Will this recession be as bad as '08?

Well I was told by our CIO if our AUM fell another -25% there would be lay-offs (potentially including me despite being a top 25% performer at my level). And I work at a T1 boutique AM with $20-100bl in AUM currently (I'm being vague on purpose here). So yeah

Markets are absurdly negative right now, valuations may not have made sense in mid-2021 but for the the opposite reason they make no sense now either. The real recession supposedly hasn't even started yet either

Fundamentals are improving though on supply chains / commodities and demand is slowing (esp global demand w/ China). So reasons to believe inflation will come down signicifantly by end of year. If we get to 5% by end of year that's a win, and sub-4% by spring would be amazing. After which hopefully we've hurt the consumer enough but not too much and then the recovery in markets can being starting spring-summer 2023. Let's hope for the best 

Oh honey, it's going to be so much worse it's not even funny when this shit hits the fan. 08 never hit maximum bad, the Fed was able to step in and turn on the printer. All we did was kick the can down the road and compound that fallout, then added on a bunch more over the last 3 years. 

Idk but I hope and pray the fed and big bad government don’t step in with more bailouts and stimulus. Let the overleveraged fuckheads lose everything and have a hard reset on valuations 

Sad

I don't worry about a recession, I worry about possible (perhaps inevitable) government intervention for the sake of government intervention.

In 2008, the big banks almost collapsed because the possible balance sheet liabilities they had were about to be so fucked that they’d go insolvent. Their balance sheets are not absurdly overlevered today like they were then. Places like Goldman literally almost went bankrupt over the course of a week. 
 

If things were really like 2008, do you really think GS would just have laid off only a few underperformers? Or do you think they would have used their post-crisis, billion dollar risk management system blood let just to survive? 

Keep in mind that the GCF was so long ago that the analysts at the time are MDs now. So pretty much every single person on this site who is below MD had 0 presence in the finance world during the GCF, so almost any account you hear of 2008 here is not from experience. 

No one knows. Those who say they know really don’t know.

Right now is nothing like 2008.

More and more evidence continues to point to a soft landing. 

Now if you want to talk about stock market that is something entirely different. Valuations have been unhinged for a decade to the point where people thought it was the new normal going forward due to tech. But inflation will come down, consumer spending will come down, highly leveraged tech companies will continue to feel pain, but nothing as of now indicates 2008 level madness.

That was a once in 3 generations type of recession. Not all recessions are equal. 

The question I ask myself is: what part of the current situation will get bad? 

In my way of thinking, markets and the economy are part of the civilization, and whatever is going on with the overall civilization will reflect in the economy.  Events and circumstances strictly limited to financial markets will make their own waves, but the overarching level of the tide is driven by the political administrations and the millions of people who have empowered them and how they act in their daily lives.

If you look at things through this lense, then it's entirely clear what will be prioritized, what will suffer, and what reactions will generally be to any given circumstance.  The more clearly you see the current state of events....the more certain you are to make money as you align your investment approach to those circumstances.

Consumers still spending and unemployment still very very low. Nowhere near as bad as 2008, where some of my mentors told me there was literally no liquidity available and sales dropped off a cliff in short order. Overnight, their vendors stopped being flexible, lines vanished, etc.

I feel like companies should be aware a drop in consumer spending was coming come 2022 given all the free money being handed out in 2020/2021. We prepared for it by sitting on more cash and delevering where appropriate.

Our plan going forward is to operate as if credit available will be squeezed even harder, which I am sure it will. A lot of the math behind the lenders we use doesn't compute to me, and am sure they will keep making big changes to their underwriting methodology.

Also kind of disagree re valuations. Yeah they've come down, but I don't feel anything is overtly firesale levels of cheap. 

Distressed deals still seem to be in the camp of bad businesses that were able to raise money and live off generous markets as opposed to fundamentally strong businesses. Seems like companies that deserved to die or not exist in the first place are now eating it.

Maybe some companies who have gone through a series of unfortunate events but are still good will end up getting sucked in too. For example, if you were in eCommerce selling big items with low retail value, the freight jump from ~$3k a container -> $20k a container probably roasted the fk out of your business from 2020 -> 2021. It's entirely possible you could have been in something like weddings too during 20/21 and eaten shit on demand side too.

Now, a beaten and bruised company heads into a recession where liquidity dries up...not good.

When everyone zigs, you zag. Long $QQQ.

