Wednesday, December 4, 2019

Signs of Recession? Or Crash?

Timing markets is hard to do.  On the other hand, it is not hard to spot trends.

When the real estate market in Florida went berserk, we got out - about two years too early.  That seems bad, but we made a modest amount of money, and it was better than getting out two years too late as others did.   That's the nature of the beast - better to cash in and make a profit early (and miss out on the bigger gains later one) than to ride it all the way down.   Well, that's what I've learned after 30 years of investing, anyway.

People have been talking recession for some time now - myself included. Republicans accuse Democrats of "wanting" a recession to occur, but this isn't really true - they just see the writing on the wall, while the Republicans see a Rorschach test - and see what they want to see, what is convenient for them.  What Republicans see is unending growth and expansion - and profits - even though there are clear signs this is an hallucination.

Recent trends have a lot of folks, including myself, on edge.   Retirement sounds like a lot of fun, but suppose your life's savings are wiped out by inflation - in a matter of a few years, as happens in Argentina regularly (and indeed, even today).  And then our GOP friends decide to cut Social Security - as they have been threatening to do for decades, now.  Very bad things could happen.   But will they?

It is kind of funny, but I never worried about "the economy" back in 1980 when unemployment was at 10%.  I had a job, a small apartment, and a car.  I was set.  I didn't have any "investments" or indeed, money in the bank.  Things like the stock market, inflation, and whatnot mean nothing to someone who has nothing invested.   Even after the real estate meltdown of 1989, I was nonplussed.  I had a good-paying job, and even though our house fell in value, it was worth about what we paid for it.   It isn't until you have skin in the game that these things worry you.

It is hard to tell, of course, if the economy is going to crater, when, and how badly.   But there are signs - things that preceded previous recessions and depressions.  Prior to the crash of 2008, I read many articles predicting such a meltdown, but all predicated with the advice that "you can't predict when it will happen" and the best thing to do is to "hold on and don't panic" - which are both probably good pieces of advice.  We all knew the housing market was overheated, but didn't know when and where the bubble would burst - or how badly.   Once you are in the game, it is darn hard to get out - and takes courage to get out while the getting is good.

The last time around, I saw people panic - and sell all their stocks at the nadir in early 2009, only to "lock in" their losses, and miss out on the recovery that took place that very same year.    If you are young and starting out, or midway through your career, "stay the course" might be good advice.   Panicking is never a good move.  Trying to time the market can backfire in a big way.

For me, however, things are different.  In the next five years, I have to live off my savings - indeed, for the rest of my life.  If I "stay the course" and the market contracts in the next few years, I will be forced to sell stocks at a loss, just to pay the bills.   So selling some investments now, and sitting on cash - enough to live on for several years - makes more sense.   This is not to say I have sold out of the market, only made sure I don't have to sell in the next five years.

It also means that if the market contracts, I will have enough cash - this time around - to snap up some bargains.  Perhaps.   Last time around, I thought I would be clever and buy GM stock, and Fannie Mae, and Avis - as all three were thought to be headed to bankruptcy.   And guess what?  Two out of three did.  I made money on Avis - enough to offset my losses in the other two, but not much more.   That's the problem with gamblers - the remember their wins, but forget about their losses.

But after living through several recessions, it seems the signs are pointing to another one, and others seem to agree - a group of Wall Street investors have placed a $1B "put" bet that the market will retract by March of 2020, which seems like an interesting point in time - a time when a lot of companies that are hemorrhaging cash might finally run out.  Even the most optimistic of bankers believe 2020 will be a "meh" year - let's hope they're right and the folks betting on a crash are wrong.  Few, if any, are predicting unlimited growth into the future.

What sort of signs are we seeing?   Things like:

1.  Farmers:  The farm business was hurting before the trade wars.  And while Trump's bailout plan for farmers may have softened the blow, it has added to the deficit (more about that, later).  Recession and Depression in the farm industry predated the Wall Street collapse of 1929 by a few years.  If this is a "tell" it has been telling for some time, now.

