100% Chance of Recession

So, so you think you can tell
Heaven from hell…
Blue skies from pain

Pink Floyd, ‘Wish You Were Here’

We left off yesterday with the biggest question in philosophy hanging from our lips like a cold cigarette…

How can you tell the difference between good myths and bad ones?

We’ll get to that in a minute. But first, we need a warm-up…like Kid Rock playing before the Rolling Stones come on stage.

More of the same

Yesterday, we looked at risks. What are the odds, we wondered, of a major disaster? Greater than we think, according to mathematician BJ Campbell. But he was only talking about floods and revolutions.

Get a bolthole, he suggested, and stock it with food, water, and firearms.

But financial risks are much more imminent.

Markets and economies move in cycles. It’s not up…up…up all the time. And the downcycle is always painful.

But when you’ve got $68 trillion in debt (the current US total)…it is also very risky.

People have spent their savings. They’ve gambled their retirements. They’ve bought houses…cars…stocks…and college educations — counting on ‘more of the same’.

‘More of the same’ is what you get for a while. Then you get ‘something different’. And then, the people who need ‘more of the same’ just to survive are in big trouble.

Here’s an old proverb for you: What goes up must come down.

Important landmark

We’ve just passed an important landmark. The US economy has been going up for 106 months, edging into second place among the longest-lasting expansions of all time.

Since 1879, there have been 28 recessions and (obviously) 29 recoveries. The average recovery lasted 41 months. So we’re driving way over the legal limit.

What are the odds of an accident? We’re not a mathematician, but we put them at approximately 100% sometime during the next three years.

The economy will go into recession. Jobs will be lost. Cars and houses will be repossessed. Some people will be desperate.

Like the economy, the stock and bond markets are also cyclical…and driving severely impaired. We are now in the tenth year of a bull market that has taken prices higher than we’ve ever seen them.

At these levels, according to market folk wisdom, logic, and the studies of Nobel Laureate economist Robert Shiller, the next 10 years will be a bad time to be in stocks.

Prices go up and down, say the old timers.

When do they go down? After they’ve gone up! 

Myth explorer

What are the odds of a major stock market decline sometime in the next three years? Again, we don’t trust numbers, but we put them at about 90% (allowing for a 10% margin because, after all, nobody knows).

How about the bond market? Bonds move in long cycles…about a generation in length. The last time bonds were this high was about when we were born — after World War II.

They fell for the next 30-plus years…bottoming in 1980. Since then, it’s been up…up…up.

But as Carl Jung — a myth explorer extraordinaire — put it: ‘No tree can grow to heaven’.

Now, after 38 years, it looks as though the tree has reached its maximum height. The cycle has turned.

In fact, we believe the top was reached nearly two years ago in July 2016. Since then, yields have been going up (and prices have been going down). Already, the yield on the 10-year US Treasury note has almost doubled.

Remember the old Bible saying that ‘the debtor is slave to the lender’. As long as interest rates are falling, the debtor can refinance…at lower rates.

But when rates move up, the lender gets out the chains and the lash. That’s when the going gets tough.

What are the odds that things will get tough in the next three years?

We don’t know.

But as with death itself, there is no escape. The question is not ‘if’, it is ‘when’ — and only the gods know the answer.

And what kind of disaster do you get when stocks, bonds, and the economy all go down together?

We don’t know. But before it is over, we might wish we’d taken Mr. Campbell’s advice.

Tomorrow…back to our question: How can you tell useful folk wisdom/myths from convenient lies and claptrap?

Stay tuned…


Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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