I do not think 2008 was all that unusual in that fundamentals were generally sound (we had some leverage and derivative issues) and markets turned around literally like a V.  We had very high unemployment because the stock market dropped 30, - 40 and then 55%.  We have very low unemployment now but if the stock market continues to fall, unemployment will rise substantially.  The biggest problem we have is inflation and the inevitability of much higher interest rates.  I am confident that the next shoe to drop will be the real estate market.  As rates continue to rise, home values will fall.  

I think it could end up being worse than 2008 imo depending on when the Fed decides to pivot. If the Fed actually carries through and gets to 4.5% rates by end of year, yeah game over. We'll see 2008 and even worse in that case. The economy is far weaker and more debt ridden than it was 14-15 years ago. Remember for the 2008 crisis, the Fed raised rates from 1% to 5% over the span of 3-4 years in 25 bps increments before the bubble burst in 2007-2008.

We have been doing 75 bps increments for the last couple hikes (besides the one 25 bps and one 50 hike earlier in the year). If the Fed is trying to take rates from 0 to 4.5% in less than a year with this dog shit economy, all hell will break loose. We have a housing bubble just like 2008, maybe even worse.

For everybody saying muH bAnK rEgULaTiOnS, those would only help if banks did dumb shit like faulty subprime loans. It doesn't protect against assets falling rapidly in value and leading borrowers to default, resulting in banks taking huge equity capital losses on their balance sheet. Remember, even in 2008, the housing crisis was not contained to just subprime, even though Bernanke said it. It infected all types of housing as demand collapsed and borrowers became underwater on the mortgages and defaulted.

Increasing supply of foreclosed homes plus weakened demand due to mortgage rates skyrocketing equaled crashing housing prices, which I think will ensue again. Plus, the stock market will take a beating too. A lot of companies, especially in the crypto space, relied on raising equity at nice valuations to absorb losses. Well those employees are gonna be laid off. GM went bankrupt in 08 and is prolly gonna go bankrupt again this time around. Same w Ford imo.

This is a credit fueled economy. It's all fake. How can you have a real economy when 70% of GDP is based off consumption? People take on loads of debt to buy shit, especially imports. A real economy is based on increasing production and supply, not demand. Instead all we do today is take on loads of debt as a country and government and then buy shit from around the world. Any growth we had from 2008 was all fake.

It was built on a perpetual policy of 0% interest rates. The Fed has completely distorted the free market in interest rates. Instead of letting interest rates naturally go higher in recessions or periods of low supply to encourage people to save and stop consuming, the Fed does the opposite. I mean what retard lowers rates and expands money supply during a time of decreased production in COVID? And then inflation happens and JPow is like no one could have predicted it. No, anyone with a brain could, but you're just a dumbass who has no clue what you're doing.

Employment statistics are totally rigged, just like the CP lie. U3 is the dumbest way to measure unemployment. Try using U6 and even that understates true unemployment. Short story is U3 (headline rate) doesn't account for people leaving the labor force entirely or people who are underemployed (ex. working McDonald's but you have a college degree). And U6 only includes people who left labor force in the last year. Doesn't include people who gave up 2 or 3 years ago for finding a job. 

Right now is only the beginning. This is the calm before the storm. 

My general prediction is the Fed will get rates to 4.5% by year end, causing a 1929/2008 type crash in the stock/housing market. It'll happen in either November or December. Reason being is JPow and the Fed know they have zero credibility left. No ability whatsoever to stop inflation without going Volcker style. Does anyone think 3% rates is going to stop 8% inflation (and we all know the real inflation number is prolly twice the government report)?

They can't reverse and go to cutting for no reason. The only excuse that would make sense is the markets and economy free falling and the Fed swooping in to save them. They'll have a perfect excuse then that they have to choose between the economy and inflation. Nobody will question them if they choose the economy.

So they'll go back to QE. Prolly 5-10 trillion this time around to get the same effect. Inflation will continue to soar because of this. Stocks will start to go back up again along with other financial assets.

The only way this whole situation is avoided is the Fed commits to no more rate hikes for the rest of the year and begins cutting in 2023. I'm not advocating for that nor do I think it's good policy, but the US economy cannot be saved no matter what in its current form. 

The thing is, most on here are quick to state that we can't/won't have an '08 style recession - while I don't necessarily disagree, the reality is, you don't know what you don't know and therefore it opens up the possibility of something breaking (like what happened in '08 with CDOs) - this is especially true when the Fed/other Central Banks are hiking at paces not seen in decades, coupled with geopolitical risk. 

