Serious The Coming Economic Recession/Depression

[McGrrr]

What's the risk we get into a stagflation scenario?

That is an astute observation. There are multiple forces at play here:

• Discretionary consumption and aggregate demand have collapsed. The "velocity" of money is a measure of how many times money circulates around the economy e.g. you might pay a builder, who buys tools from a shop that pays its employees, who then spend their income elsewhere; all of these economic activities (originating from the same money being spent again and again) drive GDP, otherwise known as the multiplier effect. However, people are now only buying essentials, so the velocity of money has fallen significantly i.e. people are buying groceries and that is all. This is very deflationary
• The increase in money supply is inherently inflationary. The problem will arise when the government starts giving everyone handouts in an environment where goods supply does not also increase, as more money in the system will be chasing the same or fewer goods (therefore, prices will increase). If anything, goods supply will decrease in the near term as supply chains have been disrupted and workers are in lock-down. This leads to stagflation

Net-net, I expect that we will witness rising food prices, while the price of non-essential products will fall.

 

[orch]

snip

snip

 

[McGrrr]

Cool flex bro. We're 5 weeks in to a >6 month economic event.

 

[Surgo]

I like how it's literally 100 points down from the month before and he thinks he's making a point.

 

[GatoDelFuego]

Bitcoin is up 26% and gold is up 8% since my June 3rd post predicting financial recession. This is the clownworld finance, and uncorrelated deinflationary instruments is the only way to preserve your wealth.

Stocks which are propped up by printed money (quantitative easing) is definitely not a massive bubble waiting to be popped...

The argument that there will be a run on banks simply don't hold due to insufficient liquidity simply don't hold up with the printers going brrr (unlimited QE)

IMO, we are at bottom

 

[orch]

Futures is going up and we're almost past peak coronavirus. The graphs are saying that you're wrong. Deal with it. You got frontrunned.

Stocks is deinflationary instrument, however not uncorrelated from USD. The bubble has been popped. 4 years of gains gone in a month. Now, the printer is BRRRing to print the old numbers back to avoid social unrest.

 

[Stratos]

I know it's a super duper long shot but I really hope that the guy who said college is an institution of unlearning is right and the LSE educated investment banker or whatever is wrong because that would be a lifetime supply of tendies

 

[Durant]

NGL I’m just happy that classic car prices are gonna drop hard

 

[Del Rio]

Gotta love it when people wet their pants over common bear market relief rallies

 

[McGrrr]

Futures is going up and we're almost past peak coronavirus. The graphs are saying that you're wrong. Deal with it. You got frontrunned.

Stocks is deinflationary instrument, however not uncorrelated from USD. The bubble has been popped. 4 years of gains gone in a month. Now, the printer is BRRRing to print the old numbers back to avoid social unrest.

The most overpriced stock market in history just lost 4 years of gains to return to a state of being merely very overpriced. If stocks didn't bounce on the back of unprecedented market intervention, then we'd already be in the endgame, so congratulations on predicting the unimaginable(!) possibility that the Fed might step in; consider taking profits while you can.

If you think that COVID-19 is near its peak, then you should follow this resource: https://coronavirus.jhu.edu/map.html Go check it every couple of days and let us all know when US cases plateau. Bear in mind that the numbers are understated as testing is not widely available. Let's also not pretend that the post-peak economy will return to business-as-usual like a light switch.

QE will sit in bank reserves to buffer liquidity concerns and satisfy regulators, and on company balance sheets because they fear the reaper; it's not going into equities. Stock buybacks are gone, 401k contributions will continue to fall as unemployment rises, and we've already talked about the boomers; there's no sustainable demand for equities.

At the moment, we're seeing over-subscription for corporate debt as spreads have widened and institutional investors are (ostensibly) de-risking. However, this is before the inevitable credit downgrades. Every sector except consumer staples and tech is getting crushed on earnings, especially energy, and the shit will hit the fan when BBB investment grade debt starts getting downgraded to junk.

