economy has contracted a bit in recent years, but the media and the usual suspects within the "business community", M&T Bank, the Buffalo branch of the Fed, etc., always brush it off. Much of Mass outside of Boston is a dump, same as much of Upstate. NY. Plenty of heroin, meth, spice, etc., to go around in those towns, these days.

In reply to by JMT

JMT Thu, 07/13/2017 - 23:42 Permalink

millenials 'de leveraging"?? HA HA HA ..  most are just as or even more into consumerism than the boomers they hate.  of course many of them take a 72 month car loan for a $50,000 car (plus monthly insurance costs which is not cheap in places like NYC or NJ) and have that along with the student loan AND a rent payment of at least $3,000 a month, but most don't even know how to cook a meal and why should they since they spend $40 a night on organic takeout and on $15 sandwiches for lunch

ds Fri, 07/14/2017 - 02:38 Permalink

Millennials deleveraging or walking off from kicked-down debts. Either you encourage them to incur more debts to be directed to prop the zombies and sustain the Ponzis or you institute debt forgiveness. The latter is unthinkable for the 1%.Whichever Tribe that resist putting aside race, culture, religion and nations carry the torch for the suvival of the species. Leadership from the new global freedom fighters shall come from the divided tribes of US millennials ?