So the yield curve inverted and global economic numbers (Germany, China) are apparently disappointing. Stocks are dropping hard today and I’m seeing a lot of “fears of recession” headlines. Can someone smarter than me help connect the dots between these things to how it will impact the general public?
My layman’s understanding of 2008 is that it was caused by a crisis in subprime mortgages, where banks were over-leveraged into assets that were way, way riskier than they could handle, which lead to a liquidity crisis and a credit crunch. This trickled back down to the general public through home values falling, second mortgages going underwater, businesses failing, etc.
If this is truly be the beginning of a recession, how will it trickle down to the general public? It’s obvious that people are worried about much more than a stock market correction, but I feel like I haven’t seen the mechanism that causes this to become a full-blown recession.
Edit: put another way, do things just look bad because people expect them to look bad, like some weird self-fulfilling economic prophecy?
There are fewer bad home loans, but I expect consumer debt, especially from things like student loans, is pretty high. Continued economic expansion and some related growth in income has seemed to stave off a reckoning, mostly at the cost of an expanding deficit, which doesn’t seem to be a problem yet but likely isn’t a net plus.
One thing I know is that saving up for down payment on a home isn’t realistic for most people under 45 in much of CA, including orange county, LA, SF, SD, and San Jose area, which is more than 2/3 of the state in population.
To me it seems like a lotta knives are being juggled, and while that’s kinda how the economy works, the animal spirits are growing anxious.
There comes a moment when everyone realizes that they’ve lent out more money than they are going to get back. Usually when payments start getting missed.
Consumers this time aren’t really where I expect it to really happen this time. Governments printing money to make payments on their debt (this is called ‘monetizing debt’ if you want to get technical) and corporations outright missing payments is where I expect this one to start. Probably going to see a somewhat large hit (25-40%) to the value of the USD, and potentially more for some other major currencies. Will not be remotely surprised to see the RMB (Chinese currency) take one of the bigger hits.
To be clear it is absolutely possible for currency as a whole to take a hit in terms of what it will buy.
There’s a pretty big bubble in corporate earnings right now because corporate net profit margins are at unsustainably high levels. There is a lot of paper wealth out there right now that is justified on these unsustainable profit margins. Either their costs will rise or the government will take more of their bottom line, but either way their current situation is not an accurate prediction of their future. Plus most of them have been hollowing out their reinvestment to boost their profitability for years at this point, so at some point they’ll have to spend real money to replenish.
So yeah I’m expecting equities to tank, currencies in general to buy meaningfully less than they do today, and I’m expecting government backed bond yields to stay where they are and corporate bond yields to go up.
I’m going to be wrong about some or all of this, but I cribbed enough of it from people way smarter than me (I’ve already linked to Ray Dalio above) that I’m reasonably confident that some of it will be right.
As for normal people I’m expecting people who save a lot of money to get poorer and people who borrow a lot of money to get richer… and I’m expecting to lose some jobs. Although honestly employers got pretty good at not hiring people during this last expansion so I’m not sure how much fat they realistically have to cut that they weren’t already cutting.
https://twitter.com/jbarro/status/1161655454738481153?s=19
(Posting because I found it funny. I think he’s criticizing Trump’s focus on stocks/the Dow. Also, some funny replies.)
Yeah the stock market is just lolhigh. The way we got here is with ‘bonds yield X so stocks are justifiable as long as they yield X+Y’ with X and Y changing depending on who is doing the analysis. This line of thinking is lolwtfstupid and has no relationship with the real world. We’ve got the S&P with an implied yield of <5%… And these companies operations and balance sheets are not in that great of shape compared to historical norms.
I fully expect profits to normalize at some point AND yields to normalize back up to 8%+. That would imply an absolutely massive drop in prices for stocks.
you might be right that the stock and bond yield valuation model is dumb, but it does seem to be how stocks are being priced. And like you said bond yields aren’t going to go up anytime soon. So why would you get the stock yields to normalize to 8+% if 10 year treasury yields are at 1.6%?
I think the spread between corporate debt and treasuries will get significantly larger when corporations start missing payments… And as that spread widens investors will be harder to find for bonds with negative and near negative yields.
Treasuries will stay down because the treasury will monetize the debt before they raise interest rates in a recession when they are trying to prop up the markets. That monetization is what will drive the devaluation of all the major currencies.
This by the way is my understanding of Ray Dalio’s take that I happen to agree strongly with. I’m probably not doing a great job of communicating it, and for that I apologize.
