What will trigger the next recession?

46 Replies

Background: The economy is on a tear, but trees don't grow to the sky.  At some point, it will over-extend and go into recession when financial commitments default.

Last time, the trigger was a default on home mortgages.

It doesn't look like that is a major risk area currently.  However, there is going to be something.

My theory - I think that commercial debt from companies in the retail sector is a major weak point for the economy.  When the financially troubled big box retailers start defaulting on their debt service payments, I see the potential for a causal chain that spreads out to the broader economy.  (Not nearly as severe as 2008, but will definitely result in lots of vacant commercial property and much higher risk premiums for bank lending)

What do you think it will be?

I'll respond with a quote from Warren Buffett: Predicting rain doesn't count. Building arks does.

I agree with everything you said in your scenario, along with many other possibilities. I can't predict exactly when the storm will reach landfall, but I can start battening down my hatches now.

@Doug Utberg according to people I’ve talked to who worked in finance they use several measures to predict this stuff. One of them is the amount of companies that issue debt at 10 percent which is like beyond junk bond levels. This percentage peaked last year and it’s a 3 year prediction, meaning if you believe it’s accuracy the recession happens 3 years from the peak. So this would be middle 2020.

I do personally think that’s a likely outcome. If we don’t have a major recession in 2020 I think it will extend several years of bull market longer

Higher borrower interest rate, higher inflation, stock market collapse, and a disaster similar to a 911.  On the Feds side, inverted curve on interest rates.  Personally I think it is going soon to be more and more like all are coming together. One day stock market crashes, triggering to companies letting go their employees you will see one triggers another like a Tsunami....  Right now housing and stocks are overvalued. The deficit and inability to run a country. Government default on obligations. 

Student loan debt and auto loan debt bubbles have been mentioned frequently on other forums I view.  

Car loans are so long now that it is almost impossible to not be upside down on them.   I could see a lot of cars being repo by a tiny economic hickup causing a flood if cheap slightly used cars which in turn forces layoffs in the auto industry which dominos into other businesses.  

Turning a small hick up into a good size bump in the road. 

Better to prepare for what may happen in the future so I can take advantage of them, rather than waste time and energy trying to predict something no one can

the bond bubble created by fed purchases,(quantitative easing) popping, the 65% higher corporate bankruptcies this year, rising interest rates causing 15% of us corporations to not even be able to afford their debt, more debt now than in 08, swiss central banks purchase of 80 billion in us stocks with freshly printed money, bank of japan's printing $4.5 trillion, the artificially low interest rates of the last 10 years and the mal-investment it has caused, auto loan, student loan, credit card debt records

The illusion of unlimited paper money can go on forever, as long as nobody panics and try to run for the exits. So relax and have a nice day.

Originally posted by @Doug Utberg :

Background: The economy is on a tear, but trees don't grow to the sky.  At some point, it will over-extend and go into recession when financial commitments default.

Last time, the trigger was a default on home mortgages.

It doesn't look like that is a major risk area currently.  However, there is going to be something.

My theory - I think that commercial debt from companies in the retail sector is a major weak point for the economy.  When the financially troubled big box retailers start defaulting on their debt service payments, I see the potential for a causal chain that spreads out to the broader economy.  (Not nearly as severe as 2008, but will definitely result in lots of vacant commercial property and much higher risk premiums for bank lending)

What do you think it will be?

I used to think rising rates and rising oil prices but now since they are in mainstream media, I am now betting on the Black Swan :)  - https://www.investopedia.com/terms/b/blackswan.asp

Originally posted by @Hersh M. :
Originally posted by @Doug Utberg:

Background: The economy is on a tear, but trees don't grow to the sky.  At some point, it will over-extend and go into recession when financial commitments default.

Last time, the trigger was a default on home mortgages.

It doesn't look like that is a major risk area currently.  However, there is going to be something.

My theory - I think that commercial debt from companies in the retail sector is a major weak point for the economy.  When the financially troubled big box retailers start defaulting on their debt service payments, I see the potential for a causal chain that spreads out to the broader economy.  (Not nearly as severe as 2008, but will definitely result in lots of vacant commercial property and much higher risk premiums for bank lending)

What do you think it will be?

I used to think rising rates and rising oil prices but now since they are in mainstream media, I am now betting on the Black Swan :)  - https://www.investopedia.com/terms/b/blackswan.asp

 I don't think oil is quite in the mainstream (Cramer was caught off guard in the recent rally, but that appears to be his m-o). US oil production, sure. They'll blame it (rising pump prices) on Trump pulling out of Iran, anyway lol

@Doug Utberg the interesting thing with most of the troubled retailers is they are not bank credit worthy. Many of them have high interest loans from private equity firms. The high interest payments is part of what is killing them. The private equity firms are making tons of money as they strangle the businesses to death. They get paid because they force them to divest assets to get paid. (For example, Sears selling of real estate and selling off brands like Craftsman). So I don't see a banking credit crisis, but there will be an excess of retail space. I have heard that nearly 90 million square feet of retail will be vacated this year. This will hit some harder than others, mall holding companies like Simon Properties will have lots of square fee to fill. My guess is they will jack up the rents on other tenants, which won't help anyone struggling. Ultimately there may be too much space to fill, so we might see the space re-purposed to other uses. I have heard of retail space converted to hotel or even the idea of residential redevelopment. The saving grace here is that these "old" retailers occupy very prime real estate. That should make it prime for redevelopment. Ultimately I don't think the retail apocalypse will lead to economic troubles. The displaced workers are entering the economy in a time of low unemployment, which is good.

