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From Kelton To Krugman To Dalio: A Recession Diary
Humans harbor a perverse fascination with calamity.
I revisit this topic from time to time. We like movies about the apocalypse, we can't resist sensationalized coverage of tragedies and we'd sooner stare at a car accident than help the people involved.
In markets and economics, our affinity for the macabre finds expression in breathless media coverage of stock selloffs and incessant speculation about the proximity of the next recession. The deeper the market malaise and the higher the perceiv
I ran into burning buildings for a living. If there is smoke there must be fire is very far from the truth. I stopped reading politics and only economics and now I’m having my fill of the chattering class here in the world finance. Everybody but everybody has a soapbox in the Internet age. In hindsight one or two people are bound to be right.
Young people want a productive and vibrant economy but the older people want a crash so they could buy cheap. That’s how financial people make their money with poor peoples blood on the street.
Too bad the fallacy that wisdom comes with age is believed by the young.
Older people tend to be in charge of businesses, media, and the government. Their concerns drive the news cycle. They get worried when their jobs and retirement savings are threatened, and some get hysterical. Young people have time and should be calm. Young people should be happy when markets decline. They should want them to stay low so that they can invest at lower valuations for longer. And they should hope for massive rallies before they retire. Things don’t work that way, of course. But as long as young people can stay employed and continue investing (admittedly those are big IFs), they should be happy with market downturns.
Even as secluded as I am, I know many old ones who have worried over these “recessions” the past couple years as they tried to retire. Now we will see about cost of living and Ukraine ontop of asset depreciation.
One of the things I remember from the 70’s was that work force union membership was a much larger percentage of the labor pool and by the mid 70’s the union contracts included annual wage adjustments tied to the inflation rate. We haven’t seen this today and union membership is a much smaller part of the work force today.
It feels like our soft-science of economics is trying to now roll alongside our soft-science of politics. Economically speaking, we seem increasingly caught in an academic debate on NAIRU or neutral rates or QE/QT or duration, that are made impossible on the theoretical level because the underlying facts are being called into question. Are the job openings real? Where are inventories exactly? Are shipping rates to be trusted? How much management incompetence is being blamed on supply chain problems? Are the cash balances, both corporate and individual, real?
But just looking at general indicators of volatility and liquidity, it doesn’t feel like we are in a good place for making any sort of bottom or inflection bet. We keep talking about how all these indicators have “never” — gotten this low or high, risen or fallen so quickly, 3 sigma events eclipsed by 6 sigma events, etc. Everything seems compressed and every trend seems discovered too late and on the verge of reversing by the time it seems actually investable, at least from these wheezy old Graham & Dodd catraract eyes. But no one who’s been paying attention doesn’t feel at least a little tempted by this market (if they’re not busy puking) after 60-80% drawdowns.
I don’t like it, but I feel like a few decades of investing experience has prepared me for this. But these violent moves and liquidity issues have my spidey sense tingling that someone is going to be caught major-ly offsides. We have our own American suspects of course (Wells Fargo, Microstrategy, ARK, levered decaying ETFS and raft of ez money zombies), but more often than not the trigger is some hedge fund we never heard of or some country we didn’t know we needed to pay so much attention to (Malaysia, Greece).
If I can be so bold, I’d love to hear your thoughts on specific tail risks. I know prospective is not necessarily your baliwick, though you’ve been an invaluable resource in understanding all of past, pressent and future for me. But all this talk about this or that terminal rate, this or that Fed put level, 3810 on the SPX, 14 or 17 PEs, makes me long for the Heisenberg big picture of what could go really wrong just with the cards we already have, and even ignoring another Russia invading Ukraine on the flop.
But Turkey and Russia are already deep in the sh–t, as is Ukraine. Europe just ran into a closed door it thought was open. Japan is playing chicken with the private market, perhaps soon to be followed by the Swiss. A 50 bp hike by Powell is now officially dovish. Nurse (Heisenberg)? How did we get here? Actually, wrong question — where the hell are we going?
Lets face facts.We are in deep sh**t. The only real question is how much will it hurt, not if it will hurt.
Funny though there are still “experts” spewing self-interest nonsense. That somehow all the losses suffered by investors since 2020 are not the result of poor investment decisions and/or poor (or seemingly non-existent) risk management. There will be more attempts (by all experts) to deflect blame if things keep going south!
Best buckle up. It is going to be a rough ride.
Wishing for 10% unemployment is just vicious.
Agreed, Kelton called out that policy impacts people; Summers 10% unemployment is demand destruction without regard to the follow-on consequence.
If this is all the Democrats fault (nevermind the Trump Tax Cuts, the pandemic, Russia starting a war, etc) then voters could elect the Republicans who don’t believe in raising the debt ceiling and instead prefer trying to default on the US Debt.
Have the comments here just validated the post?
I think this post is a fabulous thinking tool for a bulk of readers here. I do think there is a Geopolitical variable here that might be very understated but will reset the Deck that we are being dealt from. Nothing will be as it was before and as it is now. It is an exiting time and as mentioned above the internet gives everyone an opinion and someone ( or a few ) will be correct.
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Great post. Putting this stuff together is surely your superpower. One thing I learned was that Ray gets it and Larry has no clue. I’ll bet a hundie that Larry won’t be volunteering for the unemployment line any time soon.