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This Might Be The Snowflake, But The Avalanche Already Was In Place


  • The outbreak of the Coronavirus is a negative economic shock that has caused a plunge in interest rates and recessionary concerns.
  • It's inaccurate to suggest that Coronavirus is the sole cause of the potential recession. Initial conditions in the US and global economy were fragile prior to the negative shock.
  • Monetary policy has demonstrated a worrisome degree of inefficacy as aggressive balance sheet expansion has resulted in a lack of an increase in economic growth.
  • The tax cut and increased deficit spending also has failed to generate sustained above-trend growth, proving the diminishing marginal product of debt.
  • All signs point to a continuous grind toward the zero-lower-bound and trend economic growth converging near 1% rather than the already sub-par 2% growth we have grown accustomed to. Treasury bonds will continue to perform strongly.
  • I do much more than just articles at EPB Macro Research: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

The Coronavirus outbreak is undoubtedly a negative "shock," and one that's rightfully causing recessionary concerns.

The economy is hit with shocks all the time. The snowflake and the avalanche analogy properly describes the relationship. The Coronavirus outbreak is a snowflake. A big snowflake. If the economy was stable and had healthy initial conditions, even a big snowflake won't cause an avalanche.

An economy that is highly indebted with weakening initial conditions is ripe for any snowflake to set off the avalanche.

Economic Cycle Research Co-Founder Lakshman Achuthan describes this process and how recessions occur.

"The received wisdom is mistaken about how recessions are made. They are not simply caused by shocks. They are caused by a window of vulnerability in the economic cycle where the cyclical drivers of the economy have weakened to the point where it’s susceptible to a negative shock. Within that window of vulnerability, virtually any reasonable shock becomes a recessionary shock. That’s how you get a recession."

– Lakshman Achuthan, Economic Cycle Research Institute

When constructing a portfolio, it's impossible to predict all the potential economic shocks that will occur in the coming years. The best course of action is to determine the level of recession risk or how easily a snowflake will create an avalanche.

A combination of secular economic conditions such as debt, monetary policy, fiscal policy, and demographics and cyclical conditions including the rate of growth and the direction of growth can provide an accurate assessment of the economy's vulnerability to a recession.

The Coronavirus outbreak is a negative shock that has the potential to create recessionary conditions. Should this be the case, the recession will be a result of both the snowflake, but also the pre-existing avalanche of secular and cyclical conditions.

Below I will outline the ineffectiveness of both monetary

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This article was written by

Eric Basmajian profile picture

Eric Basmajian is an economic cycle analyst and the Founder of EPB Macro Research, an economics-based research firm focusing on inflection points in economic growth and the impact on asset prices.

Prior to EPB Macro Research, Eric worked on the buy-side of the financial sector as an analyst at Panorama Partners, a quantitative hedge fund specializing in equity derivatives. 

Eric holds a Bachelor’s degree in economics from New York University.

EPB Macro Research offers premium economic cycle research on Seeking Alpha. 

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Analyst’s Disclosure: I am/we are long TLT, GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (65)

Lake OZ boater profile picture

Eric's (3-10-20) new podcast titled "A Top Down, All Weather ETF Portfolio - Coronavirus Edition (Podcast)" can be found here:

(1:33:46) seekingalpha.com/...
Thanks for the food for thought. I hadn't seen a summary of the employment revisions but they fit the monthly revisions. For eight years under Obama, revisions were randomly up and down then, under Trump, they were consistently downward. Hmm.

So, one trillion dollar per year given to corporations in lowered taxes and to the defense department to make us the less secure, healthy and free and in greater debt that at any time since WWII.

Get ready for another shock when Iran completes its nuclear bomb.
Eric, don't want to jinx you,
but it's like you are the Peter Lynch of bonds here.
Lake OZ boater profile picture
Holy Sch-nikes!

"Treasury 30-Year Bond Yield Falls Below 1.5% for First Time"


The 10 year closed today (3-5-20) at 0.92% and the 30 year 1.56%.


From Bloomberg.com (3-5-20) at 9:11 pm EDT...

