this is not financial advice

*I also have no idea what I’m talking about

While I don’t know about Ray Dalio’s credibility, this video is interesting

There’s too much excess capital in the system

“(GrubHub) is a company that IPO’d five years ago and hasn’t really made any money for investors that have held the entire time”
..
“So effectively, If you’re a new customer you can get $15 of food for 3 bucks. Now I don’t eat out that much, but when I do, I sign up for a free account, pay 3 bucks, and have GrubHub shareholders cover the rest of my bill”

Something’s fishy here…

https://en.wikipedia.org/wiki/Lost_Decade_(Japan)

Japan’s strong economic growth in the second half of the 20th century ended abruptly at the start of the 1990s. The Plaza Accord doubling of the exchange rate value of the dollar versus the yen between 1985 and 1987 fueled a speculative asset price bubble of a massive scale.

The bubble was caused by the excessive loan growth quotas dictated on the banks by Japan’s central bank, the Bank of Japan, through a policy mechanism known as the “window guidance”.[8][9] As economist Paul Krugman explained, “Japan’s banks lent more, with less regard for quality of the borrower, than anyone else’s. In doing so they helped inflate the bubble economy to grotesque proportions.”

United States Federal Reserve Rate
Note that rates have been very low since ’08 and haven’t been built up
in any meaningful way like they historically have
(money is cheap, firms with good ideas don’t necessarily beat out those with bad ones)

Interest rates that are kept too low too long can cause asset bubbles to form
similar to that which tanked Japan’s economy.
chart-march-29-2019-update

The Buffet Indicator: GDP vs. Total Market can be an indicator for overvaluation

Over the long run, stock market valuation reverts to its mean. A higher current valuation certainly correlates with lower long-term returns in the future. On the other hand, a lower current valuation level correlates with a higher long-term return. The total market valuation is measured by the ratio of total market cap (TMC) to GNP — the equation representing Warren Buffett’s “best single measure”. This ratio since 1970 is shown in the second chart to the right. Gurufocus.com calculates and updates this ratio daily. As of 02/17/2020, this ratio is 158.1%.

We can see that, during the past four decades, the TMC/GNP ratio has varied within a very wide range. The lowest point was about 35% in the previous deep recession of 1982, while the highest point was 148% during the tech bubble in 2000. The market went from extremely undervalued in 1982 to extremely overvalued in 2000.

2020-02-17
Example of a ridiculously unprofitable company in the era of cheap money

WeWork’s Problems Go Much Deeper Than Founder Adam Neumann

“The average length of the initial term of our U.S. leases is approximately 15 years,” WeWork noted in its IPO filing. By contrast, from 2006 to 2017, the average term for leases signed by U.S. publicly traded real estate investment trusts was 6.8 years, according to Morgan Stanley.

ccn.com/roubini-estimates-that-global-recession-underway/

When the next recession hits, policymakers will almost certainly pursue some form of central-bank-financed stimulus, regardless of whether the situation calls for it.

In the U.S., the Federal Reserve is cutting rates and implementing a new form of quantitative easing (QE). In the U.K., the Labour Party came up with a “People’s QE,” making the central bank print money to finance direct fiscal transfers to households. Other political figures have called for helicopter drops, which involve printing money and giving it to the public to stimulate the economy. Some economists, like those at BlackRock, have proposed a standing emergency fiscal facility, which would allow the central bank to finance large fiscal deficits.

Despite the different methodologies, Roubini believes that all of these policies have the same result. In the short-term, they may be appropriate to alleviate the impact of a financial crisis. But, “they will do more harm than good over the long term.”

He says:

Fiscal and monetary loosening is not an appropriate response to a permanent supply shock. Policy easing in response to the oil shocks of the 1970s resulted in double-digit inflation and a sharp, risky increase in public debt.

Roubini concluded that the only time such policies were able to help was in the 2008 financial crisis. This crisis was triggered by a negative aggregate demand for illiquid agents, which meant that monetary and fiscal stimulus made sense. However, these policies will not help prevent the next global recession.