2.  The Car Business:  The press reports that Daimler is laying off 10,000 people, worldwide to "concentrate on research for electric cars" which is sort of putting a good spin on it.   It is sort of like how the press reports the demise of yet another retailer as being "caused by Amazon" when in fact it was caused by venture capitalists buying the retailer and loading it up with debt - and walking away with millions, if not billions, before it all collapses.  It is a lie, plain and simple that "Amazon" is to blame for the collapse of these retailers.

Similarly, the press reports with glee that "electric cars" are causing companies to lay off thousands - as many as 80,000 worldwide.  But a switch to a new technology would actually require hiring more people - to design and develop products, tool factories, and whatnot.   What is actually happening is a good old fashioned recession - people are buying fewer cars.

The reality is, car sales are down, worldwide, by about 8% this year.  Car sales in America are down and predicted to be down for the next two years.  And the car business is not healthy, plagued with overcapacity for years.  GM didn't abandon Europe and close factories in the US because business was too good.  They were losing money at these plants, and you can't lose money and still keep the lights on.  Their big cash-cow - China - is slowing down as well, and a trade war promises to make American brands about as welcome as Trump in North Korea.

Costs for manufacturers are going up (again, thanks in part to a tariff war) and labor costs have gone up as well - thanks to a strike by the corrupt UAW (Chrysler had the right idea - just bribe the union officials and get a better deal!).

Higher prices for cars and longer-term loans (up to eight years!) are meaning that sales are slowing.  Many in America are "upside-down" on car loans and paying onerous rates on what are becoming perpetual debts.  Repossessions are up, sales are down.  Something has to give.

And this is not unexpected.   The car business suffered a major recession in 1959, as people extended themselves too much in the late 1950's for extravagant cars, replete with tail fins, monster engines, and luxury features.  By 1961, they were buying stripped-down six-cylinder Ford Falcons.  And then the pattern repeats itself.  By the early 1970's, everyone wanted an expensive "muscle" car or "personal sized luxury car".   By the mid-1970's, "Sally Strippers" like the Vega, Pinto, and Gremlin were in vogue.   It is a cyclical business and due for a cycle change.

3.  Consumer Debt:   Part and parcel of the car slowdown is the increasing amount of consumer debt, which is at an all-time high since... the crash of 2008.   Personal loans - unsecured debt - is growing dramatically, and this type of debt will be the first to go South when the economy retracts, which will add to the snowball effect.

Once again, we are seeing bad debts being bundled with good debts and then sold as packaged investments, at prices that do not reflect the risk involved.   Investors are so hungry for returns, given the paltry rates of interest paid these days, that they are seeking out riskier and riskier investments.  This will not end well.

The big problem is, of course, that once consumers have tapped out all the debt they can stand, they can't borrow more, and their spending stops.  Usually, this is followed by bankruptcy a few months or years later.   Bill Ford predicted this a few years ago when seven-year car loans started to proliferate.  The snowball of debt can ruin people, but it can take a decade or more for the effects to wind-up to the point where the consumer faces only one choice - bankruptcy.

And it has been about a decade since the last go-around.

4.  Slowdown in Real Estate:  Again, the press sells us a false narrative.  We are told that Real Estate sales are slowing down, but not because people are not buying, but because of a "shortage of houses to buy".  There is no shortage of houses to buy - ever.  If you offer enough money to someone, they will sell their house.  If you offered me a million dollars, cash, for my house right now, I would gladly sell it to you.  And I know this as someone offered $700,000 for my house in Virginia (a house worth $350,000 on a good day) and I wisely said "Yes!"

So the narrative that "there isn't enough housing stock for sale" is another way of saying, "People are not willing to pay the prices being asked for houses these days."    In other words, the market is tapped-out.  Prices are too high, so more and more people are saying "no thanks, I don't need to be house poor, not when I can rent for less!"