Q1 earnings are going to be bad, but just wait for Q2. A mild recession is already priced in, but people are delusional after the longest lasting expansion in history. A generation has grown complacent having never experienced a downturn, and this one is a perfect storm.

 

[orch]

If you think that COVID-19 is near its peak, then you should follow this resource: https://coronavirus.jhu.edu/map.html Go check it every couple of days and let us all know when US cases plateau. Bear in mind that the numbers are understated as testing is not widely available. Let's also not pretend that the post-peak economy will return to business-as-usual like a light switch.

I said that we're at peak/close to peak. The NYC new cases number have fallen 3 days straight. The real concern is the peak hospitalization which you can see here:
https://covid19.healthdata.org/united-states-of-america
The peak is projected to happen in 8 days for all of America. NYC is already past peak which accounts for half of cornoavirus cases. The total number of beds needed was recently revised down. You're right, it's not going to be instantly back to normal, but we are in track of going back to normal. This is more than enough for people start buying back in at discount.

QE will sit in bank reserves to buffer liquidity concerns and satisfy regulators, and on company balance sheets because they fear the reaper; it's not going into equities. Stock buybacks are gone, 401k contributions will continue to fall as unemployment rises, and we've already talked about the boomers; there's no sustainable demand for equities.

If companies apply for the relief, then they can't do the buybacks. Otherwise, they can do it. It's not black and white as you're making it out to be. There are plenty of demand for equity. Why do you think that unemployment will continue long-term? Once lock down is over, you'll see a hiring spree. Yes, it'll be a staircase back to the previous ATH, not an elevator up. That's to be expected.

At the moment, we're seeing over-subscription for corporate debt as spreads have widened and institutional investors are (ostensibly) de-risking. However, this is before the inevitable credit downgrades. Every sector except consumer staples and tech is getting crushed on earnings, especially energy, and the shit will hit the fan when BBB investment grade debt starts getting downgraded to junk.

Energy only account for 3.52% of SPY portfolio. Who cares? Here are the sectors that stand to benefit from the coronavirus a lot:
Tech - 29.78%
Finanicals: 15.12%
Healthcare: 13.83%
Customer staples: 19.81%
Telecommunication services: 2.15%

That's 80.69% of SPY portfolio having a bullish thesis of profiting from the cornoavirus... Sure, some shitty companies in SP500 will get downgraded, but so what? Vast majority won't and will carry their weight for SPY price. The bond market concern is mostly aimed towards small caps which won't have access to enough money to dig out the hole. Oh no, Alicia is going to have to get her avocado toast and iced coffee from Walmart instead of that trendy organic and GMO-free cafe. What a disaster!

Q1 earnings are going to be bad, but just wait for Q2. A mild recession is already priced in, but people are delusional after the longest lasting expansion in history. A generation has grown complacent having never experienced a downturn, and this one is a perfect storm.

Priced in.

 

[GatoDelFuego]

Their numbers got lower because they ran out of tests lol

Priced in

do explain...if something is priced in, then why does the price go up?

 

[Bughouse]

while I'm not going to go so far to say that any particular model is wrong, I would say that all epidemiological models are incredibly input-sensitive and so you can only be as confident in its predictions as you are in the input data.

I'm not confident that peak hospitalization is in 8 days. It could very easily be in a month. While New York is obviously the largest center right now, that does not mean it will always be so. We could see other centers spring up, that a model would not have predicted, in places that were later to the game in issuing stay at home orders, etc. You could also see single individuals be superspreaders and transmit the virus to hundreds if not thousands of other people, if unlucky circumstances arise (see: megachurches still having people come to services in person, which could lead to a situation like South Korea's patient 31 https://graphics.reuters.com/CHINA-HEALTH-SOUTHKOREA-CLUSTERS/0100B5G33SB/index.html)

 

[Adeleine]

Economic activity is grinding to a halt and discretionary consumption will fall to zero. That consumption won't return soon either, as baby boomers (the wealthiest generation) just lost >25% of their pensions on the cusp of retirement age. Therefore, they won't retire... if they can help it. Younger generations are too poor to make up the shortfall. Corporate profits will suffer for years.

