Epocalypse Soon: The Second Coming of the Great Recession is Near

By Enola Gay Tail Gunner S/Sgt. George R. (Bob) Caron (SElephant at zh.wikipedia) [Public domain], from Wikimedia Commons

It was the second nuclear explosion, not the first, that ended World War II; and so it will be with the nuclear-sized economic disaster that first struck the earth in 2008. The second strike will be more calamitous and have greater consequence than the first, and that nuclear bomb is about to go off with a relatively small detonator to set the reaction in motion. And that is what this will be … a “reaction” due to all the potential energy stored up.

This month will hardly be the first time the Federal Reserve has raised interest rates going into a declining economy only to cause an economic crash. The Fed looks at a narrow cluster of instruments to judge the state of economy and routinely misses the large picture all around it. It didn’t see the Great Recession coming in 2007, though major global economic collapse looked inevitable and obvious to me; and it doesn’t see the return of that recession coming now as it considers raising interest rates.

The second crash will be more calamitous than the first because so much more top pressure is bearing down from all the piled debt and because so many more economic structures around the world are in weak condition and because central banks have run out of additional ammo to fight a war of such scale any longer.

Barring some obvious jolt to the economy on one of the few instruments the Fed does understand how to read, it will raise rates at its December meeting. Some permabears like Peter Schiff have held resolutely to the opinion that the Fed will not raise rates because it cannot without causing economic collapse. Schiff says the Fed will go straight into a fourth round of quantitative easing. I disagree and have said it will raise rates this year. The Fed has never seen an economic collapse that it could not help cause. It is not exactly a coterie of the world’s wisest people.

The Fed may be bullish on its own recovery programs, but it has the dim vision of a bear. Its bull-headed attitude is its blind spot. It will raise rates to prove its critics wrong and its own programs a success only to prove its critics right by triggering the rapid end of the mirage of recovery its programs created. The Fed is dumb like that.


Those who are generally bullish now see a US recession directly ahead


Says investment-guide Axel Merk, who is by no means a permabear, as the Fed considers its rate increase, “What could possibly go wrong? A hell of a lot!” Merk sees rising “risk premiums” that will create headwinds to the stock market for, at least, 18 months and possibly for years to come:


We can’t help but be pessimistic:

  • …the majority of corporations did not meet revenue targets….

  • Share buybacks … a key driver of the market rally, become less attractive as interest rates rise.

  • We see classic symptoms of a stock market top, including a lack of breadth (few companies participating in rallies). (Newsmax)


The last time Axel Merk soured on the stock market was clear back in 2007. He hasn’t been bearish since until he said in August that he is taking more aggressive action this year to prepare for a bear market than he did back when the Great Recession was about to deliver its first nuclear bomb.

Citi, again far from being a bear, has stated that the risk of a US recession for 2016 is 65%. The outlook for the global economy is darkening, they say, and the two biggest clouds coming the global economy’s way are the US and China, both of which look quite gloomy.

Fortune magazine says that permabull Goldman Sachs has even become “incredibly depressing” in its predictions for the near economic future:

Goldman predicts the S&P 500 will go nowhere in the coming year, saying the market will hit a headwind of rising interest rates, a strengthening dollar, and stalled profitability.

Of course, for the always-full-of-bull Goldman, nowhere equates to a mere 3% rise, including dividends, which as I recall was what they predicted for the S&P 500 this year, which has risen so far only 1.5%. In their pessimism, they were too high a year ago, and they are too high now. One of the headwinds Goldman Sachs points to is …


Only 6% of the time during the last 40 years has the median stock traded at a p/e multiple higher than it does today…. What’s more, Goldman says p/e multiples tend to fall by 10% in the six months following a Fed’s first interest rate increase, which is widely believed to take place in December. Goldman says the Fed is likely to increase interest rates faster than expected.

Another problem: stalled profitability. Goldman says profit margins at most companies have been flat for the past few years…. Goldman predicts that even tech sector profit margins have probably peaked at this point.


Brazil’s boom went bust; its recession becomes depression


Goldman is far more negative about another part of the world. They have moved from calling Brazil an economy in recession to a full-on depression, choosing a term rarely used. Thus, they must have deliberately wanted to call to mind the Great Depression as being the kind of pit Brazil is now falling into. Brazil’s economy has contracted for three quarters in a row now with no hope on the horizon.

Consider that a couple of years ago Brazil was considered one of the shining lights among emerging markets. That hope is now completely extinguished. Since much of Brazil’s debt is in dollars, an interest-rate increase by the Fed will only blacken Brazil’s outlook all the faster.

Brazil now experiences double-digit inflation, and its central bank is caught in that vicious circle where raising interest rates to stop inflation’s rapid erosion of consumer spending power, further suppresses economic growth and swells the ranks of the unemployed, thereby also eroding consumer spending power. As one particle reacts off another, there is no way out of that cycle but through an all-out explosion.


What started as a recession driven by the adjustment needs of an economy that accumulated large macro imbalances is now mutating into an outright economic depression given the deep contraction of domestic demand.


Can you think of any other economies that have accumulated large macro imbalances, such as huge debts in proportion to their GDP? A nation’s debt slowly starts to glow in a threatening way as it builds up mass; but, if it reaches critical mass, it may turn into an unstoppable reaction.


“Investment … has fallen nine quarters in a row, but this year the big change is the substantial drop in consumption,” Carlos Kawall, chief economist at Banco Safra and former Treasury secretary, said by phone from Sao Paulo. “We have not seen such a string of bad numbers for consumption.”


Consumers are reeling back in Brazil because of fear that they may not have enough income in years ahead to service their existing debts. Given the momentum of its fall and the vicious circle now in play, Brazil’s economy is certain to shrink for a couple more years, and who knows how many more years after that it will take for the economy to crawl back out of its hole? The Olypmic Games, planned when things were booming, may help but will be a short-term shot in the arm at best … or they may just be an expense Brazil can ill afford.

Brazil is one of the top-ten global economies, so its economic depression will put weight on everyone to some degree. But that’s nothing: several other economies in the top-ten are also in recession or slipping into recession. Japan is solidly in recession. China’s growth is declining rapidly, but it is not in recession, although its manufacturing base is now in recession. (In fact, the manufacturing sector of all the emerging-market economies is in recession.) Russia’s economy is deeply in recession. Canada just entered recession, and it appears the US is sliding into recession, though many don’t see it. This article is one of many to help show it is.

Did I not say this was going to be a year of global economic collapse?


US recession pressures developing quickly


MarketWatch reports that the Intsitute of Supply Management says,


U.S. manufacturers turned in their worst performance in November since the current economic expansion that began in mid-2009.


A series of interconnected reactions have begun in the US economy. In October, GDP growth slowed to the barest of crawls. In November, manufacturing reversed into actual decline, bringing the ISM index to its lowest reading since the full depth of the Great Recession in 2009.

[Note: That is to say, manufacturing has slid back to the point of the Great Recession’s greatest known depth. Fact is, we’re still in the Great Recession, and we don’t know how deep it really is. The economy died years ago and is just being kept alive by artificial life support. I have always maintained the Great Recession is ongoing but has been bridged temporarily with the support of vast amounts of new, free money. The US might as well be counterfeiting its own money, as printing it at the recent pace creates the same problem that counterfeiting does. The Federal Reserve is going to pull the plug on that life support this month, letting the economy slide into its natural death. Of course, the Fed does not believe that will be the result, and it will try to jump back in with quick recovery measures at some point next year once it realizes that the crash that unfolds is not just a temporary shock; but its efforts then will be less effective than anything they’ve done to date. We have also cooked the books on unemployment numbers and, especially, on how we calculate GDP to make things look better than they are.]

Economists did not expect this reversal in manufacturing, which is now building a backup of inventory at the fastest pace since the official dates of the Great Recession. The economic shrinkage of US industry was broad based with ten out of eighteen industrial sectors of the US economy now in recession.

While the ISM indicated US consumers are saturated with goods, US manufacturers are also saturated with backed-up inventory, which guarantees the decline in manufacturing will last some time before this huge oversupply normalizes. The problem is not going away in the next year.

Now, here is a chart that screams of US recession. It is the velocity of money in the US:




The shaded areas mark US recessions. Note that in every recession above, except one, the velocity of money ran sharply downhill. More interestingly, note how the velocity of money recovered after each recession … except after the Great Recession of 2008-2009. After a brief uptick, the velocity of money has declined to its all-time record low through the period that has been called a recovery. (Just one more reason I say we are still in the Great Recession as there has been no recovery in the velocity of money. It is, in fact, the worst we have ever seen … in spite of the fact that there has been no time in history in which the US has created so much new money.)

Velocity of money refers to how fast or often money changes hands; i.e., how fast money is moving through the economy. So, slow velocity means very little economic activity. As the Federal Reserve has exponentially expanded the supply of money, the movement of money through the economy has stalled to its lowest speed on record. That’s because the money is pooling in the hands of very few rich people where it is being hoarded but is doing nothing to stimulate the actual economy.

If money is not moving easily with low viscosity through the economy but is congealing in a very small number of pockets, the economy is stagnating. We have never lived in a time where the quantity of money was so high and the flow of money through the economy was so slow.


Conclusion: The Great Recession is still here, and it is the end of a false recovery that is near


While the stock market is still skipping along just below the ceiling it established last year because that is where the hoarded money is pooling, the overall economy is deeply mired. So, will the Fed raise rates just as the US economy reaches a critical mass of internal reactions? Of course it will! It believes the glowing stock market is a proof of economic recovery, even as the actual economy (as opposed to the stock market) is cracking up.

At this point, apparent rallies in the stock market are nothing more than death spasms. They should not be seen a spurts of recovery but as preliminary bursts of explosive energy from something that is right on the edge of explosion.

In other words, a very limited number of people and insitutiitions are looking for safe places to invest free money while the free money lasts. This creates bursts of activity among a few large players. Speculators in the US stock market are now crowding into a rapidly diminishing number of safe havens. When they do, they bid those few stocks up so much (because there are so few worth buying) that it gives the market average a brief boost. There are probably some net gains to the market in these bursts due to money moving over from high-risk bonds that look even worse.

These rallies are nothing more than the final rapid movement in musical chairs where the number of chairs is few and so are the remaining players, but the game accelerates into greater intensity until the music stops one last time, and it’s over.

To put it in crystal-clear numbers, 490 of the S&P 500’s stocks have been sinking all year; but ten have done outrageously great, keeping the S&P average bounding along that ceiling. That means there are now ten remaining chairs out of a circle that had 500, as 490 of the chairs have been removed from play. The scramble for the ten remaining chairs is now a flurry of excitement, as the removal of a single chair out the remaining ten has far more significance than the removal of one chair out of 500.

The next time the music stops will be when the Fed announces its first interest-rate increase in 84 months. At that point, the stock speculators and robo-buyers will trip over each other so fast that they’ll knock the few remaining chairs down, and no one will have a good place to sit.

The end is near — the end of a fake economic recovery. And it will be detonated by the Fed, itself, because it believes its own baloney. It believes it has created recovery. Before the month is over, I will be writing, “The End is Here,” exactly as I said I would last spring. That end will take many months to find its bottom, but the initial jolt will be quite evident. August was just a foreshock.


  1. Ping from Davebee:

    I note that Granma Janet and her fellow Fedders are to hold a SPECIAL meeting on Monday April 11 2016.
    I sure hope they are not going to announce a sneaky digital Facebook/Twitter/Social Media Apocalypse.
    However, I’m sure it’s nothing to be too concerned about as I’ll bet, as we type, some pimply faced youth will have that situation Apped before you can say WW3.

  2. Ping from Davebee:

    So, today 2016-03-21 at 20:00GMT we should see a few jumpers down at the south end of Manhattan then? Or when?

  3. Ping from Knave_Dave:

    Hi, Xavier. Glad you stopped by. First, I went with “epocalypse” to mean an economic apocalypse. I tried a couple of versions on the first articles and then changed them — such as econocalypse — just too hard to get one’s mouth around. (“Epocalypse” has been used to refer to an electronic apocalypse, as you indicate, so I’m repurposing the word to my own ends.) Thanks for asking and giving me a chance to explain it to all.

    As you’ll see when you have time to read more of the articles here, I think we’re heading into a bust that will be far worse than the Great Recession, except that I think it really is THE GREAT RECESSION. It is simply a continuation of what began in 2008. What we’ll be seeing is where all that ends up after all the attempts to superficially reinflate the economy end, and the economy sinks back to where it might have gone. The deep belly it’s going to sink into (second dip of the Great Recession) could have been less than it will be if the right things had been done to correct the many economic flaws we have; but we have squandered that opportunity completely. Instead, we expanded on those flawed ideas, tried to push them harder and farther, so we have only made the pit of debt that we’re going to fall into worse.

    If I had only myself to reckon with, I’d sell my property now while it is at peak value. We bought when the value was just coming up out of the first dip of the Great Recession; so we would realize some gain if we sold now. I’d do that, though I love the property, because I think it would put us in a stronger position for the future when property prices drop again. I suspect that drop will not be as quick as the last one because real estate will not be the leading cause of decline but will be a following casualty of the crash we’re about to go into. Of course, with selling one’s primary home, there is more to consider than just what is best economically. There are issues of uprooting and moving and losing something you love. I believe, in the end, however, we’d be able to save what we’ve gained and buy something even better and still have a smaller mortgage. By that time, interest rates could be back down again, as there may not be many people willing to pay higher interest rates.

    In the short term, though, interest rates will rise. So, those who sell now while others can still get cheap financing and while prices are high again and who, then, rent for a couple of years to sit out the decline in housing prices may do better for themselves in the long run, so long as they don’t pay too much in rent. It’s hard to say for sure, of course, because the economic collapse that is coming will be so complicated that one cannot know for sure where any single piece of the economy will wind up. One can predict a house of cards will fall in a windstorm and know they will be right; but predicting where each card will land is impossible.


    • Ping from Xavier Yount:

      Wow. Part of me is shocked by the magnitude of your call, and another part is not shocked at all.

      A few months ago, I sat across from at Merrill Edge advisor at BofA, where my money is, and after telling him I was not going to invest in the market or bonds, but would keep my money in cash in my bank account, I asked how to split it up into $250k parcels so it would be FDIC insured. He smiled at me as at a rube, and told me that banks were so cash-rich, it was hardly likely that I’d need the FDIC to fall back on. I smiled back, left, and parceled the money up myself.

      But now the idea of putting it under the mattress is beginning to have more appeal. Then again, you can’t eat paper. I might be better off starting a farm on my lone acre.

      Thanks, David, for the great info. Hope we can help each other through the coming storm. I’ll be the one tending the cow. My late husband was a dairy farmer for a short while and loved it; he’d be proud!

      • Ping from Knave_Dave:

        I grew up on a dairy and have near my retirement years returned to having a farm as a semi retirement venture. After years of managing resort properties, I wanted to just manage something smaller of my own and avoid association politics.

        We rent out some space to horses, take in some hay to sell to neighbors, and rent out one of the barns for storage, so it helps pay for some of the increased mortgage cost. The fact that we can expand on that makes me feel fairly comfortable hanging on to it, even though I anticipate another drop in housing prices and times that could make paying the mortgage harder.

        It’s just side income, though, not my main endeavor. Mostly, I do it because I enjoy it and live surrounded by mountains and streams all around. (Didn’t make me feel real happy this week, though, when I arrived home from work this past week and found a quarter of the sheet metal from one of the fairly new large barn roofs in a heap out in the field due to a freakish windstorm.)

        I think you”re safer with money in insured bank accounts than under the mattress, though I’m sure you said that partly tongue-in-cheek. You’d have to have both the bank fail and the US government fail before you’d be likely to lose. As bad as things will be for banks AND for the US government during the second dip of the Great Recession, I think there is probably a higher chance of my house burning down and my cash going up with it if it were under the mattress or a thief breaking in and stealing it.

        I think you’re wise to split it into parcels.

        In the end analysis, just as with the new roof on the barn that I thought put the barn in great shape for years to come, nothing in life is certain. We make the wisest preparation we can, and then live out whatever comes in as good a form as we can.

        (Incidentally, one institution I don’t like, though, is Bank of America. Had a very bad experience with them. They lost a major class-action court case over it, and they paid me back all that they wrongfully took, but it put me through the ringer. I’m more in favor of smaller banks.)

        In the end, a great attitude will do more to get us through than all of our wisdom, I suppose. Like you say, helping each other through the coming storm. It’s all a part of life — the good and the bad. It’s rich and crazy, sad and wonderful. When the barn roof came off, my wife said, “I’m glad I’m not married to someone is cussing up a blue streak in rage because the roof blew off.” I just said, “It wouldn’t help the roof any. It is what it is, and we’ll deal with it.” We smiled and enjoyed the rest of our evening.

        • Ping from Xavier Yount:

          As my husband (whose father owned the dairy farm in upstate NY) said, “There’s always something to do on a farm.” His father was always checking the weather, too.

          Yes, the mattress tactic (or ticking?) was tongue-in-cheek.

          And, yes, BofA can be a bit of a scumbag. But of all the banks in my town, they treat me the best. (They’re also one of my biggest clients — I help banks lower their cost of compliance — though my local BofA branch is unaware of this.) The smaller banks want nothing to do with me. I guess it’s a branch thing, or a “guy” thing. Because my husband established a relationship with BofA, I inherited the guy thing banks seem to prefer, courtesy of my late husband — at BofA, anyway.

          For instance, when I walk into the local Chase, I’m practically patted down. Their officers look like bouncers, with the attitude to match. I’m a petite housewife, and they give me the treatment. What the …? The person at their drive-through window is always a pill. My son banks there and he doesn’t get what I’m talking about. The only other possibility is Citi, but my business accounts (so clients can transfer payables) are already set up at BofA and it would be a huge pain to make my clients redo/switch. So, BofA it is. Sorry they were such dic*s to you.

          Anyway, I’m going to try to refi next March, probably with BofA. Wish me luck. And thanks for the “e”pocalypse definition. Cheers!

          PS: I noticed you managed property in Hawaii. Honolua Bay on Maui is our favorite place to snorkel (when the tour boats aren’t there). Sharks, moray eels, octopi, spinner dolphins — we’ve swum with everything there. The hike in from the street is a trip, too, like something out of Edgar Rice Burroughs.

  4. Ping from Xavier Yount:

    Hi, David. I’m new here — saw your comments on Bill Conerly’s piece in Forbes (http://www.forbes.com/sites/billconerly/2015/01/06/economic-forecast-2015-2017/2/) and liked what you had to say.

    I too am chagrined that the Fed is going to move rates up — in my case because I want to refi my mortgage. For various reasons, all of them to show a favorable P/L statement to the bank (I have my own business), I can’t apply for a refi until after I file 2015 taxes, by which time mortgage interest rates will most likely be higher.

    My only investment is my house, which gives me and my adult children a place to live, a write-off on taxes, and is building equity — at a snail’s pace, but still. I have no plans to move and don’t mind carrying a mortgage as long as it’s low.

    I have all my money in cash because I can’t sleep when it’s in the market — I pulled out of the stock market forever in October 2007, a couple of weeks after the DOW’s high, and a year before the crash. (I’m a financial neophyte but even I could see the imminent crash coming. So I’m leery of the loudmouths on the “Gambling Channel.” Even a wise man like Steve Liesman couldn’t see what was coming. Nouriel Roubini was the only guy who called it.)

    I also think there’s going to be a global meltdown (20-30% loss at minimum) in 2017 caused by illiquidity. It might not be quite as big as the mortgage bust, but close. What say you?

    btw: why “epocalypse” not “apocalypse”? I thought epocalypse referred to Internet collapse.

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