Is the next Recession really coming?

This post was a response to Mr. Money mustache Great News: There’s Another Recession Coming. In general I agree with MMM its inevitable. Like the tide comes after a wave at the sea so does the world economy works. But what I would like to elaborate is on the time when it comes. Are we really on the verge of another recession? I don’t think so. And here is why:

  1. Housing bubble not yet inflated. Yes, the prices are going up, but its not yet on the red zone. It’s something basic that real estate prices goes up. In long term they never fall. This is linked to inflation, which is also a something that will be always here so there is no overheating if apartment worth 100 kUSD 20 year ago now worth 200-300 kUSD. As you can see the prices started to go up just from Y2012 so we are only in 5th year growth. Previously this growth party was in process from early 90’s so it lasted for something like 20y or even more. In the end growth increased over +10%/y and that’s when the real bubble was formed. So two figure growth should come before we will fall into a recession again 🙂 205_graph1
  2. Next we have stock market, which yes it is booming. But the boom is linked to FED previous monetary policy when it was very stimulating. FED has thrown billions and billions (few trillions I think) of dollars into the market so no wonder its so inflated. Now the stimulus is no more, so it is logical that prices might fall back when FED starts to clean their balance sheet. Good news is that ECB is on stimulus program, so they are few years behind so there are still some folks throwing money at the stock market fire. Also low interest rates done their job. When you get 0.1% for bank deposit it’s normal that you will start to tolerating 1-2% dividend yields as a good alternative, so again everybody went to the market and you have these ridiculously high share prices. Now when deposit rates increased at least to 1% you will think twice which is better – a deposit with guaranteed 1% return or AAPL with 1% div yield 😉 Again lets look at L/T deposit rates… As you can see we are just just started to get where we were in 2000 or 2007 and that’s 4-5% my friends. When deposit rates will hit 4-5% then we are near to the overheating. Its a general indicator – 2% deposit rate and inflation is a normal level, while 4% and more this is when FED is using breaks for the economy. And smart people should know what to do when FED is pulling the break and signaling that economy is overheated. So again we are only in a recovery stage my friends.imrs
  3. Unemployment and inflation. Yes, unemployment in US is at record low and this will defiantly fuel the inflation, but that does not mean that the crash is here already. This will stimulate the economy for sure and we will end up in a recession, but I think we still have to have a boom period at first, which is just begun 🙂

So all in all I think that recession is not coming yet. Stock market correction – likely due to FED starting to clean up their balance sheet, but I think this will not be a recession just stock prices returning to normal levels. Somehing that happened in 2000 with dot com bubble burst.  As you can see P/E has climbed over 40 then, now its something around 30. I see more similarities of P/E increase from middle of 80’s to middle of 90’s to what we had in a past decade 2007-2017. You see what happened in next 5 years. I doubt that similar will follow in next 5 years, because as I mentioned a) FED will start cleaning up their balance sheet and this will increase the supply in the market b) FED is increasing interest, which decreases the motivation for investors to go to the stock market instead of putting their money in bank deposits. I cant predict the market, but either there will be a correction or a further slow increase. Unless the regulations will be eased and party will start again at full speed, then we will see another dot com and later another recession.

PE

And another more philosophical reason why there will not be a recession any time soon is because we all still remember what went wrong in Y2007-2008. People are saying there might be another recession and this is the main reason why it will not happen. When people will forget or new generation will take charge that read about 2007-2008 crisis only in their textbooks this is when the real party will start with all the hangovers at the end. But for now I think we can all sleep well. My prediction that recession will not hit us not earlier then Y2020 and the source should be China. Reason is simple – party continues there for few decades now. Their economy is based on bubbles from their huge cash reserves, but it’s not tangible. Unless China will manage its way out with its planned economy, but for now I see the biggest party there with folks at the party (economy) starting to get tired (bubbles). The party in US has just begun and should begin in EU in short time soon so lets enjoy it! 🙂 But do not forget to get out at the right time 😉

What do you think? Is it time to accumulate cash and decrease your holdings waiting for the market crash?

18 thoughts on “Is the next Recession really coming?

Add yours

  1. I’m not an economist and so I won’t pretend to have a clue when the next recession will hit. Although I do agree with MMM’s ultimate point that it is inevitable and that we just don’t know when. All we can do is to have systems or plans in place to prepare for its inevitability. That’s why diversification is key. In case one or two income sources dry up, you’re still protected because you didn’t put all your eggs in one basket.

    In any case, interesting read P2035.

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    1. Thanks DM 🙂 One question, how old were you in 2007? I was already working at banking sector then and saw whole show from within and have to say that diversification wont help you if such crisis comes. RE rental, stocks, bonds even deposits at the bank all goes down. One thing that is king then is CASH. If you have cash you are the king. You could buy apartment for 1/2 price then if you had cash, because no bank would grant a mortgage loan. Problem if you stack up cash now it will lose value due to inflation so it’s tricky thing to catch the crisis moment. I think all we as dividend investors can do is keep calm and invest invest and invest into such companies as JNJ, PG, T and other that will survive such shocks like in 2007 🙂 And stack up some cash during the boom time, which as I mentioned just staring right now.

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    1. I was 22 then, but saw it and expirience it with whole beuty 🙂 Yes this is true re diversificatiob, but best thing if you have acumulated cash. Everything goes for sale than and as I said cash is the king 🙂 Million dollar qestion – should we start stacking up cash now? Hard to tell because i think we have few nice boom years ahead, maybe even more. If you start acumulating cash righ now you may end up losing part of them due to inflation after 5y. Personaly I think not yet, but to start thinking about it yes 🙂

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    1. Yes, that is a good plan. But great plan would be to accumulate some cash and buy shares with great discount. Im also plan to continue to invest, but prices are getting to high.

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  2. Hey!

    I’m of the similar opinion, especially the part, that at this point everyone is saying the recession is coming. That’s not how it starts.

    However, we are on the third longest economy streak (US), so it’s about time.

    I personally, finally getting to my plan of at least 5% cash in my portfolio. Plus finally getting some bonds, again up to 5%.

    As per your comment that bonds go down, that’s not true, they become more desired when stocks start going down. That’s why now bonds are so cheap because now the stock is the king. On crisis, the situation will converse.

    Would be nice, to have not a recession, but a stock market correction – everyone likes the discount day.

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    1. Yes thats actualy what im thinking will happen. A 2000 dot com scenario. Economy was not hit that hard and boomed for another 8 years. We are still not there with markey P/E. I think I will start accumulating cash also 🙂

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  3. You wrote a really good reasoning there and much i agree with you that the huge rally will be far from over. We hv not seen that inflection point yet where everything is crazily priced so all things safe for now for the moment.

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    1. Thanks 🙂 but there could be a dot com style crash for shares like was back in 2000 because share especialy tech (again) are heavy overvalued.

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  4. Hello. I remember years 2009-2010, when the stocks, RE was really low price 😀 and nobody don’t have money 😀 i believe, the next crisis wil be in 1 or max 2 years…now i’m acumulating cash, sell socks…smart investor must be ready for the next crash: must have cash and buy cheap stocks

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    1. Good point, but im a dividend investor. Buy and hold. Also doubt that we will ever see such crash like in 2008-2009. Last crisis like that was only in 1930’s so next big one migh be only in 50y. BUT I can bet we will have 2000 dot com style correction in the marketbut no fallout in the economy.

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    1. Good notice ans exactly what I wrote here 🙂 The boom should last for some time. My prediction 1-2y unless sonething will go wrong. My main concern is China as they are super overheated, just that they have trillions reserves to keep the fire burning and party goes on 🙂

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