RECESSION incoming
After the massive stock market gains of 2020 and 2021, a drop seems imminent, and it looks like it will be the worst one since March 2020,
On top of the seeming likelihood of World War 3 in Ukraine and Russia, it seems as though there will also be a recession in the very near future. Obviously, we are all hoping that this doesn’t happen, but it seems as though it may well.
Multiple famed investors who predicted both the 2000 dot-com crash and the global financial crisis, such as famed Brit Jeremy Grantham, are predicting that another recession is imminent, primarily because so-called ‘superbubbles’ are going to pop, and when these bubbles pop, the end is nigh for economic prosperity.
Superbubbles
To understand, we need to focus on what caused the 1929, 2000 and 2008 market crashes. A stock bubble, which is an individual stock, a financial asset or even an entire sector, market or asset class has its price massively exceed its actual value. A superbubble is when multiple assets all increase in value big-time at the same time. This happened in 1929 causing the stock market crash, in 2000 causing the dot-com crash and in Japan in 1989, which collapsed in 1991. There were also a superbubble in housing in 2006 before the global financial crisis.
These superbubbles are initially a heyday for investors. As Grantham pointed out in the piece in which he describes this imminent crash, his first experience with a bubble in the markets came in the late 1960s, in which one of his stocks’ price increased from $7 to $21 in a couple of weeks while he was on vacation, and then up to $100 by Christmas. Then, the bubble popped, and he lost it all even quicker than he’d made it, and this is how these bubbles always seem to go. The 1920s are known as the roaring 20s because of how good the markets were for most of the decade. Bill Clinton touted his economic success before the dot-com fall. The economy was looking great in 2006. And then it all came falling down remarkably quickly when the bubble or superbubble popped.
Now, however, we have more superbubbles than we ever have before. We had 1 in 1929, 2000 and 2006. Now, we have three and a half, in housing, stocks, commodities and half a superbubble in bonds. The only past time that a major force on the economic stage has had more than 1 superbubble, it was Japan in the 1980s and early 90s, which resulted in an absolutely massive great recession in the country.
This is happening now because, during both the great recession and during the lowest points in the early days of COVID, the federal reserve handed out over a trillion dollars in free money to these companies, and the billionaires who received it had a great rush to put that money wherever they could. One example of this is real estate company blackrock buying thousands of houses for extortionate prices so that they can rent it to people for equally extortionate prices without competition, in an effort to make America a nation of renters. That is partly because of the Fed’s massive quantitative easing over the last 15 years.
Crypto was also one of the major winners out of this free cash. Crypto’s biggest gains came during the age of the Fed doing whatever they could to prop up the market during COVID, and now that they are signalling and end to that, crypto has seen a huge drop. In just one day, crypto lost over $130 billion. Famously, bitcoin jumped up a whopping 305% during the pandemic, but is now down about half.
Other assets all reached big highs during the superbubble high of the pandemic. Dow Jones, the S&P 500 and Nasdaq all reported massive increases and record high after record high.
The next stage of the superbubble life cycle is that the riskier assets, things such as crypto, begin to struggle and fall, like they have, while regular assets continue to do reasonably well. But then investors and regular folk alike start believing that the regular market can only ever go up - which is kinda true when the fed is pumping trillions of dollars into it. Then, after this massive acceleration, it all goes to shit and collapses.
The signs of these superbubbles are everywhere. Housing prices are up bigtime, as we mentioned in our pieces on inflation. Houses are in fact more unaffordable now than they were in the housing bubble crash in 2008, as the price of a house is at the highest multiple of family income ever.
While millions suffered and became unemployed during the height of the pandemic, the stock market grew to new highs.
On top of that, just about every commodity (oil, food, metals etc) are so overpriced that they are stressing real incomes big-time.
To summarize what we’ve covered so far, there is no doubt that there are massive superbubbles and there is no doubt that we have covered the first 2 steps of the 3 step cycle of life for these superbubbles. The worst is yet to come.
The Fed
The Fed has championed superbubbles for over 20 years, since the days of the “dangerously incompetent” Alan Greenspan, who was made Fed chair by Ronald Reagan and then re-appointed by both George Bush’s and Bill Clinton.
He seemed to ignore the issues caused by these bubbles and superbubbles, and as a result he refused to act to break up these bubbles and try to create a more stable market. We all paid for his inaction with the dotcom crash in 2000.
Then, George Bush Jr’s second fed chair, who stayed for the first 6 years of Obama’s Presidency, Ben Bernanke, continued with this thinking and inaction.
As Grantham wrote;
Back then, when confronted with a clear 3-sigma (superbubble) event in the U.S. housing market, Bernanke insisted that “the U.S. housing market merely reflects a strong U.S. economy,” and that “the U.S. housing market has never declined.” The information he meant to deliver was unsaid but clear: “and it never will decline because there is no bubble and never can be.” On a purely statistical basis, the history of U.S. house prices had indeed never bubbled before, being so diversified collectively – booming in Florida while coasting in Chicago and falling in California. Until, that is, the sustained excess stimulation of the Greenspan and Bernanke era created a perfect opportunity to finally boom in every region together. And what of the Fed’s statisticians? Picked for either their thick academic blinders or intimidated by the usual career risk we all know and love so well – don’t deliver information your boss doesn’t want to hear – they were totally silent or ineffective.
Dude ain’t wrong. The current superbubble situation is purely because of decades of inaction and incompetence concerning superbubbles from the Fed.
