Zombified Economy: What Will the Next Recession Look Like?

-edited

The short answer is nothing like the last.

If you search for "next recession" numerous ideas pop up. Many believe there will not be a recession soon.

Condition Comparison

Conditions are radically different than in 2007 and 2000.

The Fed re-blew a housing price bubble but the number of jobs tied to construction, sales, CDOs, agents and even the impact on banks is a shell of what happened then.

Technology is bubbly, but not like 2000. This is how I see things.

  1. We will not have bank failures in the US.
  2. There will be major bank failures or bail-ins in Europe.
  3. Housing will not have a major role but will strengthen the recession.
  4. Millennials simply cannot afford houses so housing will not lead a Fed attempt at a recovery even if interest rates plunge.
  5. Low interest rates will keep zombie companies alive for a while longer .
  6. Proliferation of retail stores, Walmart, Target, everything requires minimum staffing levels no matter how poor sales become.
  7. Unemployment will not rise much like last time. Instead, expect to see hours cut.Also expect for many of those currently working two jobs to lose one of them.
  8. Retail sales will plunge with the reduction in work.
  9. The impact of the above is very weak profits but not massive labor disruption
  10. Stocks will get clobbered as earnings take a huge hit.
  11. Junk bonds also get clobbered on fears of rolling over debt.
  12. This malaise can potentially last for years.

Zombified Economy

Japan is in a state of zombification and Europe is on the verge.

The US may not and likely will not go through Japanese-like extremes just yet. However, the demography setup is poor, the student debt problem is a huge overhang, boomers unprepared for retirement is a huge overhang, and pensions are a huge overhang.

Democrats may win the next election and massively hike taxes. That will not help either.

Finally, the Fed only has room to cut by 240 basis points or so. Negative interest rates don't help as proven by the ECB and the Bank of Japan.

Mike "Mish" Shedlock

Comments (97)
No. 1-25
lol
lol

Ominous sign as central banks move to take over the oil market,if successful in taking control of oil like they did in stocks,bonds,gold,silver,forex well.....everything,look for 200-300 dollar oil.

sunny129
sunny129

The Fed will follow Draghi's motto - Will do 'with whatever"

nic9075
nic9075

The economy is rebounding. Total vehicle sales back over 17.4 million SAAR, the mbaa purchase index rose for the last 3 consecutive weeks

nic9075
nic9075

Can everyone please stop this bleeding heart nonsense about millennials. Something they are lacking its called personal responsibility. They blow their money on crap, most are in tens of thousands of dollars in credit card and Auto loan debt and those$8.00 coffees and $11.00 craft beers add up quickly.

nic9075
nic9075

Those conditions above do not equal recession, slow growth of 1% - 3% per quarter is not a recession. Jobless claims still trending lower, the mbaa purchase index and vehicle sales are running well ahead of expectations, but the Media conveniently left that out

THX1138
THX1138

@nic9075 : " vehicle sales are running well ahead of expectations,"

eh.. how's that?

Carl_R
Carl_R

Another story recently out is that CFO's see a recession by 2020. That, of course, would mean that the Democrats re-take the White House:

Steve333
Steve333

The setup looks to be deflation, not inflation as many suggest.

timbers
timbers

My guess is, based on it's recent U-turn which came in response to not especially great pressure - Fed reaches for the usual tools of the recent past such as Interest cuts and QE.

They won't work well except to benefit the Ultra Rich and Mr Market and will mostly further inflate assets, with all the inequality that brings. Yet the Fed seems to know nothing else.

The Fed has rejected MMT that would benefit the vast majority of people (but is just fine with MMT used to fund eternal wars and massive tax cuts of Rich Gigantic Corporations and the Ultra Rich).

And it Fed is against that which is sorely lacking in the economy and would perform wonders - Robust, vigorous govt spending on programs and changes to law that benefit working people.

Snow_Dog
Snow_Dog

Joe Sixpack still trusts his bank and doesn’t really know what to make of the economic outlook six months hence. Doesn’t really matter because nothing will happen until the elitists begin turning on one another.

Lehman Bros was on the telephones up to the hour when the knock on the door from the Grim Reaper came. A couple of bridge loans get muscled through right then and there and maybe the Great Recession never happens.

Somebody figured it would be easier to push around Ken Lewis at Bank of America and so they did. He was financially waterboarded into accepting all of Merrill Lynch’s garbage. It won’t be that simple this time around and a bail in itself may not feed the bulldog even if the politics of it line up right.

Lots of promises are going to go unfulfilled. That will shake confidence in ways it has never before been shaken.

Casual_Observer
Casual_Observer

Zombie is a good word. I expect we get a 10 year downward cycle in equities once things peak. There will be a couple of opportunities on bounces but overall the next 10 years wont look like the last 10. Dollar holders will walk away once they realize they arent getting their principal back.

bradw2k
bradw2k

Reading those headlines, apparently many people are trying to skip the Shock/Denial stage of grief and go straight to the Bargaining stage, before the next recession even happens. I don't think that is going to work. It's still going to be a bad surprise, much worse than all these muddle-throughers are hoping for.

Carl_R
Carl_R

To quote Dr. Seuss: “Won’t look like rain. Won’t look like snow. Won’t look like fog. That’s all we know. We just can’t tell you any more. We’ve never made oobleck before.”

