UKC

https://www.theguardian.com/business/2018/sep/13/recession-2020-financial-c...

I hope this is a pessimistic analysis. Worse than 2008? 

We'll get off lightly compared to others, since by then our economy will have a lot less value to lose. Hooray for Brexit!

I read this in the FT last week. Yes, in once sense it's an overly-pessimistic analysis from a media-savvy provocateur.  I like Nouriel very much because he's exceptionally intelligent and insightful as well as rather entertaining. But this reads rather like a list of 10 crises that might occur in order to then claim the credit for predicting the next recession. There's an old joke in economics that "economists have predicted 14 of the last 5 recessions"

But his chief argument, a recession is coming, aligns with mainstream thought. In fact, almost every economist warns of a recession in late 2019/early 2020 as the Fed chokes off US growth with excessive interest rises.

However, I could highlight several instances where he is peddling the worst case scenario. Nouriel's predicted peak Fed interest rate of 3.5% contrasts with revised recent expectations that they may not exceed 2.75%. Trump is very keen to suppress the rise of the dollar against the Euro and the Chinese Yuan for which he needs low interest rates. And today's p/e ratio at 50% above average reflects the exceptional performance today of the US economy, yet is well under 40% (yes, under 40%) of its level in 2008.

Nevertheless, he's right. A recession is coming. But then it always is. And no matter what the ultimate spark. He'll tell you he saw it coming

I don't see that happening while Trump is President.  The Dow Jones rising and the economy growing is the only thing that is making him popular with the electorate.  He tweets about this success all the time.   Also, he's got a real estate empire with a ton of loans financing all those buildings.   The Fed won't be allowed to bump up interest rates to the point growth stops when Trump wants them to engineer a boom. 

I hope you're right but even Trump doesn't get to decide when recessions occur, much as he probably believes he can turn back the tide! In fact his tax cuts of late last year made a recession considerably more likely as it has forced the Fed into accelerating their interest rate rises to cool an overheating economy. Always a high risk scenario.

To me this reads more like a convergence of factors, which, taken together, are likely (according to him) to create the next recession.

I happen to roughly agree with him on all counts, I have made similar points before although I would say the list of defo non-exhaustive.

Thing to remember is that we've injected 18 trillion of liquidity in the financial system, with little to no effect on inflation.

Large net migration of working age immigrants, global trade boosting supply, in part, and low oil prices, have kept prices in checks in the key economies. Politics could reverse that very quickly.

The central banks have removed the cap of the ketchup bottle, shook and nothing came out, so they shook harder, still nothing came out. Well next time they shake it could all come out in one go and we'll have ketchup all over the table.

P/E ratios don't mean that much, but, for the record, once you adjust for the economic cycle, PE ratio are actually much higher than they were in 2007/08.

I really thought you were going to say "LOVE"

I'm disappointed .

This might make things worse. If Trump was to take over FED's policy and prevent them from increasing rates, who knows what it would do to confidence in the $ as a reserve currency.

Haha. I like that!

It might well make things worse.  If you keep interest rates too low too long there's bound to be a buildup of dodgy loans and a nasty bust like happened in 2008. 

However, we aren't talking about what is the right thing but what Trump will do.   Trump is a control freak who acts on his own immediate self interest.  He won't think twice about dictating the Fed's policy if it threatens his business interests or chances of re-election.

Carlyle didn't call economics 'the dismal science' for nothing...

I agree but you missed my point, maybe I wasn't clear:

Having Trump setting monetary policy, in itself, could cause a massive loss of confidence in the dollar, thus causing a collapse of the currency, and an inflationary spiral.

In recent days I have seen references to stagflation, over inflated housing markets and the breakdown of the Phillips curve.. Apart from economic texts stagflation and the phillips curve have been long forgotten...

The implications of these occurring at the same time is dire and make the last decade look rosy; austerity MkII and the increasing isolationism/economic nationalism really could take some countries down a dark path. All it would take is a trigger, oil seems to be the traditional option...

LD

It's certainly not wrong to be concerned. However, if you look at the calculation of the 10 year Shiller CAPE, the base data starts with the great recession when asset prices and profits slumped near to zero. These make for VERY easy comps which artificially inflate today's 10 year CAPE values. As these base comps roll off, and despite a possible continuing upwards trend, for which we must hope, the 10 year CAPE will fall dramatically.

What you've done is to miss the point of CAPE entirely. The whole point to do this calculation is to adjust for such events. It's not "inflated", it's this way by design.

Now you may say it's a relatively useless measure for the purpose of predicting recession, as are PE ratios. I agree. That is what I've said earlier.

Feel free to disagree but don't speculate on what I do and do not understand.

CAPE is designed to adjust for the "normal" business cycle, not for exogenous catastrophes like the GFC. These form part of the wider economic story of course but they are by nature outlying events with a significant distorting effect on statistical analysis. Over a long enough period those distortions would be smoothed away, but we are still in the wake of an event that is only 10 years old, a key characteristic of which is the lag between asset prices and inflation. I humbly submit therefore that this is not not a "normal" cycle and that CAPE, a useful metric, is however imperfect.

I do agree with the reading that prices are high however and I'm watching closely for signs to reduce equity exposure.

Odd to say that after having rightly pointed out that it indeed doesn't do that.

on the contrary. the principle is that by taking a longer view one off shocks and bubbles are smoothed out.

you can always take 25 year cape if you are worried about that, same story: sits at about twice the historical average.