Recession Indicators: What’s Your Sentiment?

by Faceh

I will put forward a huge disclaimer first: I am of the mind that nobody can truly ‘predict’ a recession in the absence of some clear and obvious event that could cause it. By ‘predict’ I mean accurately state the timing of the recession, the severity of the recession, and which sectors will be most impacted far enough in advance and with enough accuracy that true prescience, rather than luck, is the best explanation for it.

Any person who states “recession is Imminent!” year after year, without making any specific claim about when it will happen can’t legitimately claim to have predicted one that eventually does occur. No points for exploiting randomness.

Literally all I want to achieve with this post is to gather some level-headed responses regarding your basic feelings on how likely or unlikely an economic downturn is.

So I’m just going to lay out the basic factors as I see them and ask that you please add any information or commentary you like to the stew that we may all partake of the result. You shouldn’t take ANYTHING here as investment/financial advice.

Tech companies stalling out: Maybe this one has echoes of the Dot-com bubble. Basically I perceive that many of the most ‘promising’ tech companies, the Pegasus unicorns that flew to Billion-dollar valuations on a wing and some lofty promises, are continually coming up short of the potential that they were originally valued upon in the first place.

For example:

Uber. Still burning piles and piles of VC money and now an underwhelming IPO, and as far as I can tell no road to profitability that doesn’t involve sacrificing most of the advantages that make it the market ‘leader’ now.

Tesla. Elon Musk seems to be keeping the stock price afloat through meme magic alone. They have a great product but literally can’t seem to produce it fast enough, and the established players are starting to enter the Electric Vehicle game. And EVs in general haven’t overcome the basic limits that make them less attractive to most drivers: reduced range, long charging time, much higher up-front cost. Battery tech in particular has been playing catch-up here.

Self-driving car progress has been slower than the more optimistic predictions, and seem to have run up against some hard problems, which will probably stymie both of those companies.

Apple. It hasn’t produced a disruptive product on the level of the iPhone (or even the iPad) in a while now, and Steve Jobs being gone would seem to make it less likely they’ll put out anything truly innovative versus just iterating on their existing products.

I’ll make a similar claim on Google. When’s the last time they put out a truly remarkable new product, somewhere on par with gmail or google earth? And some of their flagship products, Youtube in particular, are increasingly troubled. This recent piece doesn’t paint a good picture of its current culture. (I don’t really know what Alphabet is up to these days, so now maybe I’m looking in the wrong place). Also, keep an eye on Stadia to see if I’m wrong.

And I could talk more on smartphones, which also seem to have hit the point where there’s no more innovation to cram into them, so each new generation is only eking out marginal improvements for massive price increases. (Granted the lower-tier phones are still cheap!)

I think everyone here is pretty familiar with the controversies brewing around Twitter, Facebook, and the other social media players. Does the recent clearance sale on Tumblr portend what is to come?

Netflix. Massive credit for pioneering the streaming industry and killing cable. Doesn’t seem poised for greatness anymore as competition gears up and it spends like mad to build its content library but can’t keep up the user growth.

In sum, these Tech giants have grown to the point where they ought to be spitting out life-changing innovations on a pretty much yearly basis if we extrapolate their early successes and the potential they showed early on, but instead we’ve gotten some mild life improvements and in some cases they actually got worse at their primary service! If, within the next five years I can’t have an autonomous drone deliver me food or packages at the push of a button or summon a driverless car to carry me hundreds of miles while I sleep in the back I’m going to be rather disappointed.

Full Employment. We’re at the point where pretty much all surplus labor has been absorbed (although the labor force participation rate remains suspiciously low too). 3.7% unemployment means we can’t just put more people to work to increase production, so the only way to make productivity gains is for workers to get switched around to the most productive/efficient jobs available. Anecdotally, in my area there’s been an ongoing shortage of workers in the low-skilled jobs (food service, yard work, cleaning services, etc.) meanwhile a literal drug addict with (non-violent) felony convictions can get hired on for plumbing, carpentry, and other skilled trades simply because there’s nobody else to hire!

Surface level this is great but it means we’re in the position where businesses will have trouble expanding for want of quality employees, workloads will increase, and some of these low-skilled jobs just won’t get done anymore because nobody has the time or inclination to do them (or the price of these jobs will rise to clear the market, which has its own implications).

