Lance Roberts and Mish Discuss What the Next Recession Will Look Like

Mike Mish Shedlock

Lance and I did four video segments today. We discuss the Fed, the US, Europe, and other topics.

I had lots of fun on the Lance Roberts show today.

Every time I am on with Lance, I cannot help thinking about WLS.

On Sunday evenings, Art Roberts had an oldies show with the theme "Hey baby they're playin our song"

Forget about that. For economic reality, check out Lance Roberts.

I do not know why my lighting is so red in the videos, it's not shown up that way before. Otherwise the quality is good.

YouTube links follow.

The Fed Cannot Fix What's Already Broken

Problems in the EU

What the Next Recession Will Look Like

Don't Expect a Crash

SoundCloud Links

The Fed Cannot Fix What's Already Broken

Problems in the EU

What the Next Recession Will Look Like

Don't Expect a Crash

In that last clip, I side with economist Daniel Lacalle in that we will not have a "crash".

Curiously, it will be far worse than a crash for Pension plans.

Side Notes

Recall the Buckingham's hit "Hey Baby they're Playin Our Song".

The Buckinghams named their hit song after the first edition of Art's show, on WLS in the 60's.

Real Radio notes "The theme song was written for the show by the Chess Records studio band. Leonard Chess was one of my dearest friends and the theme song was his gift to me in 1965. I used it on WLS on Sunday nights for 5 years."

Topics Discussed in the Podcasts

  1. Eight Reasons a Financial Crisis is Coming
  2. Expect a "Lost Decade", Stock Market Rout "Only Just a Start"
  3. Junk Bond Bubble in Six Images
  4. Mortgage Rates Hit 7-Year High
  5. Tariff Scorecard: 57 Companies Bitch About Trump's Tariffs, 7 Give Positive View
  6. Vanishing Middle: Political Polarization in the US and Europe
  7. California Ground Zero in Upcoming Real Estate Bust
  8. Merkel's Legacy: Refugee crisis, the Splintering of Germany, Brexit
  9. Eurozone Growth Slows to 4-Year Low, Italy Stagnates, Global Recession Risk Up

We covered a lot of territory in those four clips and we both had a lot of fun doing it. Apologies for the red cast on the video from my side.

Mike "Mish" Shedlock

Comments (16)
No. 1-10
2banana
2banana

Great conversation.

For America - it sounds like seven lean years of negative 7% contractions (on average), per year, is coming.

It will start with the housing bubble popping. Then spread.

Very few safe harbors. Gold. Cash. Treasuries. Maybe emerging markets.

mark0f0
mark0f0

The pension plans need lower interest rates. Higher interest rates would be deadly.

Realist
Realist

Well run Pension Plans are heavily diversified (stocks, bonds, real estate, infrastructure, energy, farmland, timberland, private equity etc). They look 75 years into the future and invest for the long term. Interest rates do matter to them, but not in the way mark and 2 banana mention. Pensions do not worry about what interest rates are and how they effect their investment in the short term, such as bonds, stocks, real estate. Rather, interest rates are one of the important factors used to determine the discount rate, which reflects what the pension plan can expect to earn on its assets over the long run (75 years). Higher rates mean that the pension needs fewer assets today to meet their future liabilities. The reason that many US pensions had such large actuarial deficits in the last decade is because the discount rate was so low, it required a higher level of assets today to meet future obligations. So even though a drop in rates will increase the value of a pensions bond portfolio, this is inconsequential compared to how it affects the assets needed today to meet obligations in 75 years time. And even though higher rates will reduce the value of a pensions bond portfolio, the much larger factor will be the huge decrease in assets needed to meet obligations for the next 75 years. In short, slowly rising interest rates can result is large surpluses in actuarial values of well run pensions. Sadly, the US does not have very many well run pension funds. They can be found in other countries.

Realist
Realist

Mish, I agree that a crash is not a high probability. However I do not see a long slow decline. Rather I see a long slow climb of roughly 1% for several decades. Of course some years will be 1%, some will be 1.5% and others will be -0.5% But the long term average growth rate should be roughly 1%.

Casual_Observer
Casual_Observer

I do see a crash at some point because of how equities and other markets trade at nanoseconds. There is more likely to be a panic we saw b/c of how information flows. The computers can stop trading but once they start again it will be more selling. Pricing on bonds and other opaque instruments will be hard to find and that will creep into equities and the broader economy. The global debt crisis will bring down the entire globe over next half decade but things will look up as we emerge from more wars and crises by 2027. Right now each dollar spent globally creates about 8x the debt. We actually have an inverse relationship between money spent and debt. I think we will look back on 2017 and 2018 as golden years to have sold equities once all is said and done.

Casual_Observer
Casual_Observer

And here’s the point that you need to understand. The US Treasury borrows those dollars and it goes on the total debt taxpayers owe. The true deficit that adds to the debt is actually much higher than the number you see in the news. It brings to mind the scene in the Wizard of Oz, when they wizard says, “Pay no attention to the man behind the screen.”

Household and corporate debt is growing fast, too, and not just in the US. Here’s a note from Lakshman Achuthan.

Notably, the combined debt of the US, Eurozone, Japan, and China has increased more than ten times as much as their combined GDP [growth] over the past year.

Yes, you read that right. In the last year, the world’s largest economies are generating debt 10X faster than economic growth. Adding debt at that pace, if it continues, will boost the debt-to-GDP ratio at an alarming rate.

Lakshman continues.

Remarkably, then, the global economy—slowing in sync despite soaring debt—finds itself in a situation reminiscent of the Red Queen Effect we referenced 15 years ago, when tax cuts boosted the US budget deficit much more than GDP. As the Red Queen says to Alice in Lewis Carroll's Through the Looking Glass, “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

I am trying to imagine a scenario in which this ends in something less than chaos and crisis. The best I can conceive is a decade-long (and possibly more) stagnation while the debt gets liquidated. But realistically, that won’t happen because debtors won’t let it, and they outnumber lenders. Hence, something like the Great Reset will happen first.

The rational course would be to delay the inevitable as long as possible. Yet in the US, at least, we’re hastening it.

Freddy
Freddy

Hi Mish, I am a long time reader. However, something is seriously wrong with your website. The articles do NOT stay on the screen (because ads keep pushing them here and there). So, I cannot read the articles. In fact, I get severe headaches.

So, I am going to check back once in a while.

If it stays the same I am afraid I physically cannot read your articles.

It's too bad because I have been reading your site for many, many years.

Tony_CA
Tony_CA

We have never truly left the last recession. It has mostly been a mirage.

Realist
Realist

In the last 9 years unemployment has dropped from 10% to 3.7%. The Dow has gone from 6500 to 26500. The US has doubled oil production and has become the worlds biggest producer. There are shortages of all kinds of skilled workers from truck drivers to welders. How is that a mirage?

Blurtman
Blurtman

Let’s review how investors in government bonds get paid. They receive a credit in the currency of the country. That credit can be exchanged for paper cash, or retained in digital format, and used to exchange for other goods and services. There is nothing real about any of this, it is merely an artifical convention. And so it can go on forever, as there is nothing real there.


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