And in a parallel to the 2008 housing crash, people who own these homes are thinking (what many thought back then) "Why sell this house?  It keeps going up in value!  It is a good investment!  And besides, if I sold it, where would I live?   I'm not going back to renting!"  A lot of people thought this way in South Florida.   Staying put so they would have a place to keep their furniture.  Again, we sold out at this point - nearly doubling our money in only a few short years.   A year later, those condos were back on the market (in foreclosure) for less than we paid for them originally.

5.  National Debt:  George Bush accelerated deficit spending to fund the "war on terror".   Barack Obama accelerated this further to "prime the pump" of a sick economy, as economists would counsel to do (and it worked, in part).  Donald Trump decided to cut taxes and increase spending even further, which "goosed" the economy for a dozen more quarters.   All told, we have had a record of deficit spending - ever since the Clinton years (remember then?  People were worried that the government was making so much money it might actually pay off the national debt!).

The problem with deficit spending and the national debt is that eventually, if interest rates climb, this debt could become unmanageable, as it did in the high-interest era of the late 1970's and early 1980's.  When a huge chunk of government spending goes toward debt-servicing (interest payments) this doesn't leave a lot left over to "prime the pump" on a recessionary economy.  The result is what we are seeing in Greece and Chile (among other places) where "austerity measures" are met with resistance if not outright rioting.  It can also lead to inflation or hyper-inflation.

This is not to say this debt will cause the next recession, only that it will make it more pronounced and miserable.  And sadly, what usually ends up happening in such recessions, is that people vote out the government that caused it, and vote in new leaders to clean up the mess.  And the opposition will then "blame" the folks who cleaned up the mess for causing it - as people's economic memories last only 18 months or so.

Low interest rates, zero interest rates, and even negative interest rates are scary things.   What markets want is predictability, not governments handing out free money.   You can't hand out free money for too long, before it becomes worthless, as folks in Argentina are discovering, yet again.

6. The Tech Crash:   There has been a lot of advancement in technology in the last four years - and a lot of companies claiming to be technology companies that are little more than traditional businesses with an "app."

The real advancements, as I see it, are in battery technology - the lithium-ion battery.  My neighbor has an electric lawnmower.  Sure they have been around for decades.  But with lithium batteries, they are actually a practical solution.   Power tools today are more likely to be battery powered than have a "cord" attached.   Air-powered tools are being supplanted by electric ones.   And of course, electric cars finally seem to be practical as a result of this increased energy density.

LED lighting has basically taken over, slowly at first, but accelerating rapidly in the last year or so.  People are familiar with the technology now, and when buying "bulbs" (which will go away, as I predict) figure it makes more sense to spend more on LED technology (which gets cheaper all the time - the dollar store sells LED bulbs now!) than to hassle with short-lived incandescent lights.

Solar and wind power are taking off as well - to levels we never though possible in years gone by.  Self-driving cars may be a thing in the near future, or just a driver's aid, as the "autopilot" in the Tesla is today.

Those are real technologies, though.  Fake tech, like hailing cabs through an app (Uber, Lyft) or renting scooters (Lime, Byrd) or renting office space (Wework) or booking fake hotel rooms (Airbnb) are not "technology" at all.   And not surprisingly, many of these tech-that-are-not-tech companies are not making any money, or if making a profit, making very little in terms of P/E ratio.  Still others are just hemorrhaging cash and counting on venture capitalists to keep pumping money into them, with hopes of making a profit years down the road.

The problem for these companies is that a recession could kill them off, as venture capitalists pull back from setting fire to more piles of money.  And if consumers spend less on taxi rides or rental scooters, it could make things go from bad to worse.

Already we are seeing that the appetite for money-losing IPOs is tapering off.  The Wework IPO was an utter flop and withdrawn.   Airbnb claims to be making a small profit, but canned its IPO talk in 2017 - and now promises an IPO in 2020.   The problem is, the small investor, being burned by previous IPOs is finally realizing that an IPO isn't a chance for "the little guy" to get in on the ground floor, but rather a chance for the real ground floor investors to cash-out with the little guy's money.