Virus or no virus, do you think this long-term picture changes at all? Natural population growth continues to fall across the west, we have much more danger in big wars that would kick-start the economy, a continually more-educated populace with more and more fragmented consumption patterns that also deepens the former two issues, very few geographical expansion opportunities on the planet, government investment focused on keeping the ship above water... it feels like we could be watching big threads unravel.

Will real wages need to start rising? Will the unaided market ever get there? What happens if it doesn't?
If real wages do rise, will enough of the benefit go to the poor / lower-middle class that has much less discretionary spending and therefore much more room to improve?

that was a bit of a rush of questions on rather nebulous future possibilities. welp. also I'm no economist but I hope I got enough of what I was thinking across.

 

[McGrrr]

Virus or no virus, do you think this long-term picture changes at all? Natural population growth continues to fall across the west...

The demographics are what they are and Western pensions are systemically and increasingly underfunded, even before the current crisis. Private pension schemes have promised benchmark annualised returns of ~7% for decades, but this figure has been pure fantasy since 2008. Anybody who understands compound returns will also understand that these pension deficits can never decrease, which is a very real problem as the average baby boomer is now ~65 years old.

The average boomer had ~$1m in net assets prior to this crisis, but that figure is greatly skewed by the 1%. The median boomer had ~$185k in net assets, with ~$80k in equities or equity correlated investments, so that total figure is now ~$165k; the boomers can't retire. Additionally, social security is a promise that the government will either break or fulfil with printed money, as inflows from younger generations will never be enough to offset the liabilities.

Will real wages need to start rising? Will the unaided market ever get there? What happens if it doesn't?
If real wages do rise, will enough of the benefit go to the poor / lower-middle class that has much less discretionary spending and therefore much more room to improve?

Real wages can't rise without breakthroughs in productivity, but improvements in productivity are coming through automation, which cuts labour out of the equation entirely. The poor and unskilled will suffer as they always do. This goes a long way to explain the dichotomy of society and the rise of Trump and Sanders on either side of the political spectrum; they represent two opposing lenses on the same problem, that the marginalised majority have been left behind.

As I understand it, the US minimum wage doesn't track inflation, hasn't changed for years, and there's no nuance to account for geographic location. Presumably, by the time it does increase, inflation will have eroded the value of any nominal change anyway.

Basically, the future looks grim, and that's because the 11 year expansion that just ended was fuelled by debt, and debt is borrowing against the future. All of the excess will have to be paid for. I think people will be forced to adjust to being poorer... it's as simple as that; either they will have less money, or the money that they have will have less purchasing power. I know that average household size is increasing, which is an indication of where society is heading. More and more people are living with their parents, and over time that could change from a joke to the norm.

 

[Adeleine]

Real wages can't rise without breakthroughs in productivity, but improvements in productivity are coming through automation, which cuts labour out of the equation entirely.

My only remaining question is with this: even if average real wages wouldn't be affected, could a more equitable distribution of wealth than current at least increase median real wages, which would help offset the coming storm by giving more money to the people who would have the greatest proportional increase in consumption? But perhaps only temporarily?

 

[McGrrr]

My only remaining question is with this: even if average real wages wouldn't be affected, could a more equitable distribution of wealth than current at least increase median real wages, which would help offset the coming storm by giving more money to the people who would have the greatest proportional increase in consumption? But perhaps only temporarily?

You'll need Sanders for that experiment to happen, and yes, there would be a short term boost, with lagged unintended consequences. It's hard to say what these long term unintended consequences would be - this would be a painful and inconclusive debate between different schools of economic thought.