Vox – The chart that predicts recessions

(inverted yield curve)

wsj.com/market-data/quotes/bond/BX/TMUBMUSD10Y

(look at bottom black curve 3m and 10y values)

Essentially, when the yield curve inverts, you have to assume that:

  • The best investors in the market
  • With the most up-to-date and valuable information
  • Believe that it’s wiser to put money toward long term bonds instead of short-term bonds
  • Because they “have a hunch” with short-term bonds they would be getting money back in a bad economy
  • And wouldn’t be able to re-invest the money well

forbes.com/sites/chuckjones/2020/12/31/2019s-yield-curve-inversion-means-a-recession-could-hit-in-2020/ +

Probably because the Fed has become more accommodative, investors seem to have come down with amnesia that there is a lag between the inversion of the yield curve and the start of a recession. If history is repeated a recession could start between January and November 2020.

Over the past three recessions, when the result turns negative the economy has entered a recession 8 to 13 months later all three times since 1990. The key data listed below is this lag between the initial date of the inversion and the start of a recession.

1990 to 1991 recession

  • Day of first sustained inverted yield curve: May 24, 1989
  • Last day of inverted yield curve: August 25, 1989
  • Length of inverted yield curve: 3 months
  • Largest amount of inversion: 35 basis points
  • 3-month yield at that time: 8.50%
  • 10-month yield at that time: 8.15%
  • Start of the recession: July 1990
  • Timeframe from start of inverted yield curve to recession: About 13 months

2001 recession

  • Day of first sustained inverted yield curve: July 7, 2000
  • Last day of inverted yield curve: January 19, 2001
  • Length of inverted yield curve: 6 months
  • Largest amount of inversion: 95 basis points
  • 3-month yield at that time: 5.87%
  • 10-month yield at that time: 4.92%
  • Start of the recession: March 2001
  • Timeframe from start of inverted yield curve to recession: About 8 months

2008 to 2009 Great recession

  • Day of first sustained inverted yield curve: July 17, 2006
  • Last day of inverted yield curve: August 27, 2007
  • Length of inverted yield curve: 13 months
  • Largest amount of inversion: 64 basis points
  • 3-month yield at that time: 4.50%
  • 10-month yield at that time: 5.14%
  • Start of the recession: December 2007
  • Timeframe from start of inverted yield curve to recession: About 18 months

2020 recession?

  • Day of first sustained inverted yield curve: May 23, 2019
  • Last day of inverted yield curve: October 10, 2019
  • Length of inverted yield curve: 4 and 1/2 months
  • Largest amount of inversion: 52 basis points
  • 3-month yield at that time: 1.99%
  • 10-month yield at that time: 1.47%
  • Start of the recession: Unknown
  • Timeframe from start of inverted yield curve to recession: Unknown

Note that interest rates in 2019 were significantly below rates in the previous three recessions. This means on a percentage basis the largest inversion of 52 basis points in 2019 is greater than the earlier recessions.

Negative interest rates could explain the inversion

There is about $11 Trillion in various debt that has negative interest rates with almost all of it in Europe and Japan per Bloomberg (and almost $17 billion in August 2019). This means that the person or organization owning the debt will receive less money back than what they deposited.

One impact from negative rates is that some international investors have bought longer term U.S. Treasuries to receive a positive return, or more money when it matures, than what they invested. As foreign investors buy U.S. Treasuries this increases their price and lowers their yield. This situation could have caused the 10-year to fall more than it normally would and therefore create an inverted curve for a non-recession reason.


Consumer spending is keeping the country from entering a recession since business investment has been negative for two quarters, as it is essentially in a recession.


zerohedge.com/news/2019-09-04/big-short-investor-michael-burry-explains-how-index-funds-will-trigger-next-market

Central banks and Basel III have more or less removed price discovery from the credit markets, meaning risk does not have an accurate pricing mechanism in interest rates anymore. And now passive investing has removed price discovery from the equity markets.