EDIT: And to be clear the biggest reason I think stocks get to 8%+ is that they currently are pricing basically no real risk premium vs bonds… Even though their balance sheets are extremely risky right now. The big reason why stocks are being valued this way is that there is simply way too much money floating around in financial products right now… and holding cash is how you get fired. The competition for good/safe investments has gotten super fierce and investors have taken on a TON of risk at very low yields. When it crashes it’s going to be pretty dramatic as people get stopped out of positions or margin called. The stock market will probably be a good very good value at the lows of this next crash just like all the other ones.
Consumers are massively over leveraged, as are private firms (leveraged loans). The middle class has zero cushion. It’s going to be really ugly and likely prolonged due to lack of available fiscal or monetary tools.
Which is why the currency will have to absorb the hit. If you think about it devaluation is basically the best available option for easing that. It’s a bailout for borrowers that avoids mass defaults basically. It also bails out the many many many people in foreign countries (including some governments) who have loans denominated in dollars.
Cool, cool, I’m all savings and zero debt so this sounds great -_-
Yeah don’t panic too much. Owning solid stuff is the way to go here. BRK.B is an exceptional counter cyclical. Buffett’s going to make a mint bailing out big names again like he always does. I’m thinking about going to ~5% gold as a hedge.
Also not the worst time to buy some rental properties on the longest mortgages you can qualify for if you’re very well off. The higher yield ones in poorer areas not anything my wife would be OK with living in.
Honestly the next 10-20 years I’m expecting to keep the vast majority of my net worth in privately owned businesses that I either start or buy for reasonable valuations. The amount of extra price you take on for buying a financial product instead of the underlying thing is kind of insane. I’ll do my own due diligence to buy a business for 35-40 months of net profit instead of 144+ months of gross profit on basically any stable public company.
I worry about my parents who are 65 and have the vast majority of their net worth in the stock market. There won’t be time to recover if we have a prolonged recession. They won’t starve but it could drastically affect their QOL for the rest of their life with not much ability to earn more money. It scares me.
And they are the lucky ones who have actually saved quite a nest egg. The people who haven’t who are in that age bracket will be absolutely crushed.
Yeah… thing is they’ve been very fortunate up to now and will probably have to take their lumps. The Boomers are going to get screwed in this recession for sure. I wish I could pretend to be sorrier about it… but I’m not. I’m sympathetic to your particular parents, but their whole generation has run super good on the financial markets lifetime so they can take a downswing on the chin as far as I’m concerned.
Not to mention their generation if not them specifically are what is wrong with our country. I won’t feel bad for their suffering as a whole but seeing my parents suffer will not be fun should it happen.
Also just some anecdotal evidence. As an attorney practicing bankruptcy law I have seen literally over 1000 people come through my office over the last 5 years and gone through their financial pictures in depth. You know how many people 50+ have more than 100k in a retirement account? Literally zero.
Now granted these aren’t the most financially literate people out there and they are filing for bk. But I have yet to see ANYONE with a 401k above 100k at any age bracket. That is terrifying.
I do think it’s very important that the Boomers dreams of an idealized retirement get crushed. They promised themselves something that they now expect the rest of us to pay for. That’s gonna be a no from me dawg.
There are already a lot of poor old people, and for the good of the country there need to be a lot more. The generations that follow them need to be shown that there are consequences for being completely selfish and short term oriented your entire life. The Boomers basically have to be an object lesson at this point because it’s way too late for them to actually fix it enough to avoid it.
If we want a future worth living in we have to make choices based on their future impact. The Boomers absolutely didn’t do that. Short term thinking is IME and IMO one of the core reasons why their generation won’t be treated well by the history books. This is awfully conservative of me but the bill is about to come due and they need to pay it in full… or this political meta of pillaging the future to get a few people rich in the present will continue.
Boomers WOAT, zero sympathy.
I don’t really have much sympathy either.
What is the long term effect of an entire generation trying to live on 1k/month Social Security with zero retirement savings. That is what I am interested in. It seems like it has the potential to be a complete disaster, especially if the economy tanks and there is actual competition for the entry level jobs a lot of these types have been using to make ends meet.
My eyes will be dry if they starve to death honestly. The mess they’ve left us becomes more apparent every day. I plan to donate my money to making the world better for my future kids, not helping them dodge the consequences of their actions.
Food is probably going to get more expensive when we switch to sustainable agriculture too. I hope they like eating ramen. I ate it for enough years while desperately trying to figure out how to stay alive in my late teens and early 20’s after a childhood of neglect at the hands of two particularly weak baby boomers.