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:
- 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 🙂
- 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.
- 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.
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?