What do you guys think the catalyst will be for the next recession?
Pretty straightforward question, so what do you guys think will be the catalyst(s) for the next recession?
Pretty straightforward question, so what do you guys think will be the catalyst(s) for the next recession?
Career Resources
I'm beginning to be convinced subprime auto loans may be a precursor to the next downward trend but perhaps not serious enough to be the cause of a recession.
www.bloomberg.com/news/articles/2017-03-10/u-s-subprime-auto-loan-losse…
On the flip side from an investment standpoint, do you see value in buying swaps on subprime auto loans or some derivative to win on the short side? Or is this currently still a dark market?
Is there a way for the retail investor to short auto loans?
I think we are still in one.
Keeping people out of the labor force for 4 years and saddling them up with $40k debt is a great way to slow down the economy and productivity.
Big banks can train you for the job in 3 damn weeks.
I have previous experience selling auto loans and my biggest takeaway from that industry is that it will definitely go through the same crisis that the RE market went through in '08. Lenders have no qualms about playing with a borrower's income to make them qualify for an auto loan, and it was always a "goal" to get the borrower to take as much as possible (often over 25% more than the vehicle value). For a smart borrower, this is not necessarily bad, as they are getting better rates due to the security of the loan. So, I would have to agree.
Truth.
I know a former Accenture senior partner that quit his post to buy and run a car financier. Dude is making an absolute fortune, and part of that is because people can't stop making car payments - they need a vehicle to get to work/run errands/take kids to school, and there are no squatters rights or other types of protection like there is for home owners... Quit making payments, and the repo boys will come and snatch your whip.
Like the above poster I'm not sure if it will cause a recession but something I feel is worrisome may be pension underfunding
Trade war between China and the U.S. and Europe sounds like a good one.
Funny answer? Doesn't matter. We'll blame Donald Trump.
My answer? The most likely catalyst is a fixed income crash in the Eurozone.
Inflationary Trump trades. A recession doesn't have to be a crisis.
beanie babies 2.0
Can't believe no one has mentioned this yet - the student loan bubble
Student loans are essentially backed by the government, hence one regulatory reason for persisting through personal bankruptcy. In essence they have a bailout built in to them because even private loans for education are regulated like federal loans.
Additionally the value of the underlying assets is largely intangible (an educated workforce) so in the event of a large series of defaults valuing which accounts will contribute to some contagion effect is tremendously difficult. Student loans don't increase in value due to speculative demand the way tangible assets like homes can. The contagion effect will be minimized to very narrow issues of personal credit, yes a problem, but no not a bubble.
Student loans are worrying if you want to discuss income inequality or real wages and their effect on economic policy but they are less worrying in context of an actual recession. The name bubble is actually misplaced here.
This is the main set of reasons there is no student loan bubble, it is contrary to core economic principles of how bubbles form and what causes them to burst. Student debt absolutely is a problem but it isn't this kind of problem.
So not a bubble, more of a sag...
Agree with FinanceBrah - there's no credible justification for believing that student loans will specifically catalyze a recession. Of course, they contribute to the overall indebtedness of US citizens and so could increase the risk of recession generally (though less so than other types of debt, given the very generous terms extended to student who default on their loans).
Loan book growth and loan quality of Chinese banks. Lending to riskier companies has slowed last year, but it's a house of cards hinging on the country's ability to continue growing at a high single digits rate. However, growth is in part driven by banks' increasing lending. Has some resemblance to the US housing bubble building up pre-2008. Caveat is that the Chinese government is fully aware and ready to intervene... S&P's take: "A banking crisis is likely to be avoided yet again in 2017, in light of another year of GDP growth exceeding 6pc, and a change in the credit mix to relieve asset quality. However, the current trajectory is not sustainable"
1 way to spot a dummy: wait for the 'student loan bubble' answer to this question.
It's almost assuredly not going to start a recession but if and when it pops, it'll be a very disruptive event and will hasten the move to more non-university post high school education alternatives.
Trump's failure to repeal Obama care. Relax for the next few years US is boom town.
ETF will be at the center of the next crash I think
How so?
I think that with the amount of money traded in ETFs (which is a relatively new concept), and the eventual and possible scale back of financial regulation imposed by trump, ETFs could possibly have a very strong crash and liquidity could become non-existent. I don't see it as something that is a "guarantee" but it is such a new investment vehicle that gained popularity so quickly it is something that needs to be watched.
There is probably more to this that I don't know but I'm not convinced.
When there is enough volatility the bid ask spread on ETF's becomes problematic because one determinant in the way ETF's are priced is by the arbitrage that authorized participants trigger by buying discounted ETF shares and then trading them for the underlying stocks.