The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally.

Alternative viewpoint:

  • May only actually effect small cap ETF’s and not most ones built from mostly large cap stocks

Got it right once syndrome: The media LOVES to overweight the opinion of the person who famously called the last market crash correctly. This is amplified even further by the fact that Burry was played by Hollywood hunk Christian Bale in a blockbuster movie. But those things don’t make him the all knowing source for what’s going to happen in the future. A Random Walk Down Wall Street does a great job marching through the history of market doomsday predictors. For every crash, there was a brilliant predictor who called it correctly. The media coronates them as the king or queen of knowing the future and happily publishes their next big predictions as front page news. …

So what to do? Do what rich people do: Live below your means. Invest early and often. Buy and hold. Ignore the news.

Signals to watch:

(live updated)

fred.stlouisfed.org/series/RECPROUSM156N

fred.stlouisfed.org/series/T10Y3M (bond yield values)

Note: The yield curve inverted summer of 2019, spooking many a investor. As of January/Febuary 2020, it has inverted again. Not a great sign.

seekingalpha.com/author/georg-vrba#regular_articles

seekingalpha.com/author/ted-kavadas#regular_articles


https://economicgreenfield.blogspot.com/2020/02/chicago-fed-national-financial.html

“The St. Louis Fed’s Financial Stress Index (STLFSI) is one index that is supposed to measure stress in the financial system.  Its reading as of the February 6, 2020 update (reflecting data through January 31, 2020) is -1.463. Of course, there are a variety of other measures and indices that are supposed to measure financial stress and other related issues, both from the Federal Reserve as well as from private sources. Two other indices that I regularly monitor include the Chicago Fed National Financial Conditions Index (NFCI) as well as the Chicago Fed Adjusted National Financial Conditions Index (ANFCI).”

Here are summary descriptions of each, as seen in FRED:

The National Financial Conditions Index (NFCI) measures risk, liquidity and leverage in money markets and debt and equity markets as well as in the traditional and “shadow” banking systems. Positive values of the NFCI indicate financial conditions that are tighter than average, while negative values indicate financial conditions that are looser than average. The adjusted NFCI (ANFCI). This index isolates a component of financial conditions uncorrelated with economic conditions to provide an update on how financial conditions compare with current economic conditions. For further information, please visit the Federal Reserve Bank of Chicago’s web site:

chicagofed.org/webpages/publications/nfci/index.cfm

fred.stlouisfed.org/series/NFCI


fred.stlouisfed.org/series/ANFCI


Glassdoor Economic Research

glassdoor

Google Trends:

2008 to 2009 Great recession

  • Day of first sustained inverted yield curve: July 17, 2006
  • Last day of inverted yield curve: August 27, 2007
  • Length of inverted yield curve: 13 months
  • Largest amount of inversion: 64 basis points
  • 3-month yield at that time: 4.50%
  • 10-month yield at that time: 5.14%
  • Start of the recession: December 2007
  • Timeframe from start of inverted yield curve to recession: About 18 months

Corporate debt:

The credit rating agency Moody’s has agreed to pay nearly $864m to settle with US federal and state authorities over its ratings of risky mortgage securities in the run-up to the 2008 financial crisis, the department of justice said on Friday.

https://www.theguardian.com/business/2017/jan/14/moodys-864m-penalty-for-ratings-in-run-up-to-2008-financial-crisis

I forget where I’ve heard this from, but I’ve heard of a recession described as the following:

You’re the owner of a small restaurant. One day, the circus comes into town, and is around for a few months. You, apparently not aware that the bearded lady and fire swallower are part of a traveling act, decide to build expansions and hire new waiters for your restaurant.

Eventually, the circus leaves town. You have a bigger restaurant and more wait staff than you can afford. You downsize your shop back to its normal size. This has been a market “correction” because it is more in line with reality.

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