The Coming Recession*

The Coming Recession

Gary Shilling is one of modern America’s storied economists. He has nailed any number of economic turns over the past 40 years. Perhaps his most prescient call was his early-’80s prediction that the U.S. was entering the bond bull market of a lifetime … he was right …, and that bull market continues to this day.

He’s now calling for a Recession. Shilling, in fact, believes that the U.S. economy most likely already is in Recession.

Contemporaneously calling the beginning of a Recession is an almost impossible task – it generally takes the National Bureau of Economic Research (which is charged with the task) almost a year after the beginning of a Recession to make even a retrospective call. In reaching his conclusion, Shilling has charry-picked from a multitude of economic statistics, including the direction of revisions – since payrolls, hours worked and consumer spending, for example, were reported at a high number and thereafter adjusted downwards, he sees them as an important indicator of an economy that has passed its cyclical peak. He also sees growing weakness in core commodity prices, industrial production, surveys of CFOs, and new home sales as well as troubling mismatches between macroeconomic data, as signs that growth has ended and contraction has begun. His facts are correct and the statistics he is relying on tell a recessionary story …, but there are a huge number of statistics which different economists can … and do … read in different ways (as Harry Truman reputedly said, “Get me a one-handed economist”).

Not surprisingly in a world of investment banker bulls, Shilling’s view is not shared by the substantial majority of economists. Most believe that the economy is humming along quite nicely, fueled by Central Bank money printing and suppressed interest rates, low inflation (though see “Deflation?” in the June 17th TLR), and a strong domestic employment picture. They point to the fact that GDP grew by over 3{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} in Q1 and that the Conference Board is predicting GDP growth, consumer spending, exports and capital spending growth in excess of 2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} for the remainder of 2019 and through 2020. A number of economists add that the statistics relied upon by Shilling frequently underreport the strength of the U.S. economy because they rely on outdated manufacturing-centric data. Because America now is primarily a services economy … and services are far more resilient than manufacturing …, even though growth is slowing, reason most economists, that doesn’t mean it’s reversing.

The one thing on which virtually all economists agree is that the resilience of the global economy is due to the successful, coordinated micromanagement of their economies by Central Bankers, ably led by America’s Federal Reserve. The markets accordingly have become accustomed to the Central Bankers riding to the rescue any time economic expansion is threatened. Their interventions began during the tenure of Alan Greenspan with the so-called Greenspan “put.” From 1987-2006, Chairman Greenspan adjusted interest rates whenever it appeared that the stock markets might be wobbling. He was followed as Fed Chair by Ben Bernanke (and the Bernanke “put”) from 2006-2014, then by Janet Yellin (and the Yellin “put”) from 2014-2018, and now by Jerome Powell (and the Powell “put” … brought to us, and constantly emphasized, by President Trump). Mario Draghi, the outgoing President of the European Central Bank, made it clear how modern Central Bankers view their role as global political economic guardians. They will do “whatever it takes” to protect and support the global economy – in the ECB’s case, the European economy. The Fed has made it clear that it, too, will do whatever it takes … to protect and support the U.S. economy. And that’s precisely what the Fed-led Central Bankers have done – they’ve maintained control of, and provided slow and steady growth for, the global economy.

How long can their successful run continue?

Shilling believes that the Fed will be unable to fully offset the risks from several headwinds, including the Trump Administration’s trade wars and the President’s policy flip-flops … and the responses of other countries to the high level of uncertainty in America’s economic, trade and foreign policies. Varying U.S. policies towards China, India, the EU, Mexico, Central America, the UK, Afghanistan, Russia, Iran, Israel and Turkey (among others) make it impossible to model potential economic outcomes. The uncertainties themselves therefore create market volatility … and the markets are allergic to uncertainty and volatility. This at a time when China’s economy is beset by internal issues and also is slowing. That slowing, and China’s response, whatever that might turn out to be, also will have knock-on effects on the global economy … and the U.S. Where once the Fed and the People’s Bank of China coordinated their policy responses, it is unlikely that they will do so going forward. Their respective goals have changed. The same is true for Central Bankers in the EU, Japan, the UK, Canada, etc., etc., etc. The Fed no longer can take the lead and expect other countries’ Central Bankers to follow.