 

[Adeleine]

welp, time to become a bernie bro For Science

 

[Tmi489]

we have much more danger in big wars that would kick-start the economy,

wanna press this point more
would a big war kick start the economy?
anything other than ww2 tanks ablazin' would be closer to a technology focused war: nuclears, guerilla/stealth, etc., as seen vietnam onwards, which dont impact productivity the same way ww2 and prior wars did
theres also the issue of automation, if it gets there

 

[Adeleine]

wanna press this point more
would a big war kick start the economy?
anything other than ww2 tanks ablazin' would be closer to a technology focused war: nuclears, guerilla/stealth, etc., as seen vietnam onwards, which dont impact productivity the same way ww2 and prior wars did
theres also the issue of automation, if it gets there

My take is that things like nukes, and the messiness of guerilla wars, and the like are a major cause of the absence of tanks ablazing wars we have seen of late. So like... I agree asterisk.

 

[McGrrr]

would a big war kick start the economy?

There's certainly precedent for governments to start wars during a crisis, but using war to kick start the economy is the ultimate "broken window" fallacy:

• If you break a window, you create work and therefore income for someone to come and fix it, but had you not broken the window, the raw materials and labour could have been used for other things. Fixing the window is captured in GDP, but the economy hasn't gained anything; we just have the window that we started with
• If you start a war, you create e.g. manufacturing and therefore income for lots of people, but had you not started a war, those raw materials and labour could have been used to e.g. build infrastructure. This is captured in GDP, but the economy doesn't gain anything useful (you can make the argument for technological advance, but this can be incentivised without war)

From an economic point of view, war is a lot like public spending on major infrastructure projects (the merits of which are itself debatable), except the outputs are less useful for the general population.

 

[Diophantine]

Since several indicators have been pointing towards this (the recession, not COVID) for a while now, could this have been avoided?
What kind of new regulations should we expect to see once this has "settled"?
Do you think that ETFs are overall a bad thing due to their ability to overvalue their underlying assets, if you believe that to be the case?
Also here to second McGrrr's words to Orch before he loses all his tendy-wendies in a bull trap.

 

[McGrrr]

Since several indicators have been pointing towards this (the recession, not COVID) for a while now, could this have been avoided?
What kind of new regulations should we expect to see once this has "settled"?
Do you think that ETFs are overall a bad thing due to their ability to overvalue their underlying assets, if you believe that to be the case?

• I don't think recessions are avoidable. After all, booms and busts are tied to human behaviour. That said, I do think this downturn would have been less severe had it been allowed to play out sooner by e.g. the Fed raising interest rates earlier and by more than they did. Unfortunately, they took the expedient option of kicking the can down the road, but that just exacerbated the problem
• I don't know. It depends on who gets scapegoated. There will certainly be new regulations, because the regulators can't be seen to be doing nothing in response, but whatever they come up with will have unintended consequences
• Yes, ETFs are one of the reasons why risk has been mispriced, because dumb money pours in indiscriminately and pushes stock prices ever higher. There are smarter people than me who can explain it better. Try YouTube

 

[McGrrr]

Speaking of corporate debt... So much of it is going to get downgraded to junk, which means pension funds will have to sell it as the risk profile would be untenable. Can you imagine selling hundreds of billions of junk debt into this market?! There will be no bid! Nobody can absorb such volumes... except the government. FUCK.

This is essentially a bailout of private equity and (after the downgrades) pension funds. Additionally, RIP price discovery.

So the US is replicating the Japanese experiment, except without a population of habitual savers. If you're curious about where the stock market might be heading, go look at a 30 year chart of the Nikkei, and then think twice about paying into a 2050 401k equity scheme:

 

[Endeby]

Will be really interesting to see what the housing markets look like a few months from now. AirBNB superhosts are absolutely rekt and I can't even in my wildest dreams see them getting bailed out.