American Economic Outlook 2018-2020: Bad news?

[Painisia]

Isn`t there a student loan bubble growing now?

[Major-Tom]

Isn`t there a student loan bubble growing now?

Yes, but it's been growing since the 90s.

[Trumptonium]

Shadow banking in china may also be a concern.
http://www.businessinsider.com/chinas-s ... omb-2017-8
https://www.brookings.edu/wp-content/up ... ber_yu.pdf
https://www.huffingtonpost.com/otaviano ... 91706.html

China is particularly scary, as corporate profits have been in decline since 2008 but their debt level has reached 169% of GDP while off balance sheet level is 109%; this is a dangerous amount of over-leveraging, as should be obvious.

Doesn't really matter. It's completely unclear where business begins and the state ends in China. For all intents and purposes, Chinese-owned private sector businesses are basically the state, not least because of the political situation, but also the fact that financial reporting standards are really fucking shit in China. We're talking 15 year old on work experience shit.

Chinese-owned businesses abroad do not actually show any worrying financial health signs when they have to report in line with Anglo-American conventions. Geely and Huawei are both horrendously overleveraged, but look quite healthy when you see their American or British units.

Isn`t there a student loan bubble growing now?

Doesn't pose any risk at the moment.

Except for social reasons and political implications of course, with house ownership going down to pre-war levels and becoming unaffordable to the majority of youth, but that's not really an economic problem per se.

[The Serbian Empire]

Agriculture is already in a slight slump, so it is possible the economy could drop in the near future. We generally do see the hurt before the rest of the economy.

The US is not dependent on agriculture enough to see the 'hurt'. In fact agriculture would have to more than catastrophically crash in half to pull the US into a recession right now.

It's a warning sign of commodity prices which involve food, petrochemical, manufacturing, and chemical companies which are much larger than just agriculture in general

[Oil exporting People]

Robert Shiller: The stock market today is similar to the stock market in 1928

The stock market (^GSPC) is trading at all-time highs. But the prices have been outpacing earnings growth, sending valuation measures like the cyclically-adjusted price-earnings (CAPE) ratio to troublingly high levels.

Robert Shiller, the Nobel Prize-winning economist who popularized CAPE, shared his thoughts about the U.S. stock market with Yahoo Finance’s Jen Rogers.

“My latest kick is to be thinking in terms of narratives, stories that drive the market,” Shiller said at the World Economic Forum in Davos, Switzerland. “In some sense, we’re similar to the 1920 — I’ll say the ’28 market.”

Back then, the stock market had been roaring higher — all the way up until it crashed spectacularly in 1929.

“Calvin Coolidge was president. Pro-business,” Shiller noted. “Everything looked good. Anti-regulation. Same story. That’s part of it.”

Today the U.S. has pro-business President Donald Trump, who has been pushing aggressively for deregulation. Similar to 1928, the economy was growing, but there were also plenty of folks warning about the overpriced market.

“There were a lot of people then who saw that the market was getting overpriced,” he said of the 1928 experience. “It was a common observation. But it seemed like it just kept going up. And people started to wonder, ‘When is it going to correct?’ And somehow, that built steam. And eventually, it corrected.”

Shiller stopped short of suggesting that the stock market was doomed to crash next year.

“I keep trying to figure out what the narrative is,” he said. “I think that economists have to be more expansive in this dimension. They don’t like to talk about narratives.”

He said that a narrative that may explain why people are buying stocks is that it “makes you feel better about yourself in one way or another.”

“Young people today have to plan for the next 50, 70 years,” he said. “So how do they do that now? So I think that gives an emotional coloring to all their decisions. And it might make it more acceptable to invest in stocks, even if they look overpriced. Especially tech stocks.”

[Oil exporting People]

The heightened danger of the next recession

CAMBRIDGE, Mass. (Project Syndicate) — The United States’ economy is roaring ahead, and above-trend GDP growth looks set to continue in 2018 and 2019. Although the expansion is in its ninth year, there is no sign of an imminent slump.