I think there is pending trouble with student loans so that could be a future hot-spot. Oil has proven itself to be a major economic hot-spot in the past. The middle east is and always will be a hot-mess. The only good news is we have decent domestic production, so that should reduce risk.

Ultimately lots of moving pieces. The biggest problem is usually the one we don't see, that seemingly comes out of nowhere. Anything people can predict is usually not what gets us.

Always an interesting debate. I am interested to see what others have to say.

The student loans are another really intriguing topic.

Since the GOV underwrites >90% of all student debt and it's not dischargeable in bankruptcy, I see one of three things happening.

1) Debt judgments turn former students into a permanent underclass with reduced spending power.

2) Indebted former students are brought onto the GOV payroll as 'indentured employees' to pay off their debt.  (Not very likely, but would make for a great fiction novel topic)

3) People default in large numbers and the politicians lack the willingness to do #1 or #2, so resort to giving out a 'haircut' on the student debt

For my part, I see #1 as the most likely outcome with a good chance of sliding into #3 as the number of defaults rises.

@Bill F. on student loans my thought is the fact that you can't get rid of student debt is what makes it even more dangerous. People defer payments and the interest keeps piling up. There is no tangible asset like with a mortgage or car. People are stuck paying, but it cuts deep into their budget. The debt impacts consumer consumer spending, which affects the overall economy. Government may eventually wipe some loans away, but that will be costly and politically unpopular. I don't know exactly how it will play out, but there is a major problem brewing there. 

@Joe Splitrock I agree 100% about student loans. One guy I follow called them an anchor on future growth. Same thing for getting a 60 month note on a depreciating asset; that falls into the sub optimal decision making category, then selling that car in month 61 to get a new one is a whole new level. 

All that being said, I don't consumer debt being at the epicenter of a business cycle correction. To me they look more like a death of a thousand cuts rather than a big shock. 

Also, the debt levels, not corrected for population makeup and other factors, are right around historical averages.

Originally posted by @Joe Splitrock :

@Bill F. on student loans my thought is the fact that you can't get rid of student debt is what makes it even more dangerous. People defer payments and the interest keeps piling up. There is no tangible asset like with a mortgage or car. People are stuck paying, but it cuts deep into their budget. The debt impacts consumer consumer spending, which affects the overall economy. Government may eventually wipe some loans away, but that will be costly and politically unpopular. I don't know exactly how it will play out, but there is a major problem brewing there. 

I see student debt as the next bubble to pop for pretty much all of the reasons you mentioned here.  

Originally posted by @Will G. :

the bond bubble created by fed purchases,(quantitative easing) popping, the 65% higher corporate bankruptcies this year, rising interest rates causing 15% of us corporations to not even be able to afford their debt, more debt now than in 08, swiss central banks purchase of 80 billion in us stocks with freshly printed money, bank of japan's printing $4.5 trillion, the artificially low interest rates of the last 10 years and the mal-investment it has caused, auto loan, student loan, credit card debt records

The illusion of unlimited paper money can go on forever, as long as nobody panics and try to run for the exits. So relax and have a nice day.

I think Will is right on. I worked for the FDIC during the recession and then as a contractor for the FDIC. We are on 8 to 10-year cycles which put us smack dab in an upcoming adjustment.

Food for thought, as I mentioned I worked for the FDIC as a contractor during the recession clean up and recently I was approached by a contracting group since the FDIC is getting their roster of qualified contractors ready again. The FDIC got caught last time unprepared and they have data on banks that others do not. I think the FDIC's economists see something on the horizon and it is not good.

Originally posted by @Dan Roma :

Personally, I think we’re still in a recession. Lowest employment, let’s get real.

 Things must be very different in HOUSTON.  Middle FL, Oklahoma City, Little Rock all on fire huge increases in property prices 

Lots of help wanted signs 

1500 new houses being built within 5 miles of my house in FL. etc etc 

Bitcoin & other cryptos.  I read Wall Street is now getting in on the game.  We will perfectly recreate 2008 as cryptos proliferate into mainstream Wall Street investment houses.  Wall Street is starting to invest their own money in cryptos.  The next step is to increase those investments with customer accounts, leverage them, use them for collateral, then.... startling profits!  They're geniuses!!!  Pop!  Uh oh....who knew cryptos were never really backed by anything anyway?