10 year: 0.83%

30 year: 1.45%

@LakeOZ boater Yes, it’s truly remarkable, but not completely unexpected. It doesn’t bode well for the near-term.
Lake OZ boater profile picture
@motionstream If you have been following follow Eric like I have, you'd have to agree his advise on L-T treasuries has been spot on.
@LakeOZ boater — Today has the potential to be really bad for the Market, possibly a limit down event. Nobody wants to be long over the weekend with so much uncertainty.
miraclejack profile picture
very interesting and a REALLY good read - just added myself as a 'follower' of your work (only my 3rd follow tag)
Nice try, but absent a "credit event," this is typical sell-first, ask-questions-later nonsense. Exacerbated by media sensationalism and political weaponization.

Three months in and COVID-19 (2020) doesn't even rate as a ROUNDING ERROR compared to H1N1 (2009). Over 12 months from March 2009 thru March 2010, 61 MILLION Americans were infected, with 250,000 hospitalizations and 12,500 DEATHS. Yet the major indexes rose steadily during that 12 month period.

Today there are less than 7,000 SERIOUS cases WORLDWIDE!

Unless / until we see actual bankruptcies, defaults and job losses, the smart money is looking to BUY, BUY, BUY.

Get the FACTS: worldometers.info/coronavirus
Market valuations were much lower at that time. We are just coming off a huge equity overvaluation right now.

"Unless / until we see actual bankruptcies, defaults and job losses, the smart money is looking to BUY, BUY, BUY."

By the time you see those (and we may), the bottom will be in already. Look for support at the S&P 500 200 week MA. The warmer April weather may help.
Lake OZ boater profile picture
FYI...This morning's (3-5-20) 'tweet' from Eric. Global manufacturing PMI has fallen off a cliff. Good graph at link.

Lake OZ boater profile picture
@Eric Basmajian Another great piece, built on a solid foundation of the lifetime of work of Dr. Lacy Hunt!

Thank you too for your tweets in-between SA articles. It really helps us navigate these turbulent markets.


Question please: With the recent cut by the Fed, some are concerned we are on our way to "Japan-ification." Your thoughts?


Thanks in advance.
It's the very long running trend of global deflation (except education and health care, hence Sanders revolution). Japanese seem to be doing just fine and have gotten used to life without being in a bubble.....more than 20 years, it changes generations and perspectives, people cope. I know people love going to Japan on holidays. I sure will go skiing there.
"Japanese seem to be doing just fine and have gotten used to life without being in a bubble"

If you think Japan is doing "just fine" then you should have seen it before its lost decades.

Then it was "doing fine".

Today it is "not collapsing" and only because of unprecedented monetary and fiscal policy for +2 decades.

Japan is not "doing fine". It is "not collapsing" by virtue of unprecedented policy.

In a sense, Japan has been lucky because during the past +2 decades of its troubles, it has had good business relations with 3 other major growth hubs: China, EU, USA.

Once China, EU, or USA goes down, the remaining 2 will go down.
This is a reasonable enough analysis, but I definitely disagree with parts of it. There's really no basis for lumping private and public debt together as a sum. Public debt underpins private debt as liquidity and equity and is cost-less to produce. I can see how economists believe that a large public debt to GDP ratio means that a larger public debt is ineffective, but that is only because of it's distribution and the rising inequality we have seen since 1980. (Really since 1960 but put on steroids since the Reagan admin) Too much of the public debt and corporate debt and equity are held by households with no propensity to borrow. Recycle more through taxes in order to increase incomes and savings in the bottom half, or, alternatively, provide real tax relief and increased incomes through fiscal policy (even without increasing taxes on the wealthy) to that same half of the population and it won't matter what the debt to GDP ratio is, you will still see velocity and productivity increase.
Steelhead15 profile picture
@Eric Basmajian . Thougtfull piece! I do think the US is the best of the bunch by far. I don't see a recession until 2021 at the earliest- we are overdue. I see a recession as a cleansing.
Excellent piece. Very thorough analysis and synthesis of different factors at play. Will follow this author.
LaughingTrader profile picture
It seems to me that job growth should be normalized for current unemployment. It's a lot harder to maintain a job growth rate when we are at or near full employment, so I would expect the job growth numbers to trend downwards with increased employment.
Eric Basmajian profile picture
Sure - then you concede lower growth unless you believe there will be an offsetting rise in productivity growth.
Windsun33 profile picture
Last time I looked productivity has actually gone down over the past year.
Great fusion of economic information, historic perspective, and analysis/discussion of current conditions!
Notice a trend? Reagan up. Bush W up...

