I want to be clear from the outset: I have not predicted, and I am not predicting, a recession in the US.
But, make no mistake: Recent data releases make clear that the prospect of recession hangs in the balance. The ultimate outcome is of great transcendental importance because it is no exaggeration to say that the consequences of a recession at this historical point in time would probably be doom.
What’s The Big Deal?
The US has had many recessions in its history. According to the National Bureau of Economic Research (NBER), the most authoritative source of information regarding business cycles, there have been 11 recessions since 1945.
So what's the big deal if the US has another one?
This historical moment is different. The US simply cannot afford a recession right now. Consider:
- Millions of Americans are “under water,” barely hanging onto to their home mortgages. With their homes being worth less than what they owe on their mortgages, another recession would cause massive numbers of these “underwater” mortgage holders to definitively cease payments.
- Given the still relatively fragile state of US financial institutions, a general bankruptcy of the entire banking system could ensue from an acceleration of mortgage defaults. A collapse of the banking system would imply a US recession on a scale unprecedented since the Great Depression.
- The US budget deficit currently exceeds 8% of GDP. Worse still, as a percentage of government revenues, the US budget deficit is substantially higher than that of any of the PIIGS. A recession would imply a collapse of tax receipts. The projected budget deficit under such a scenario could easily balloon to more than 12% of GDP– simply not financeable by the private sector. Thus, the specter of either default or inflation would become inevitability. Again, the resulting general panic would trigger an economic crisis of unprecedented proportions.
- Combined unemployment and underemployment is already more than 15%. A recession would likely push that figure above 20%. The specter of social unrest would become very real.
- Unlike at any time since 1945 (the starting point for modern counter-cyclical macroeconomic policy management), the US currently does not have the fiscal resources available nor is there enough political will to counteract the devastating economic and financial impacts that another recession would have at this particular time.
- The nation is deeply divided and highly polarized politically. Populist right-wing demagogues spewing economically ignorant doctrines and hatred have proliferated. Left-wing labor-style militancy could surge at any moment. Historically, extremism and political violence has emerged from such a political and economic configuration. The economic and political atmosphere shares certain parallels with Weimar Germany or Pre-Peronist Argentina. Economic crisis and political polarization served as ideal breeding grounds for political and social conflict and the emergence of populist, extremist and ultimately anti-democratic national “saviors.”
Will doomsday ultimately transpire? I don’t think so. I explain why here.
But this is what is at stake with the prospects of another recession hanging in the balance.
From this point of view, the recent volatility exhibited in US equity markets (^DJIA, ^NDX, SPY, DIA, QQQ) due to signs that the rate of activity in the US economy may dip below “stall speed” is fully justified.
Indeed, I expect further discounting of recession probabilities to cause a test of the 950-1,020 range on the S&P 500 (^SPY). If so, attractive stocks such as MSFT, AAPL, INTC, T, VOD, VZ, GS can probably be purchased at levels 10%-20% cheaper than they are right now.
I will repeat: The US simply cannot afford a recession. This is unlike any time since 1945 because the stakes have never been higher.
Disclosure: I am long SPX puts.