It is just a matter of time as more cryptos proliferate to distract buyers.  We will hear the giant flushing sound when sellers overwhelm buyers because Wall Street is unloading or caught in a downdraft, possibly due to a hacker or closure of international exchanges.  I think everyone is thinking, "I will get out just before that..."  We will then discover cryptos crept into many parts of our financial system and who knew?  Lots of people, but they chose to watch the cash go into their pockets rather than do the responsible thing.

Same as with those 120% LTV mortgages with no verifiable income.

This scenario would probably occur in conjunction with the other concerns in this thread, such as stock market plunges, rising rates, etc as buyers unload riskier positions and the "smart money" wants nothing to do with them.

We measure quantity of employment, but I'm not sure how well we measure quality of employment.  I suppose there are metrics for 'underemployment' and I think that is a big part of the problem.  Grad students working at coffee shops, etc., and this discussion fits right in with the student loans discussions.  Too many crappy jobs, not enough really good jobs. Something there has to give - people cannot continue to pay $80k-90K for an undergrad education that doesn't really get them a job that pays anything (yet, trade schools cannot find enough people to fill the demand for those jobs).  So yeah, I agree with the general theme that wages aren't keeping past with the cost of education, car loans, healthcare and in some areas, housing.

Personally I believe our society is going to start to return to a more entrepreneurial place, like it was maybe 100 years ago. There was a time when more people were still farmers, shopkeepers and tradesman, working for themselves to earn a living, and only a few worked in large factories or in big corporate settings.  I honestly think the pendulum is going to swing back to that again, at least it will move in that direction.

Normally these things are cyclical.  Caterpillar plans on a recession every 7-8 years.  As @Dan Wallace points out, we're close to 9 or 10 now, but then again, it depends on how we measure it.  That last one was not really a cyclical downturn, but a total breakdown of the banking system, and so it surely took more than a year for the economy to get back on its feet.  We might only be 5-6 years into that normal 7 year cycle.

But will the next one be cyclical in nature?  Folks bring up Amazon and the demise of retail space - that is a real situation playing itself out right now.  Interesting discussion for sure.

The most important number in the entire economy is the cost of money, so our decade of artificially low interest rates have created an economy based on an artificial input. How well the jenga tower holds up to the removal of the base block is anyone's guess. Somehow we have to transition back to "normal" rates and actually pay for the 08 crisis. This transition will cause untold pain throughout the system as investments that made sense at low rates will be stress tested. Right now I am wishing we would have taken the icelandic model approach and let the banks fail.

Originally posted by @Joe Splitrock :

@Bill F. on student loans my thought is the fact that you can't get rid of student debt is what makes it even more dangerous. People defer payments and the interest keeps piling up. There is no tangible asset like with a mortgage or car. People are stuck paying, but it cuts deep into their budget. The debt impacts consumer consumer spending, which affects the overall economy. Government may eventually wipe some loans away, but that will be costly and politically unpopular. I don't know exactly how it will play out, but there is a major problem brewing there. 

 Actually, I can see the government wiping away student loan debt being quite popular.  It's free money, right?  At least, that's how much of the public sees it.  This type of student loan bail out would get the U.S. in even greater debt.  Personally, I think the U.S. may end up as another Greece (financially) though it may take a generation for things to get that bad. I'm interested in buy and hold RE, but in the back of my mind I keep thinking it might be a good idea to have long term plan to exit the U.S.  I guess I'm just a nut.

Originally posted by @Eric James :
Originally posted by @Joe Splitrock:

@Bill F. on student loans my thought is the fact that you can't get rid of student debt is what makes it even more dangerous. People defer payments and the interest keeps piling up. There is no tangible asset like with a mortgage or car. People are stuck paying, but it cuts deep into their budget. The debt impacts consumer consumer spending, which affects the overall economy. Government may eventually wipe some loans away, but that will be costly and politically unpopular. I don't know exactly how it will play out, but there is a major problem brewing there. 

 Actually, I can see the government wiping away student loan debt being quite popular.  It's free money, right?  At least, that's how much of the public sees it.  This type of student loan bail out would get the U.S. in even greater debt.  Personally, I think the U.S. may end up as another Greece (financially) though it may take a generation for things to get that bad. I'm interested in buy and hold RE, but in the back of my mind I keep thinking it might be a good idea to have long term plan to exit the U.S.  I guess I'm just a nut.

It would be popular only with those who benefit - like any government hand out. The rest of us that were responsible and worked our asses through college wouldn't be so happy. 

As you pointed out, if it became a bail out, the cost would be a very heavy burden on US debt. I am not sure the US will go the way of Greece. Sadly since the US dominates the world economy, we are too big to fail - as the saying goes. Financial ruin for the US would have catastrophic effects on the global economy, so exiting the US may not protect you. 

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