"Bush W up..." Yeah, until he was down and then it was Obama up.
John Naccarelli profile picture
OBAMA was and ObamaCARE is a DISASTER!! It has cost the average American a significant sum. Just look at healthcare insurance premiums since OBAMA was elected ... they went straight up and it is killing middle income families that get a small or no subsidy. As an employer with employees, I see this every year. Even the employer-provided plans for small businesses are astronomical in costs and businesses cannot subsidize these benefits even at 50%.
Funny how people always whine about the ACA, but when asked about the GOP's plan its...crickets. The plan wasn't perfect given all the competing constituencies, but at least there was a plan. The Republican's healthcare plan is to hobble and destroy the ACA and replace it with....mumble mumble distraction nothing.
When the economy is a house of cards, you only need a slight breeze to upset things.
Wait, I thought we had the greatest economy in the history of the world!?
normana profile picture
no....in the history of the universe !! C'mon where talkin TRUMP now
True or False?

"The received wisdom is mistaken about how recessions are made. They are not simply caused by shocks. They are caused by a window of vulnerability in the economic cycle where the cyclical drivers of the economy have weakened to the point where it’s susceptible to a negative shock. Within that window of vulnerability, virtually any reasonable shock becomes a recessionary shock. That’s how you get a recession."

– Lakshman Achuthan, Economic Cycle Research Institute

Thus far, there were lots of times when the US and Global economies were vulnerable to financial/fiscal shocks including event-driven shocks post 2008/09 GFC.


Case in points were the following major shocks considered by numerous Economists and Financial Analysts as harbingers of recessions and catastrophic bear markets:

- 2010: PIIGS Crisis in Europe;
- 2011: US debt downgrade + EU Debt Crisis;
- 2012: Fiscal Cliff Crisis + EU Recessions and Depressions;
- 2013: Government Shutdowns + Fed Tapering Crisis;
- 2014: Ukraine War + Global Ebola Pandemic Scenario;
- 2015: Earnings Recession + Global Commodity Crisis;
- 2016: EU Deflation Recessions + Trump Election;
- 2017: Nuclear War with N. Korea (/China);
- 2018: Trump Trade Wars + Fed QT;
- 2019: more Trump Trade Wars;
- 2020: Global Ebola Pandemic Scenario.

Each of those financial/fiscal crises including system shocks caused by unpredictable black-swan events were predicted to be more than enough to knee-cap the US economy and result into major recession and catastrophic bear markets, specially during economic downturns that sometimes resulted into transient collapses of US GDP (/mostly during 1st quarters post 200/09 GFC).

- always Different This Time: drive.google.com/...

It is always different this time with no rhyme nor reason nor synergy among different types of exogenous crises and events.

With no reliable pattern, practically impossible for even the brightest and most knowledgeable economists and financial analysts to succeed in correctly predicting the markets for decades and centuries, even if any of them can possibly live for centuries to acquire all the knowledge and correctly analyze all of them:

- History Repeating Itself = nada, caput, none whatsoever.

If financial/fiscal crises and black-swan events never repeated themselves, how is it possible for History to Repeat Itself?

That's why the most knowledgeable and highly experienced (89 years old) Warren Buffett looked ever so STUPID each time CNBC asked him what's his future 'prediction' regarding say the EU debt crisis, the US debt crisis, the Fed QEs, the government deficits, the Ebola Pandemic Crisis, etc. etc.

- FUD Investors Club: staticseekingalpha.a.ssl.fastly.net/...

Tough Luck for those Who Got LEFT Behind.
Praveen_Chawla profile picture
Lets cut through the cr@p. Are you calling a recession? Yes or No.
Praveen_Chawla profile picture
No answer?
What happens when you put 10 economists in a room? You'll get 11 different opinions.
Lake OZ boater profile picture
@Praveen Chawla FYI...Global manufacturing PMI has cratered.


Bonds have told the story all along. The stock market is a terrible leading economic indicator.

"Men, it has been said, think in herds; it will be seen they go mad in herds, while they only recover their senses slowly, and one by one." Charles MacKay
Great work Eric,you have are spot on as usual.
Thanks B/L
Excellent evaluation, data and commentary.
Eric Basmajian profile picture
Thanks for reading!
U Hate Me profile picture
What percentage of GLD and TLT should an investor hold in there portfolio? Thanks.
Eric Basmajian profile picture
Hey I4D,

I publish a model portfolio guide to members of EPB Macro Research.

Anyone can join us for a two-week free trial.


All the best,

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