Tengen
Tengen

Agree on most of your points, Mish, but I don't see stocks getting clobbered, or anything close to that. With a lot of help from cheap money and PPT, they've done a remarkable job of shrugging off bad news and should continue to do so. I could see a modest decline but I don't think they will allow anything more, as the Fed seems hellbent on propping them up. Stocks haven't reflected reality in a while.

Unemployment is a tricky one. Actual unemployment could increase dramatically as retail suffers, but officially it will be fine. Former workers will quickly become "discouraged" in the eyes of the BLS and will be eliminated from the equation. I don't foresee an official number anywhere near the almost 10% we saw in 2009.

Most of all, I agree strongly with your last point. Unfortunately, this crash won't be allowed to run its course so the zombified economy could last another decade or more. At this point the only way it ends sooner is if widespread unrest occurs, but we don't seem close to that either. There's a lot of grumbling but we're much more unhappy with each other than we are with the Fed.

numike
numike

"Life has become better, comrades, life has become more cheerful" Stalin 1935

AWC
AWC

New (Moral Hazard) normal here,,,, they've done jumped the shark. The Fed owns it all now. It's all about the "Flow." The Fed will provide whatever liquidity is necessary to keep the plates spinning. And spin they will, until the dollar is toast. That could take a long time. 10 years? 20 years?

My guess, considering the above, is, we've likely hit peak "Cash is King," and will begin to see slow, steadily increasing erosion in the value of the dollar.

stillCJ
stillCJ

Editor

As long as I keep reading articles every day that the next depression is right around the corner and it will be a disaster, I'll stay long the stock market.

Mish
Mish

Editor

"I will go out on a limb and say we will see both political and economic crises in the next 6 years. "

I expect a pension crisis and a junk bond crisis in due time. Not sure what a "political crisis means" here although the UK is in one now.

jivefive99
jivefive99

I guess anyone who would expect you to predict the future would find out from this post that yer just as crystal-ball-less as the rest of us. :) All we can surmise is that good times dont last forever, and the credit bubble started in 1982 would have to eventually come to an end. We were supposed to have a recession not long after 2008 (every 6-8 years or so, right?) I think the Trump surge is because all the credit removed in 2008 was restored, and people went back to borrowing with reckless abandon. This all is gonna reverse eventually.

Blacklisted
Blacklisted

Unfortunately, the landing will be hard, as the big driver, govt largess, will continue to consume an ever larger portion of the economy, starving the real economy. While the US will be the last to feel the effects, due to global capital flows seeking the RELATIVE safety of dollar-based assets (especially, blue chip stocks), the impact of rising rates and taxes will take their toll on pensions and growth.

The growth of govt (taxes & regs) since the 50's has resulted in a steady declining economy across the west. As govts panic, due to the rise in interest expense and pension liabilities, they will shoot themselves in the head by raising taxes, fees, penalites, and civil asset forfeitures in an attempt to save themselves. The Yellow Vest movement is the tip of the civil-unrest iceberg.

Realist
Realist

There should not be a recession in the next few years, unless we experience some kind of black swan event (like Trump closing the border for a month, or expanding his trade wars). Having said that, I expect continued slow growth of around 2%/yr for a few more years. Then I expect only 1% growth for the next decade. This will be followed by no growth or even slight economic decline for a few more decades after that.

Inflation will remain around 2% for the next few years. After that I expect inflation to begin to accelerate back towards mid to high sjngle digits for the next several decades. Since growth will be slow or negative, we are in for quite a long period of stagflation beginning in a few years time. Living standards will drop for the vast majority of the populace.

The reason for this rather dire forecast is a combination of factors. One is existing high debt levels. This will act as a drag on growth for the foreseeable future. The second issue will be energy. Fossil fuel costs will increase significantly. The third big factor will be the costs of climate change; more crop losses and failures; more severe droughts, floods, and wildfires; coastal erosion and flooding; ocean acidification hitting fisheries;, more migration of people leaving areas that are no longer habitable. Please note; I’m not talking extinction and alarmism; just higher costs. These changes will creep up on us slowly over several decades. They will hardly be noticed by many and they will also be denied by many, even as they happen.

JonSellers
JonSellers

Historically, business recessions were caused by companies over-expanding and running out of available labor. In a global economy, it's hard to see that happening. I think it is possible to see a few months of slow or no growth, but I don't see an actual recession with mass unemployment unless someone wants one. Maybe the Fed decides too many Americans are employed and keeps jacking up interest rates. Or the ChinComs want to teach their local capitalists a lesson and tighten up credit standards. But it will be by choice.

Mark Sircus
Mark Sircus

Surprised you are so optimistic! If we do not have a complete crash, destruction of the entire financial system we are out of luck as a race, I am afraid, for we will catch hell from several directions, nuclear war comes to mind, G5 which promises untold horrors I am sure others can think of ways modern man is in suicide mode.

RonJ
RonJ

"Negative interest rates don't help as proven by the ECB and the Bank of Japan."

Yet they still exist, despite not working.

KidHorn
KidHorn

Have we ever had a recession with the unemployment rate this low? Seems like layoffs and closings would have to proceed a recession.