Not many knew how bad '08 would get before it actually happened... if we have an '08 style recession, it would be due to likely some unforeseen/"low probability" event that ends up coming to fruition and catching a lot of money off guard.

• For those that don't think there's the type of systematic risk out there that there was in '08, you may be right, but what happened in the UK the other day should give some pause: ever hear of LDI or Liabilities Driven Investing? https://www.ft.com/content/f4a728a5-0179-48bd-b292-f48e30f8603c
•  You also have firms like BofA and people like Larry Summers warning about potential breakdowns/credit market dysfunction --> maybe this is a positive as people aren't blind to the risks, but who knows. 
• As of right now, the Fed Put doesn't exist - and likely won't for a while until inflation comes closer to 2% - unless of course, something breaks
• Something like Crypto could have big implications - I admit I am not well-versed in crypto, but I find it weird that BTC cannot seem to break below $19K for more than a day - what's holding it up and what will happen if the floor falls from underneath? Idk. Maybe nothing... maybe something. Ok ok I get it, it's a relatively small asset class, but still.
• Wtf is going on in China? For all we know, their economy could be on the brink of collapse.... even if they pivot from zero-COVID. Their debt-fueled property boom has popped, which was a huge source of demand for raw materials.
• Europe is fcked. What are the implications? Will this bring unknown, systematic risk?
• Russia is always a wild card

The above is just what could push us into an '08 type situation - personally, I think the more likely outcome is a hard (but not nearly as hard of a landing as '08)

• There's no denying that the asset bubble created over the last couple of years was driven by "free" money. The Fed is now taking this away. Here's what's going to follow as a result:
  • Real Estate is going to come down hard - each market will be impacted differently, but the reality is, 6.5%+ mortgage rates are going to bring valuations down. We're at the standstill period right now, waiting for the shoe to drop. Think about what kind of implications this will have --> RE Agents making significantly less, along with mortgage bankers - very high paying jobs. How many people took out variable rate HELOCs to rehab their house, buy a $70K SUV, etc.? That money which fueled spending in a lot of sectors is now gone. How many people bought houses that were stressing their budgets to the max, and how many of them were able to do so due to jobs that were paying good money solely as a result of the boom (i.e. cyclical jobs)?
  • The Debt Markets (esp. non-IG) are essentially shut. Good luck financing your LBO/large M&A... (ignoring lower/MM LBOs are the private credit markets are still open, albeit much more pricey than a few months ago and shops have significantly reduced their ticket size). Result = Investment Bankers and the likes pay is going to come down materially = less money to throw into the market/RE, etc. and also job cuts.  Bankers just had to pull the plug on syndicating Apollo's Lumen deal... and they just got BURNED on Citrix. There's more paper that needs to come to market, god forbid if Twitter ends up making its way to the debt markets... who tf is going to buy that paper? 
  • Fairy Tale tech startups = we're in an '02 type scenario when it comes to "pre-revenue" type tech companies. Think of all the jobs that were created by the SPAC/VC markets that financed this shit.  Additionally, think of all the money people were making on RSUs etc.... that money is no longer a thing - you'll see posts on other forums where tech workers pay is down 25%+ (or significantly more)
  • Bull-Whip Effect - how much of the FY21 / early FY22 was driven by double, triple ordering due to the supply chain issues coupled with the huge spike in demand as a result of many of the points above?  See Nike, Target, Walmart, etc. Same thing with the chip companies... Shipping container rates are CRASHING along with trucking spot/contract prices. 
    • ​​​​​​​Further building onto this, how many companies like Amazon thought that boom was permanent and went out and bought up a ton of industrial real estate that they now realize is unneeded? 
  • Just think about how much Leverage in general is out there right now that was built-up since 2010 --> this amount of leverage has not been tested with SOFR going to 4%+.  Think of all those LBOs that recently got done at 6-7x leverage...coupled with a likely decline in operating performance.

In short, we're going to have a hard landing IMO and it will take 2-3 years to get back to all-time highs on the S&P. IF something breaks in the credit markets, it will be even longer and much more painful. I think people need to face reality and realize that this soft landing is not probable unless the Fed pivots at the first sign of pain (which I will admit is a possibility). We should of never ran up as far as we did on the S&P - it was a huge blow-off top driven by the Fed's ABSURD easy money policies, and the irresponsibility of congress/the administration on putting so much fiscal stimulus into the economy. 

Deflation is coming, and it will be the result of a hard landing -- not the Fed engineering a magical soft landing.