In essence, full employment can be a drag on economic growth because it literally indicates a labor shortage and means we have to look elsewhere (outsourcing? immigration? automation?) to keep it going.

More likely the growth just slows, stops, or falls to ‘correct’ the problem.

Boomers. I’ll keep this brief. Avoiding any complaints about Boomer’s political/economic effects, I see a one-two-three punch coming as these guys age out:

  1. More boomers retiring and/or dying means the economy loses their experience and knowledge, and we have to hope their replacements are up to snuff.
  2. Simultaneously, boomers will start drawing on their retirements. To the extent their nest eggs are held in stock market equity, this will likely mean a pretty massive selloff of a lot of stock all at the same time. I don’t see how this can have any other effect than downward pressure on prices, which may exacerbate other symptoms if I’m right about tech companies and such above. But you’d hope this is already priced into the market!!!
  3. and of course, most of that money will, in all likelihood, end up spent on late-life medical expenses and long term care, which is one industry where prices have been rising unabated for decades now.

What happens to an economy as it loses its most valuable workers, and those workers pull their money out of the stock market and throw it into an increasingly expensive medical money pit trying to keep themselves alive and well?

Debt Debt DEBT.

Credit card debt, mortgage debt(!), auto loans, and student loans recently hit all time highs. In ‘good’ news the per-capita/household debt levels are still a little lower than all-time-highs.

Government debt.

Even if the debt itself isn’t a risk to a nation’s economic health, it certainly maximizes its exposure to other risks.

Global Conflict Risk. Will the U.S. invade Iran? Will we intervene in Venezuela? Hong Kong? Kashmir? Is that Syria thing still going on? Is there some other currently brewing dispute that is ripe to bubble over?

Why does it feel like most of the people in power (in the U.S.want another large-scale conflict?

Democrats. I’ll fly my colors here a tiny bit to say that it seems likely that if the Dems get the Presidency and both houses we’re going to see a massive push for tax increases, regulations, single-payer healthcare, climate/environmental restrictions, etc. etc. etc. Now I doubt that the more extreme candidates are likely to win, and I expect that the ‘moderate’ candidates are probably only about 10% as bad as their campaign rhetoric would imply, but I would still expect the market response to a ‘blue wave’ to be a big ol’ NOPE since the Democratic base will sure as hell demand drastic, sweeping action.

At this point I think a Trump victory is more likely than the alternative but it must be freely admitted that the Dems could pull a win. And since the GOP has done an abysmal job (outside of Judicial appointments) at making gains and pushing back (seriously, I get the sense they don’t want to win) it is to be expected that at least some of the Dem agenda will get passed in the first couple years of them taking control.

If we haven’t hit recession territory before then, I feel that’ll be the catalyst.

A few positives that I do note to keep my outlook semi-optimistic:

AI/Machine Learning seems to be making some solid leaps. Shame its most prominent uses right now are faking videos, governments tracking their populace, and beating people at vidya games.

Hand in hand with that, automation. I’ve never found automation scary in-and-of itself, and automation gains are, in my view, key to addressing the challenges I’ve outlined above.

Black Swans are still out there, and they can be positive! If I knew about/could predict the next big tech innovation in advance I’d just create/invest in it myself and get filthy rich, so I plead ignorance as to whether we’re around the corner from the next big thing.

We can make gains in productivity if only a few policy changes would occur. If Trump ‘wins’ his trade war (without turning it into an actual war) and China drops tariffs, if we get tangible peace progress in North Korea, if immigration policy became sane (HAH!), marijuana legalization, prison reform, all of these should have immediate positive economic effects! But you have to assume away all the obvious obstacles to think all of this is likely to happen. A few of them might, though.

At this point the only sort of ‘preparations’ I’ve made is to start putting together a liquid cash fund so I can use in emeregencies and to sustain me and/or better take advantage of opportunities should they emerge. I’ve already got the guns stockpiled and plenty of food in storage just as a formality, but I’m not pulling my money out of the stock market or opening any short positions so I can’t say that I’m truly, TRULY worrying that the recession is nigh.

So I put it to you. What are your feelings as we await for the seemingly inevitable point when the carousel ride stops and reality reasserts? Are we going to stretch this cycle out much longer? Do you have strong emotions one way or the other?

Just give me a sense of your gut feelings and, if you care to, point to the information that is making you feel that way.




Disclaimer: Consult your financial professional before making any investment decision.