The Fed’s policy on these matters is all based on one principle and beliefs: there is no bubble so it can’t burst, therefore we should be trying to be as market-friendly for as long as we can. This isn’t based in reality.
Bernanke’s incompetence was followed by that of Janet Yellen and then Jerome Powell’s, all of whom were remarkably market-friendly, creating these superbubbles that are very much going to burst soon.
After the 2008 crisis, the Fed did massive amounts of Quantitative easing (QE), where they made large-scale purchases of financial assets, such as corporate bonds or stocks. As a result, there is much more money circulating in the economy, which means that long-term interest rates can decline, which in turn lowers the cost of borrowing. This spurs economic growth among the wealthy.
Since 2008, the Fed has done a shitton of quantatitive easing, but this was especially increased by about after March 2020, along with massive cuts of interest rates.
All of this played a major role in the massive inflation we have seen this year, which has impacted working class people more than anyone.
As a result of this inflation, the fed is now opting to increase interest rates, maybe even up to 4 times this year, according to Goldman Sachs, and they are also planning to stop quantitative easing, or at least lower the amount they are doing.
And while this will decrease inflation in the short term, it could also cause these superbubbles to pop, which will trigger a deep recession. However, if they don’t, the superbubbles will continue to grow and grow, and then they will eventually and inevitably pop at some point, and since the general rule is that the higher the high, the lower the low, that will cause an even bigger recession at that time.
Please also remember the other effect of quantitative easing: massive inequality. The rich get richer, the poor see no change in their income while inflation rises. Disastro. It is not generally a good policy, and while it might have been necessary to get us out of the 2008 and 2020 crises, it could now well cause yet another one.
The Economic Result
When the stock market does well, the rich benefit. When it doesn’t, everyone suffers. That is the general rule of the markets. The top 1% owns 51.8% of all stock, and the rest of the top 10% owns 35.4%. The whole of the bottom 90% own just 12.8% of all stock.
Billionaires have gotten an aggregate $1.9 trillion richer over the pandemic. Meanwhile, the country as a whole have a record amount of credit card debt. Jeff Bezos doesn’t have credit card debt. Your average Joe in New York or Kansas or literally anyone else does. The poor are getting poorer.
That is partly the result of the massive stock market successes, which was mostly the result of low interest rates and quantitative easing, both of which have fueled inflation.
When a recession last happened outside of the COVID era, in 2008, it wasn’t really the ultra wealthy who suffered. They caused this crisis through their risky loans, but they didn’t really suffer. They kept their jobs. They kept most of their money. They weren’t imprisoned for their failures. They got off scot-free.
Meanwhile, 3.1 million American homes were foreclosed on. That means that 3.1 million families lost their homes as a result of this crisis that was not of their making. What a horrific situation for the middle and working classes.
The crash also caused 5000 suicides that would probably not have happened otherwise. Five thousand people took their lives as a result of the stock market failing. And, again, these are not the rich people who got off scot free. This is the poor people who lost their homes during the crash. They also lost their lives because of the stock market crash.
This is what will happen if there is another recession. However, there isn’t a whole lot that we can do. Whatever the fed does in the short-term is going to cause a deep recession at some point in the near future. And that is going to have some horrible, horrible results for the people.
Political Consequences
We can expect a 2016-like election again when the recession comes. The re-rise of the populists and fake populists, on the left and on the right.
In 2016, after people had felt massively let down over 8 years by the Democratic establishment, Bernie Sanders ran for President on the left. Meanwhile, Donald Trump ran on the right. Both these candidates ran on anti-establishment rhetorics, one of them because he thought it was a winning message and the other because he is genuinely a champion of the working class. One of these candidates ran on helping every member of the multi-racial working class, while the other tried to divide us. However, both ran on populist messages, and both were popular within their voting bases and beyond.
These messages were based upon the anti-establishment beliefs that the majority of the population now hold because the establishment has failed us time after time. That is true in every part of their actions over the last couple of decades, including with the Fed’s elitist response to the 2008 crash and their fueling of inequality through quantitative easing.
Anti-establishment rhetoric has only become stronger over the last 6 years. 68% raising taxes on the rich. Unions have become significantly stronger over that time as well. People don’t like the elites, and will support politicians that also at least pretend to be anti-establishment.
Donald Trump pretended to be anti-establishment. He’s a billionaire with billionaire friends but, because he went after the elites who have ruled in America for decades and talked about how much NAFTA sucks. He governed in a pro-establishment fashion (tax cuts for the uber-wealthy, quantitative easing for them, Goldman Sachs in cabinet etc). But he caught the hearts and minds of about half the country because he pretended to hate the establishment.
The same will probably happen to an even bigger degree if and when this next recession happens. Not only will the anti-establishment feeling be even more powerful throughout the country off the back of the COVID lies and maybe World War 3 with Russia, but it will also be off the back of the biggest economic crisis since 1929.
However, this is not something to overly excited about. It is possible we get another Bernie who actually knows how to fight (Marianne Williamson would be my pick for this person), but we are much more likely to get 4 more years of Donald Trump or someone even worse than him, who seeks to divide us on stupid culture problems like the sexy M&M nonsense that conservative twitter is currently blowing up about. This person will probably have fascist-lite beliefs that will harm the United States even more than they are. But they’ll have the ability, much like Josh Hawley does, to make it seem like they are anti-establishment.
So, to conclude, in the next 3 years we are going to see: world war 3 in Ukraine, a great recession and a fascist-lite, Josh Hawley-like fake populist win the Presidency. What a merry time this is going to be.