Recession Obsession

I am seeing a lot of articles on “a recession is coming”.  Total fear mongering.  Basically, they all say, “A recession is coming but I don’t know when it will start.”

That’s not exactly the Amazing Kreskin of predictions.

A lot of it is because they have Trump Derangement Syndrome.  They think that things can’t possibly be good economically because they hate the President no matter what.  That’s just not thinking.  Will Trump get impeached?  I am going to assume that it will happen because the Democrats are seething.  But, the Senate won’t vote to remove him from office so none of it will matter in the end.

Back when Clinton was impeached, the market rallied.  There is a side story about a trader that got hauled out of the S&P pit at the CME by the back of his neck.  He was short futures and long puts.  Texas spread.

Some predictions center around meaningless statistics.  Is there a worse statistic to follow than the trade deficit when it comes to measuring economic health and well being of citizens?  The good stats to follow are unemployment, from U-1 to U-6; hourly wages and overtime, and GDP.  That will give you a good clue to the underlying currents moving the economy around.

Some of the predictions center around business cycles.  We have had a long period of positive GDP growth and so it is time they say for a recession.  The problem with that is from 2009-2016 the GDP growth in the US was anemic.  It never went over 3% for any sustained period of time.  We didn’t have robust growth at all until 2016.

US Real GDP Growth data by YCharts

The other thing to remember is that we basically had 0% interest rates from 2008-2016.  That is totally unnatural and unprecedented in US financial history. The cost of money should never be free.  It’s not dissimilar from the late 1970’s to early 1980’s when we had short term rates at over 20%. The historical long term discount rate is right around 4%. When the cost of borrowing money is at its historical norm, that’s good for the economy because people and organizations make better decisions. There is less risk of unnatural bubbles forming since risk/reward and cost/opportunity costs are more inline.

US Discount Rate data by YCharts

Certainly, tariffs need to be figured in. Tariffs are never good for economic growth.  I have seen a lot of economists drop their growth forecasts for GDP to below 3% next year because of tariffs.  But, GDP is still above 2% which isn’t great but it is not a recession.

We certainly are seeing a lot of volatility in the stock market.  That’s not because investors think a recession is coming but has more to do with the uncertainty over a lot of issues.  Certainly, government policy plays a big role in stock market gyrations.  That’s too bad in my opinion but is a fact in our lives.  Governments have gotten too big, too interventionist and we need to take action to take our lives back.  If you look at the yellow vests protesting in Europe, that is exactly what that is about.  Getting rid of the regulatory state and the cascade of taxes it puts on citizens.  Until we do that, expect more volatility.

China’s economic climate is certainly an issue.  People have forgotten they are a communist country.  Communist countries have to operate at full employment.  That creates all kinds of economic problems.  For years we have seen whole cities built, with nothing and no one in them.  There are all kinds of bubbles in China and the tariff war exacerbates them.

The EU is a bit messy.  There is consternation over Brexit but that has more to do with the attitudes of people and uncertainty than anything else.  If you want to understand the EU, take my friend Yra Harris advice and read The Rotten Heart of Europe.  By the way, Yra wrote a similar musing to this one at his blog.  I suggest you read it.

There is no way to insulate your portfolio from a recession should one come.  When the market goes down, it goes down for everyone. The only way to come away unscathed is to be 100% in cash or US Treasuries and if you structure your personal portfolio that way it’s not smart.  Instead, utilize the work of people like Eugene Fama and follow it.  Don’t pick single stocks.  Buy broad market indexes and just invest monthly.  If the market goes up or down it won’t matter.  Don’t pick tops, don’t pick bottoms.  The only time to really take a hard look at it is when you get closer to retirement.  We are going to have recessions and we are going to have growth and none of it matters if you take a passive approach.

You can take a part of your net worth and actively manage it if you want.  But, I’d make it small and I’d also wager that you will lose money.

Instead of succumbing to the fear mongers, take a step back.  Look at real data on sites like Ycharts.  If you work for a company, encourage your Human Resources department to engage with a company like Holberg Financial.  Instead of watching financial television and regular news, start reading blogs like John Cochrane’s The Grumpy Economist.  Here is a link to a recent blog on analysis of the last recession.

Arming yourself with information that comes from the practice of “positive” economics will go a long way to giving you peace of mind.  Then you can concentrate on things that matter.  I am gonna go take the dog for a walk.