The greatest risk to the economic expansion is the fragility of the financial sector. A decade of excessively low interest rates has pushed asset prices to extreme heights. The real yield on 10-year Treasury bonds BX:TMUBMUSD10Y is approximately zero. The price-earnings ratio of the S&P 500 share index SPX+1.18% is about 70% above its historic average.

If these and other asset prices reverted to their historic benchmarks, investors would suffer losses in excess of $10 trillion, leading to declines in consumer spending and business investment.

Economic activity could also slow as a result of international conflict in Korea, heightened trade disputes, or domestic political events in the U.S.

Downturns are a normal feature of the U.S. economy, which has experienced nine recessions during the last 50 years. What makes the current situation unusual and more worrying than in the past is the low level of short-term interest rates, which limits the ability of the Federal Reserve to bring monetary policy to bear in countering the next recession.

The Fed traditionally responds to a downturn by sharply reducing the short-term federal funds rate.

During the most recent downturn, the Fed lowered the benchmark rate from over 5% in July 2007 to just 0.16% in December 2008, a total reduction of more than five percentage points. At only 1.4% now, the Fed has little scope for a significant rate reduction. At its meeting in December, the Federal Open Market Committee’s median forecast for the federal funds rate at the end of 2019 was still a very low 2.9%.

To stimulate demand in the last downturn, the Fed also practiced what it called “unconventional monetary policy,” promising to keep short rates low for a long time and buying long-term bonds for its own portfolio. This strategy was aimed at keeping long-term interest rates low enough to boost demand for equities and real estate, and thereby increase wealth and spending. It is not clear that this strategy would provide the hoped-for stimulus as long as real interest rates remain low.

The responsibility for stimulating the economy in the next downturn will therefore fall to fiscal policy — changes in taxes and government spending.

A new temporary tax cut would not work. Experience shows that a temporary cut in personal income taxes would provide very little stimulus, because most taxpayers would use the resulting extra net income to pay down debt or increase their savings, rather than spending more.

But the 2017 tax law provides an opportunity for a permanent tax cut by preserving the cuts that are now scheduled to expire in 2025. The Republicans who designed and voted for the 2017 law expected to extend those cuts beyond 2025 in subsequent legislation. An economic downturn in the next few years would be a good time to enact make the cuts permanent.

The other way to reverse an economic downturn would be to increase government spending. There is now widespread bipartisan support for increased spending on infrastructure of all kinds, just as there was in the 2007 downturn. Although the Obama administration spoke about “shovel ready” projects when promoting its putative stimulus legislation, the reality was that very little of the money was spent on infrastructure, owing to the long delays involved in implementing such projects.

The Congress and the White House should begin now to develop an inventory of infrastructure projects that could be implemented when the economy slows. If there is no downturn during the next several years, it would still be desirable to start some of those projects.

Another form of spending to stimulate the economy would be increased outlays for defense. Because of the “sequester” rule in the Budget Control Act of 2011, the level of defense outlays is required to decline from 4.3% of gross domestic product in 2012 to just 2.8% of GDP in 2023, the lowest GDP share since World War II. Defense experts agree that this level is far too low for America’s defense needs.

An increase in outlays to 4% or more of GDP would be a significant source of increased overall demand and a crucial contribution to national security.

The high level of the national debt — about 77% of GDP now and heading to 97% at the end of the next 10 years — would create strong resistance to either tax cuts or increased spending. But a significant economic downturn with limited scope for Fed action would leave Congress with little choice.

The need for a future fiscal stimulus makes it clear that the U.S. needs to start now to develop a strategy for slowing the growth of the national debt. That is the only way to create enough room for the expansionary fiscal policy that the economy eventually will need.

[Great Minarchistan]

I see, thanks for the hints. It's also important to check at industrial growth since it has went down during/right before all recessions IIRC. One of the rare cases was 2016 when it went down at a prolonged time (although the economy showed recession signs everywhere but on GDP growth, that was saved by Trump's election).

