Welcome back you bunch of HomoEconomicus! Let’s see if we can predict the next recession.
I wanted to begin today’s Daily Dose of ECON with a quote from a legendary economist (Austrian School): Henry Hazlitt. He was an American journalist who specialized in business and economic publications [Economics in One Lesson, The Failure of the New Economics, The Conquest of Poverty]
“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” Henry Hazlitt, 1946
Without further deliberation, let’s hop into it! I came across this article on Fortune today: 5 Numbers to Watch to Spot the Next Recession. And it truly raised my eyebrows, because I’ve been reading everywhere about the economic Nostradamuses who are predicting the next recession for quite a while now. But is it true, half-true or just fear mongering?
These are my thoughts! [I am no expert on this topic and these are my initial thoughts; to be taken with a healthy dose of Kosher salt]
There are a few references within the intro which are not entirely indicative of the underlying economic atmosphere, particularly within the United States. Firstly, the fact that market volatility has soared which is not the best indicator of risk does not reflect anything tangible – I’ll leave the intellectual burden on Mike Dever’s Jackass Investing. Additionally, the “$100 billion” being pulled out of mutual funds is quite typical during a market rally as investors pick up their confidence and decide profits are better sought out in more active investment strategies.
However, the fact that “77% of economists expect a recession by the end of 2021” is quite telling of the enveloping mood within the entire economy, and this professional analysis may in fact lead to a slowing down of the economy. How? Because in economics things that are predicted often become true. If you hear there is going to be a recession in 2021, your following actions may create or even magnify the “recession”. You will curtail your consumption as your confidence drops and so will business owners, which will mean less money within the Circular Flow of Income and a slowing down of economic activity. Investment may drop as a consequence and potential layoffs may ensue, which further aggravates the economic panorama. And so on, and so forth…
Moreover, are most people experiencing PTSD from the Crisis of ’08? Or have the individuals who completely ignored the signs of the previous crisis, learned from their past mistakes?
1. The Yield Curve
A telltale sign used by many analysts as it has “preceded the past nine recessions since 1957”. But it has also produced a few red-herrings, and Morgan Stanley claims the indicator is no longer valid after the distortion of bond markets by the Central Bank.
2. Auto Loans
A similar situation to the one which came before the subprime mortgage crisis. Many individuals are excessively indebted and are late on payments, with many unfounded loans being securitized in the financial markets. Much smaller market than the mortgage one; so a crisis would be reduced.
3. China’s Consumers
Chinese GDP reliability has been put into question, due to statistical manipulation by the government. Plus, “GDP doesn’t tell you if a project is good or bad, or if services are useful,” says Yukon Huang, a senior fellow at the Carnegie Endowment and former China director at the World Bank. “It just tells you what is being produced—and it doesn’t matter if it’s ghost cities or roads that don’t go anywhere.”
4. Corporate Debt
At a record high in the US, and with many variable-rate contracts which will hike repayments as interest rates are pushed up.
5. Corporate Profits
Beginning their descent as a percentage of GDP, which the Oracle of Omaha claims tend to return to their historical averages.
I recommend you fully read this article and continue researching this fascinating topic. Let’s have a conversation in the comments section below!
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