Prediction #1 U.S.Recession is here or will be here soon. Much of the world is already in recession.
I am predicting a severe recession resulting in a dramatic stock market decline. It will be the hard reset necessary to rid systems of excess and to seed opportunities for future growth. The U.S. bull market is very old and there is data pointing to a rollover in the economy. Most other economies are in worse shape. Jobs will be lost and asset prices will drop including equities and real estate. On going trade wars, supply chain uncertainties and hostile political acts will exacerbate the recession. I am writing this post as the stock market is hitting new highs.
Prediction #2 Corporate Debt Crisis
The current level of corporate debt is staggering. U.S. nonfinancial corporate debt of large companies now stands at about $10 trillion dollars, 48% of GDP according to Forbes. Companies have been borrowing because money is cheap. This money is frequently redeployed to buy back company shares. Much of this debt must be rolled over in the next few years which corresponds to the recession timeline when corporate profits will be dropping. Corporate debt will be downgraded causing debt service costs to rise. Balance sheets will be under pressure. Companies will not be in the position to buy back shares. The stock market will continue to drop without this backstop.
Prediction #3 Banking Crisis
Interest rates are dropping worldwide and will continue to drop in central bank efforts to combat economic weakness. About $15 trillion of government bonds worldwide now trade at negative yields according to Deutsche Bank as reported by CNBC. Negative yields are very dangerous for banks. European banks are already trading at record lows and this phenomenon is coming to the U.S. Remember what happened to the lovely folks of Cyprus in 2013. There is systemic risk with unpredictable outcomes.
Prediction #4 Stock Market Caught In Negative Feedback Loop
There will be a bear market and it will become more severe as the stock market begins its waterfall stage. Negative momentum will build until there is a capitulation when there are no more sellers.
Prediction #5 Pensions Crisis
Public pension systems already have large unfunded liabilities. Many governments have underfunded their contributions and hope that continued market gains will make up the difference. What happens when equities drop in price and bonds yield zero percent or default? These pension systems are not nimble organizations and are in no way able to trade themselves out of this catastrophe. They will be forced to sell assets at exactly the wrong time. For example, there are limitations on ownership of various debt credit qualities and as debt is downgraded, pension funds will be forced to sell when there are few if any buyers. This will be the final stage before the hard reset. Pension plans will not be able to meet their obligations. Social unrest will become the new normal. It will be similar to what we saw in Chile in October, 2019 except on a much larger scale. By kicking the can down the road, governments will end up footing a much larger bill in the end.
Hard Reset and the Turnaround
The tipping point is at hand. The multiple crises will result in a hard reset of the economy and social unrest will be front and center. Worldwide governments will launch massive monetary and fiscal stimuli to turn around economies and to appease the public. This will result in a massive infrastructure initiative that will create a commodity price surge. This will happen in America regardless of which political party is in power. The federal government will backstop failing pension plans although there will likely be a reduction in payable benefits. Another appeasement will be the rollout of universal medical care for all Americans as fewer citizens will have jobs or sufficient assets to be able to afford healthcare in its current form. This will have the unintended consequence of accelerating economic growth through entrepreneurship as people are no longer tied to their employers for healthcare coverage. This reset will offer a generational opportunity to go long commodities and equities.
So I see tough times unfolding during the next couple of years. I do not take any cheer in these prospects, but I will do my best to enable my portfolio to grow during during these troubling times. I see no moral dilemma here. In fact, I plan to be one of the counterparties when so many others are selling assets at a discount or when they are buying options at a huge premium. Active counterparties will stabilize the markets. This is why I manage my own money. I am not beholden to some committee working with decades old technology and investment strategies. Volatility will return in a big way and the ability to take advantage of it will make all the difference. My next Commentary will discuss the core positions and trading ideas that I am considering to weather the storm.