Is the Recession Here?

I believe we are just about in recession. U.S. personal income in August fell for the first time in 2 years, as did wages. The unemployment rate refuses to budge downward, and problems in the banking sector are developing. The Occupy Wall Street Movement is gathering steam, and you can bet if the economy were expanding, we would not be seeing this level of civil unrest.

Think about it: if deficits run at $1.5 trillion during an “expansion”, what will they be during a recession? $2 trillion deficits are very conservative. Treasury yields will spike and send interest expenditures on our debt flying, which will crowd out spending for Social Security and Medicare. Boomers will therefore have to cut spending at a time when they should be supporting the economy. Youth unemployment is a full blown crisis, especially because of the amount of debt college grads carry. Make no mistake about it, the debt crisis is upon us.

We need to develop new solutions and not just focus on monetary policy. The past couple of years have proven that lower interest rates don't necessarily fuel economic growth. Where there is no confidence, there is no investment regardless of interest rates. Furthermore, when the economy fundamentally shifts, which requires people to develop new skills, there will be a downturn. This economic downturn is just the product of a lot of different trends/cycles converging.

Civil unrest is percolating in America, and this is when there is still demand for our debt. When the crisis in Europe subsides, our situation will naturally worsen as the artificial demand for our debt disappears. The public sector will then accelerate its contraction as interest expenditures take up a larger portion of tax receipts. And tax receipts will naturally fall as unemployment rises. There is no way out of this vicious feedback loop. It is only a matter of time before a panic ensues in America.

If you've followed this blog long enough, you know how much I love buying into panic selling events. There may very well be a time when investors instinctively sell stocks as they see the economy worsen in America. But they'll eventually realize that the alternative (bonds) is much worse. People need to realize that even nations that believe U.S. Treasuries are a huge bubble have large amounts of money parked in Treasuries. The way the world economy is structured, this is their only option. Nonetheless, the bond market is bound to collapse in a similar manner as the MBS market; this powerful move in bonds is just providing energy for a pendulum move in the opposite direction. The panic selling in bonds is going to come very quickly, and I want nothing to do with this bubble.

Is the Recession Here? is a post from: Expected Returns