Would you care to elaborate on this a bit, it's interesting from an allo-historical viewpoint.

On most indicators 2016 was a recession:
-> Industrial production https://fred.stlouisfed.org/series/INDPRO
-> Stocks https://fred.stlouisfed.org/series/DJIA
-> Commercial&Industrial loans deliquency rate https://fred.stlouisfed.org/series/DRBLACBS
-> GDP growth (dipped hardly) https://fred.stlouisfed.org/series/GDPC1
-> Government deficit increased for the first time since 2008-09 (indicating a weakening of economy) https://fred.stlouisfed.org/series/FYFSGDA188S
-> Unemployment change YoY stopped to decrease and touched zero (several past recessions had the same behavior) https://fred.stlouisfed.org/series/UNRATE
And while not actually exactly related, the number of billionaires in the world also fell compared to 2015 (first decrease since Great Recession). I'm sure there are other indicators that I just can't remind about rn or that I haven't found out yet that show the same thing.

[Major-Tom]

Oil Exporting People, while I agree that we are inevitably headed for a "soft landing" (something I've been saying for months), do you agree with Mr. Shiller's narrative that we are looking at something as disastrous as 1929? Because, frankly, to me, it seems very very very implausible and far fetched.

[Great Minarchistan]

aaaaand Dow plunged 4.6% today, 8.5% on red ink since Jan. 26 (may as well call Down Jones, haha). My hypothesis is that Powell has been taking a more hawkish stance on the latest speeches surrounding the end of Yellen's term. In fact most of the devastating loss today happened right after 2PM when Powell started to unveil his plans as the chairman of Fed during a speech. And yes, this may involve a 50bps hike on March (indicating a MUCH faster tightening than before) instead of the old-fashioned 0.25% a quarter.

[Trumptonium]

Oil Exporting People, while I agree that we are inevitably headed for a "soft landing" (something I've been saying for months),.

People have been saying that since 2011 no less.

On the other hand, Morgan Stanley's measurement of economic sentiment has just surpassed it's 1929 backcast and is at the highest level since recordings began under Reagan.

Though over the last week there has been some pretty severe worldwide falls in market indexes, though of course a correction need not result in a market recession.

-> Government deficit increased for the first time since 2008-09 (indicating a weakening of economy) https://fred.stlouisfed.org/series/FYFSGDA188S

Government deficits are not a good measure of the strength of an economy, unless fiscal policy has been unaltered since whatever base year.

And while not actually exactly related, the number of billionaires in the world also fell compared to 2015 (first decrease since Great Recession). I'm sure there are other indicators that I just can't remind about rn or that I haven't found out yet that show the same thing.

Product of the above links (particularly the downturn in equity markets), though I'm surprised that it still fell despite (presumably?) global real estate price growth.

[Major-Tom]

Oil Exporting People, while I agree that we are inevitably headed for a "soft landing" (something I've been saying for months),.

People have been saying that since 2011 no less.

On the other hand, Morgan Stanley's measurement of economic sentiment has just surpassed it's 1929 backcast and is at the highest level since recordings began under Reagan.

You're not wrong, and by all accounts, we had several "flash crashes" and some quarters with more "lackluster" growth, but never anything close to a major slowdown of any sorts. Whether or not this is just a major flash crash or indicative of more market corrections in the future is what is up for debate.

[Trumptonium]

People have been saying that since 2011 no less.

On the other hand, Morgan Stanley's measurement of economic sentiment has just surpassed it's 1929 backcast and is at the highest level since recordings began under Reagan.

You're not wrong, and by all accounts, we had several "flash crashes" and some quarters with more "lackluster" growth, but never anything close to a major slowdown of any sorts. Whether or not this is just a major flash crash or indicative of more market corrections in the future is what is up for debate.

Well, we're still above where we were when the year started. It's only major because it reflects how stupidly quickly it appreciated.

I only hobby trade Forex anyway so I'm not up to speed with equity markets apart from my own two investments.

At the moment anyway, equity markets removed, the global economy is still on the up, particularly the recent upturn in the Eurozone which seems strong and of course overdue.

There is of course also the explanation that as you said this is a flash crash. This tends to happen when trading volumes are algorithm-driven at higher rates than an average day. Which included today.

[Oil exporting People]

On most indicators 2016 was a recession:
-> Industrial production https://fred.stlouisfed.org/series/INDPRO
-> Stocks https://fred.stlouisfed.org/series/DJIA
-> Commercial&Industrial loans deliquency rate https://fred.stlouisfed.org/series/DRBLACBS
-> GDP growth (dipped hardly) https://fred.stlouisfed.org/series/GDPC1
-> Government deficit increased for the first time since 2008-09 (indicating a weakening of economy) https://fred.stlouisfed.org/series/FYFSGDA188S
-> Unemployment change YoY stopped to decrease and touched zero (several past recessions had the same behavior) https://fred.stlouisfed.org/series/UNRATE
And while not actually exactly related, the number of billionaires in the world also fell compared to 2015 (first decrease since Great Recession). I'm sure there are other indicators that I just can't remind about rn or that I haven't found out yet that show the same thing.

Basically it sounds like the "forgotten" recession of 1966; this also likely explains Trump's election.

Oil Exporting People, while I agree that we are inevitably headed for a "soft landing" (something I've been saying for months), do you agree with Mr. Shiller's narrative that we are looking at something as disastrous as 1929? Because, frankly, to me, it seems very very very implausible and far fetched.

Probably not, but I'm certainly no expert it should be noted.

[Great Minarchistan]

Basically it sounds like the "forgotten" recession of 1966; this also likely explains Trump's election.

Hmmm, will take a look at it. Also, that's an interesting take you brought up, the economic weakness may be very well the reason why Trump is in office instead of Hillary.

[Freezic Vast]

Is there any explanation as to why the stock market took the largest drop in recorded history today? Is it because of the fact of the release of the classified FBI document or is there something else.

[Hydesland]

Is there any explanation as to why the stock market took the largest drop in recorded history today? Is it because of the fact of the release of the classified FBI document or is there something else.

The markets are expecting tight monetary policy and lower profit margins due to strong gains in wages.

[Trumptonium]

Is there any explanation as to why the stock market took the largest drop in recorded history today? Is it because of the fact of the release of the classified FBI document or is there something else.

Stock markers are largely unaffected by the personal affairs of politicians.

The plunge seems to be largely (at the moment) blamed on two factors
A) Today's swearing-in of a new Chairman of the Federal Reserve (US Central Bank) who is far more hawkish (wants to raise interest rates faster) than his predecessor. <-- Low interest rates propel cheap stocks, if it goes away, stocks depreciate (to some degree)

B) Computers which trade on their own algorithms, taking away the human from the equation. They hugely exaggerate shocks to the financial market because there's no human behind to say "stop guys, this is irrational". We saw a similar thing with the "flash crash" in 2011 when markets dropped a huge percentage, no one knew what was going on, and then the market quickly returned to normal-but-slightly-lower. As an ever increasing number of trades are through algorithms, such events can only be more intense now and in the future.

All in all, a drop was expected. This much was not expected. Will it continue tomorrow? After-hours say probably yes, but we might be in for a huge up-correction when the markets open, as a lot of the downturn was on companies which have intangible value (like GM) rather than those with tangible value like Google.

[The Sauganash Union]

Is there any explanation as to why the stock market took the largest drop in recorded history today? Is it because of the fact of the release of the classified FBI document or is there something else.

Stock markers are largely unaffected by the personal affairs of politicians.

The plunge seems to be largely (at the moment) blamed on two factors
A) Today's swearing-in of a new Chairman of the Federal Reserve (US Central Bank) who is far more hawkish (wants to raise interest rates faster) than his predecessor. <-- Low interest rates propel cheap stocks, if it goes away, stocks depreciate (to some degree)

B) Computers which trade on their own algorithms, taking away the human from the equation. They hugely exaggerate shocks to the financial market because there's no human behind to say "stop guys, this is irrational". We saw a similar thing with the "flash crash" in 2011 when markets dropped a huge percentage, no one knew what was going on, and then the market quickly returned to normal-but-slightly-lower. As an ever increasing number of trades are through algorithms, such events can only be more intense now and in the future.

All in all, a drop was expected. This much was not expected. Will it continue tomorrow? After-hours say probably yes, but we might be in for a huge up-correction when the markets open, as a lot of the downturn was on companies which have intangible value (like GM) rather than those with tangible value like Google.

Don't be such a hardo.

By the way, Trumptonium, are you gonna meet me and the rest of the Goldman boys at Smith & Wollensky's tonight?

[The Black Forrest]

Is there any explanation as to why the stock market took the largest drop in recorded history today? Is it because of the fact of the release of the classified FBI document or is there something else.

The markets are expecting tight monetary policy and lower profit margins due to strong gains in wages.

Strong gains in wages? Where?

[Hydesland]

The markets are expecting tight monetary policy and lower profit margins due to strong gains in wages.

Strong gains in wages? Where?

https://www.reuters.com/article/us-usa- ... SKBN1FP0IC

[Great Minarchistan]

The markets are expecting tight monetary policy and lower profit margins due to strong gains in wages.

Strong gains in wages? Where?

Real hourly wages have been also climbing rather fast since 2013 IIRC

[The Black Forrest]

Strong gains in wages? Where?

https://www.reuters.com/article/us-usa- ... SKBN1FP0IC

Hmmmm. Not in a service job :| so no raise for me.

Thanks though.....

[Great Minarchistan]

https://www.reuters.com/article/us-usa- ... SKBN1FP0IC

Hmmmm. Not in a service job :| so no raise for me.

Thanks though.....

Manufacturing? lolrip

[Great Minarchistan]

Good news everyone, Dow(n) Jones lost another thousand, 4.1% in the red. One or two more decreases and it will probably excel 2011 crash and become the worst downturn since 2008.

Hoping for a race to the bottom, clean the market from retarded investors

[Trumptonium]

By the way, Trumptonium, are you gonna meet me and the rest of the Goldman boys at Smith & Wollensky's tonight?

These damn invite lists are never extensive enough!

Good news everyone, Dow(n) Jones lost another thousand, 4.1% in the red. One or two more decreases and it will probably excel 2011 crash and become the worst downturn since 2008.

Hoping for a race to the bottom, clean the market from retarded investors

Well from a more positive perspective, a strip-down of most companies would reveal a significantly stronger position of financial health than 2005-2007, so a "repeat" of 2008 is not really possible per se. Many companies especially the car giants have taken a lot of steps to cut away unnecessary costs and create some real tangible shareholder value.

Most CEOs are happy with a lower share price anyway, in that they prefer gradual and rational increases in their share prices as they create shareholder value, instead of market-wide speculation. Then again, that's the effect of the extreme growth of tracker funds over the years pricing by weighting not by fundamentals.

Nevertheless I'd agree with Bernstein's analysis: "The key thing that I think people keep in mind here is that the market moves a lot very quickly, it doesn't mean fundamentals are changing that quickly. What you are seeing is the recalibration among investors that we actually are in a late-cycle environment"

Quick glance at the yen shows the market isn't really pricing in safe haven last resort just yet. The alternative, of course, is that this is just a minor price correction, and we're back on track next week. Because honestly, no macroeconomic indicator would suggest that we're on the cusp. I don't know, and to be honest I don't really care, but I see no reason why anyone should be 'worried' about anything.