7.  Fear:  What drives markets is greed and fear.  In the last 12 months, we've seen the greed part, as the market has shot up, and everyone who is invested in stocks, bonds, and Real Estate is seeing their assets increase in value, most of the time.   Log onto your trading account and realize you've made more money in passive income in a few days than you spent all last month.   Makes it easier to spend, and as a result, the economy keeps going.

But for others, the economy hasn't been as kind.  They are seeing debts pile up, and eventually it reaches a point where they cannot borrow more and then really bad things happen and this has a cascade effect.

When that person stops spending, the people he buys from make less money.  The bank he borrows from loses money as his loan defaults.   These companies in turn lay off employees, so as to preserve their bottom line.   But those laid-off employees now spend less (and/or default on their loans) and the cycle continues.

Chaos theory - and history - predicts this.   Bull markets are generally gradual in nature (except, of course, at the very end, when things shoot up out of control).  But bear markets can be rather sudden and marked by a collapse in prices.   People are emotional and they panic.  They see prices of stocks and other investments going down and decide to "sell out before it is too late!" and that, in turn, drives prices even lower.   That is how I bought Avis stock for 74 cents a share - people were freaking out, big time, in the Spring of 2009.

But there are other fears as well.   Political upheaval worldwide, including in our own country, will crank of the fear level further.  Country after country is seeing political dissent, as younger people feel less invested in their governments and economies and demand change.  Whether it is the political divide in the USA, Brexit in the UK, Yellow-vest protesters in France, or even people protesting (and dying) over gas price increases in Iran, it seems that not many people are very happy with their governments or economies these days.   In a way, it feels a lot like a bomb ready to explode.

But what about the upside?   Aren't there as many indications that the economy could continue to grow and expand in the coming months?   Isn't it just a matter of perception?  Aren't I selectively viewing negative information and not considering the positive?

Perhaps, but the positive information seems to be little more than cheerleading - making conclusory statements that 2020 will be "even bigger" without any explanation as to why - and why the market is already showing signs of decline.  Of course, most of those saying such things have political agendas to advance, often boldfaced supporters of the current administration - who hopes that any recession can be forestalled by more economic stimulus until after November 2020.

Even some of the cheerleaders seem a little half-hearted.  They admit that growth in 2019 has been slow (2%) but that the economy "could turn around" if a lot of things happen just right in 2020.  Increasingly, it seems the tide of opinion among economists is not positive.

* * *

So, what to do?   Can you really time these things and make money, or is that just gambling?  If you are young and starting out, with little invested in the economy, it really makes no difference.  All you can do is work hard at your job, try to save a little money, and minimize the amount of debt you take on (and pay off what you already have).   In other words, basic sound financial advice.

For those in middle-age, the same is true - avoid taking on consumer debts and buying too much bling.   Invest, but diversify your portfolio among a number of things.   When the crash comes, speculative "tech" stocks will crash the hardest, while more prosaic and less sexy investments will recover sooner (people will still need to buy food, watch TV, drive cars, buy gas, and so on and so forth).

For those who are older and near retirement or retired, they should think carefully about where to park their money.  As a retiree, you are no longer "investing for the future" but spending for today, and money is something you park places, not risk on investments.

The old rule of thumb is to halve as much of your money in "safe" investments as your age.  At age 50 that should be 50%.  At age 70, 70%.   And paid-off debt, such as a mortgage, is the safest investment there is.   At the present time, I think we are at that level.  Mr. See is still in mutual funds, which is fine at his age (55).  But we have paid-for real estate, and my IRA is mostly in cash these days.   In fact, while I was typing this, I was on my trading site, selling off yet some more stocks, as I have been doing slowly, over the last year or so.

Will I miss out on the "Trump economic miracle of 2020"?   Probably not, as even the most optimistic prognosticators are saying "2020 won't be that bad!"    And if it all goes to hell in a handbasket, well, at least I won't have to sell at the nadir.

But that's all you can do, is hope for the best.   And based on past patterns, I think we may see some sort of crises in the near future, followed by a slow and steady recovery for many years - until someone else decides that slow growth is no fun at all, and gooses the economy once again.

Stay tuned!