Keep in mind many managers keep their ETF's hedged by futures contracts for efficiency.
As the bid ask spread on the ETF increases further it causes a ripple effect by specialized traders trying to either acquire the discounted ETF shares or dump equities etc...
Theoretically if a flash crash occurs and trading isn't halted on both the ETF and underlying stocks you can get some serious liquidity issues.
**(This is not my outlook just my understanding of this specific stance) **
Let us assume a flash crash of this type does occur; exchanges halt trading and then what? It is probably levered ETF's that will suffer. Holders of these are usually not the typical retail investor. Maybe holders try to move a different set of investments similar to the early days of synthetic CDO's as Lehman was going up in flames.
The underlying stocks for other ETF's are probably efficiently priced already though.
Maybe a trader can explain it better than I can but lack of liquidity is not enough; this should remind you of student loans in a way.
I think the catalyst for the next recession would be if Trump and his republican cronies are unable to get anything done in 2017-2018. Markets currently are on an "animal spirits high" right now which I believe can be reversed instantly once they see that Trump is not what they thought he would be as President.
fully agree - markets are starting to get more realistic after the Trumpcare disaster
Right, 100% agree- after the ryan/trumpcare debacle, I am noticing people starting to get skeptical that they will be able to pass a tax reform package with enough support
Recessions can come from lower sentiment (investor's sentiment reflected in the market and consumer) if people turn their focus to world events. Remember, this administration has been chaotic and we haven't even faced any sort of new world scare (war in ME, for example, or another Bird Flu breakout). Once the market (investors and businesspeople) look at budgets to be dampened somehow, we could see an economic retrenchment through less hiring for a couple or a few quarters, until Trump is able to show he's competent enough to get something done.
This is more of an absolute fact and the prognostication is when/why.
Seriously? That's the best you got? That wasn't even funny, Dick. Hit the watering hole, knock a few back and come back tomorrow... smh.
I'm concerned about the amount of corporate debt outstanding and inflationary moves sparked by Trump administration.
Self-imposed 20% border tax is the most likely catalyst given that top advisors aren't backing down regardless of economists estimates. The Trump administration is one that has nearly the fewest economists on staff in American history. I would look for a catalyst related to economic policy as a likely culprit.
Commercial Property Bust. We're seeing the initial onset with the big retailers like JCP and Sears selling off.
CRE isn't defaulting anytime soon, every purchase isn't over levered or is in straight cash. CMBS maybe.....
lots of things to be worried about IMO...
subprime auto and student loans too small on their own to cause a crisis but each are very real problems (and both are securitized and sold to investors) especially with used car values tanking and student loan defaults rising (at least for borrowers who have already missed payments).
ETFs have become the tail that wags the dog for a lot of fixed income products which is concerning since it is too difficult to buy/sell a lot of cash bonds without moving the price too much (could see more flash crashes/rallies).
brick and mortar retail continuing to go bust (sears, jc penney, macys, etc.)
peer to peer lending. this was a bad idea from the beginning and i think all the issuers had their default/credit models wrong. i dont have many peers i would personally lend money to, especially if it were unsecured.
hardly any wage growth
US corporate debt (there is now more US corp debt outstanding than mortgages if you can believe that).
european banks are still zombies
possible trade wars with China
another EU country exiting
10%+ stock market selloff
fed raises rates too aggressively
Trump administration not getting things done (ie. Healthcare and Tax Reform, except i think Tax Reform will go through easily)
multifamily housing, there is currently an FHA backed glut of this stuff in nearly every city across the US
also, remember that central banks are buying roughly $200 Billion per month in securities between the Fed, ECB, BOE, BOJ and SNB, so what happens when they stop buying?
not sure any of these cause a recession, but a combo of a few certainly could...we are about due for one though
Years of an expanded Fed balance sheet translates into significant inflation as money that was 'sterilized' in the financial system begins flowing into the real economy.
I think this risk is particularly acute (although low probability for the near term) because anyone who said QE would translate into hyperinflation was laughed out of the room, and subsequently no one is thinking about this at all.
Yeah I thought as much an interview in 2009 but was brushed off.
Just look at asset values. Different kind of inflation.
While this is not the "next recession", long term, I think that within a few decades, the answer will be "death".
We've got a generation on the precipice of retirement that's leveraged to the hilt and has got less than $10,000 in liquid assets saved up on average, with most of their wealth concentrated in a single asset, their house. Right behind them is an even more indebted generation - their children - and so on.
What happens when millions of highly indebted, cash-poor boomers go to the grave? