The Second Dip of the Great Recession is Coming Soon
When you look at numerous key sectors of the economy, they hang together like the bones of a rickety skeleton. Here is a list in bullet points of some economic bones to pick over. When viewed altogether, they indicate the next dip of the Great Recession is likely near and severe:
“There are more obvious light switches today or ticking time bombs” than in 2007, says Barry Sternlicht, CEO of real estate investment firm Starwood Capital Group. “The whole macro global situation is not good.” (MoneyNews)
Key indicators that the second dip of the Great Recession is near:
- Stocks are priced to perfection. The Shiller price-earnings (P/E) ratio is approaching a 26.5, far above the longstanding average of 15.5. If the market is priced to perfection, anything higher becomes overpriced. So, stocks have nowhere left to go but overpriced. Historically, Shiller P/E ratios over 25 are associated with market downturns. The only times it has been this high have been shortly before the crash of 1929, shortly before the dot-com crash, and just before the Great Recession began in 2008.
“Priced for perfection, unfortunately, doesn’t mean attractive,” writes Wall Street Journal columnist E.S. Browning. “It means that stock prices are so high that gains depend on a very favorable investing environment, with strong corporate profits, low interest rates, low inflation and continued global growth.”
“The market is primed for more volatility,” [says] Scott Clemons, chief investment strategist at Brown Brothers Harriman Private Banking. (MoneyNews)
- The stock market has recently smashed all records. Typically, when the stock market smashes through a long-standing ceiling, as it has done in the past month, some investors pull back in order to reap profits from the long climb they’ve just completed. They take a breather and eat lunch. As a sense begins to develop that the market is now operating in rarified atmosphere, investors may start to become wary with the feeling that they are now in the stratospheric zone. So, the market will become more skittish — i.e. volatile.
- The CBOE Volatility Index (VIX) has risen 35 percent in less than a month since stocks peaked at record highs.
And the trouble may have only just begun, says Scott Clemons, chief investment strategist at Brown Brothers Harriman Private Bank. “I’m nervous,” he told CNBC. “I think investors have had a holiday from volatility for almost two years, and that vacation’s about over.” (MoneyNews)
- The Federal Reserve is discontinuing quantitative easing, the source of nearly all the new money that has been pumped into the stock market by major banks that benefited from the Q.E.. No new money, means prices cannot rise more. When prices could rise no more in the housing market because people were maxed out on debt (meaning they had no capacity to get more money), the market crashed because people couldn’t pay off adjustable-rate mortgages without a rise in equity. So, too, no new money now means investors will start pulling out of the market because the easy money that enabled people to bid up stock prices is gone. And, because the money was free, the risk-taking has been great … just like with those adjustable rate mortgages. So, the crash will be great.
- Many analysts have been saying the stock market is just another speculative bubble created by the huge cash influx of free money from the Fed.
You can add mutual fund manager John Hussman, president of Hussman Investment Trust, to the list of those who think stocks are forming a bubble similar to the last two market peaks. “Our concerns at present mirror those that we expressed at the 2000 and 2007 peaks, as we again observe an overvalued, overbought, over-bullish extreme,” he writes in his weekly commentary. (Moneynews)
- The bubble has formed in the same high tech stocks where a bubble formed before the dot-com crash. Having learned nothing, major investors rushed to pump billions of dollars into companies that have never seen a dime of profit.
Nearly half of Nasdaq Composite stocks are down 20% from a year ago, meaning they are all deeply mired in a bear market. The Nasdaq is made up largely of high-tech stocks, which is where market vulnerability showed up in the last crash of a speculative stock market. (The Great Recession Blog)
The Hulbert Nasdaq Newsletter Sentiment Index has dropped “an incredible” 75.5 percentage points (to minus 6.7 percent from 68.8 percent) since the Nasdaq Composite stock index hit a 14-year high…. “We currently observe the ingredients of a market crash,” said Hussman (MoneyNews)
- The mother of all bubbles has nowhere left to go. A study by Deutsche Bank was published this summer that tracked the roll over of economic bubbles through the decades from the Japanese collapse to the dot-com crash to the housing-market crash that started the Great Recession. Their conclusion is an important warning, coming as it does from one of the biggest financial institutions in the world:
The “near two-decade rolling series of inter-related bubbles … [has] nowhere left … to go given that it is now in the hands of the lenders of last resort (governments and central banks….) The worst case scenario being future restructuring….”
Former Reagan budget director David Stockman [agrees]: “Central banks all over the world have been massively expanding their balance sheets, and as a result of that there are bubbles in everything in the world, asset values are exaggerated everywhere.” (Economic Collapse News)
- The student loan crisis peaked. Over the past two years, The Great Recession Blog has been pointing out that student loans were approaching a point of massive default. Students coming out of college were not getting jobs but had huge debts to pay. The long job slump of the Great Recession and the reduction in wages for those jobs that remain have not helped the situation. Student loan defaults dipped for the first time in quite awhile this summer; but remain high and create a perilous situation if another economic crash were to happen.
- Contracts to buy homes slide one percent in August, sparking economic slowdown worries. The housing market started to struggle again in mid 2013 when the Fed announced it would begin to start pulling down quantitative easing.
August contracts fell in all four geographical regions — Northeast, Midwest, South and West — compared to the prior month. (MoneyNews)
- Europe and Japan are falling back into recession. Even Europe’s economic powerhouse, Germany, appears ready to take a third dip in the Great Recession while the rest of the world hovers on the brink of being dragged down by each nation’s massive debt.
“I think Europe would probably be our number one area of concern,” Zients, director of the White House National Economic Council, told the Economic Club of Washington today. “They’re potentially going to have a triple-dip recession.” (Bloomberg)
On a global level, growth is being steadily drowned under a rising tide of debt, threatening renewed financial crisis, a continued squeeze to living standards, and eventual mass default…. Contrary to widely held assumptions, the world has not yet begun to de-lever. In fact global debt-to-GDP – public and private non financial debt – is still growing, breaking new highs by the month…. The only way the world can keep growing, it would appear, is by piling on debt. Not good, not good at all. (The Telegraph)
- All major banks now operate deep inside a realm of experimentation where investment bankers use cash reserves created out of thin air by the Federal Reserve in quantities never before imagined by economists. We have no experience to guide us in where this will go.
- Hong Kong’s student protests could become the kind of trigger that tips the global economy. Beijing is not likely to yield to protestors. They’re not likely to back down. Since Hong Kong is a major stock market, what happens in Hong Kong has some impact throughout the world’s modern economies.
The latest show of popular dissent represents one of the biggest threats to Beijing’s Communist Party leadership since its bloody 1989 crackdown on pro-democracy student protests in and around Tiananmen Square. (Yahoo!)
That’s not a lovely set of bones. Hanging together as they do, they look to me like a Halloween threat to the economy. I believe the second dip into the Great Recession will be a plunge worse than the first because all nations have exhausted their credit limits, which they used for economic stimulus. Thus, they have no credit capacity for more stimulus when needed again. Moreover, they have exhausted all the usual tricks that central banks pull out for economic stimulus, which have given less bang for the buck each time they’ve been employed.
Nearly all the nations of the world have squandered their options without resolving the underlying problems of their economies, the primary problem in the first place being that the economy was all built on expansive debt. Recovery from the next plunge will have to be a global effort that changes the way the world does business.
What the great second dip (third for some countries) is waiting for is a sufficient trigger — something that will overtax the rickety structure. While the economic system will eventually topple from its own dead weight, it is weak enough now that increasingly smaller triggers can bring it down. While something like a global ebola epidemic or war with Iran could certainly collapse the ailing structure, it may be the crash of a single bank or single national economy in the right place at the right time that gets the bones to fall, or it may be a terrorist attack on the financial grid. The point is that vulnerability is extremely high, and the number of potential triggers is growing as fast as the number of serious fractures in the global economy, making the economic collapse more imminent.
Consider briefly these additional factors talked about in previous articles here on The Great Recession Blog that are likely to contribute to a second dip into the Great Recession:
- Russia and China, who were recently the largest buyers of U.S. debt, are pulling away from using U.S. dollars in their reserves, meaning the U.S. will eventually have to pay higher interest to finance its colossal debt once the government-funded bond-buying from quantitative easing is over.
- Russia and China are creating a secondary currency for trading oil, raising further difficulty for the world’s largest economy when it needs to finance debt through something other than the money printing known as quantitative easing.
- Russia and the Western World are entering an economic cold war of eye-for-an-eye sanctions at a time when the global economy cannot absorb economic suppression.
- Tensions between China and Japan are growing as they play war games in the ocean. Likewise between China and the Philippines and China and Taiwan.
- Tensions from the Iranium Crisis could come to a head this fall when talks are scheduled to end, and solutions are not forthcoming.
- Middle East tensions are worse throughout the Middle East than they’ve been in half a century.
- The number of terrorists and terrorist organizations in the world seems to be increasing and spreading out, not decreasing.
- Our dependency on the internet/cloud creates greater vulnerability where a small number of terrorist can reek havoc globally.
- A new U.S.-led war has just begun in Iraq.
Next article in series on the second dip in the great recession:
Other articles predicting the second dip in the Great Recession:
Suggested deeper reading for The Great Recession:
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