Shilling also is concerned about the dominance of algorithmic trading which detaches fundamentals from market valuations. He believes that such trading has created unrealistic and, in a Recession, unsupportable stock market values. The fact that the yield curve is threatening inversion is another sign of a disconnect between bond prices … and the sentiment in the bond market … and stock prices … and a further sign of fundamental economic weakness. Although Shilling is correct that algorithmic trading has created a false sense of value in many stocks, it’s also served to support the Fed’s policies and has been directionally stabilizing in the stock market’s rise. In a Recession where the Fed is creating a tailwind, algorithmic trading might well add consistency and strength to market valuations … or do the opposite.

Although Shilling is correct that with interest rates at historic lows, there is little room for further Central Bank easing or for further money printing … although there is a bit of room. Central Bankers have successfully micromanaged the global economy for more than 10 years … and it’s difficult to argue with their success. The Fed’s toolbox is not empty. It has tools that it’s fully prepared to use. Moreover, the U.S. government has additional weapons that, if Recession appears imminent, are likely to be brought to bear. For example, while infrastructure spending legislation now is stalled in America’s Congress, the threat of Recession likely would see its speedy enactment. (This admittedly would have little current economic impact because of the timeframe between authorization and disbursement, but it would have significant psychological impact and undoubtedly would be accompanied by actual spending measures.)

It nevertheless is true that the amount of global money printing has been enormous – and that at some point whatever measures the Federal Reserve adopts would not be sufficient to offset a softening global economy. TLR has been fond of quoting Herb Stein who, as Chairman of the Council of Economic Advisers under Presidents Nixon and Ford, made the simple observation that “If something cannot go on forever, it will stop.” The success of Central Bank economic micromanagement cannot go on forever. At some point, too much money will have been printed … and interest rates on government securities cannot go down to negative 100{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}. At some point, there will be catastrophic consequences the global economy money printing will stop. Although TLR has noted troubling parallels with 1937 (see “1937” in the March 11th TLR), those parallels have remained merely troubling … the Central Bankers thus far have avoided the mistakes of the past.

Even so, the economic cycle has not been repealed, merely repressed. The cycle’s growth phase that began in 2009 is now the longest in U.S. history. Although the rate of growth in this cycle has been the weakest in modern history, that probably contributed to its duration. Population growth has slowed as well and, with it, historical economic growth patterns. Technological innovation has had a similar muffling effect on economic measurements. Muted population growth, technological advances and Central Bank interventions have suppressed and delayed the pressurizing consequences and resulting misallocations of the expansion. The longer the growth part of the cycle continues, however, the greater the build-up of pressures. The longer interest rates remain suppressed, the greater the build-up of pressures. The more money that governments print, the greater the build-up of pressures. At some point, those pressures will require release and global growth … will stop … and Recession (or, if the build-up continues for too long and is too great, Depression) will begin. Or perhaps, as Shilling indicates, the Recession already has begun. If so, its depth most likely will mirror the expansion’s peak.

Finally (from two good friends)


I have been in many places, but I’ve never been in Kahoots. Apparently, you can’t go alone. You have to be in Kahoots with someone.

I’ve also never been in Cognito. I hear no one recognizes you there. I have, however, been in Sane. They don’t have an airport; you have to be driven there. I have made several trips there, thanks to my children, friends, family and work.

I would like to go to Conclusions, but you have to jump, and I’m not too much on physical activity. I have also been in Doubt. That is a sad place to go, and I try not to visit there too often. I’ve been in Flexible, but only when it was very important to stand firm.

Sometimes I’m in Capable, and I go there more often as I’m getting older. One of my favorite places to be is in Suspense! It really gets the adrenalin flowing and pumps up the old heart! At my age I need all the stimuli I can get!

I may have been in Continent, but I don’t remember what country I was in. It’s an age thing. They tell me it is very wet and damp there.

*┬® Copyright 2019 by William Natbony. All rights reserved.

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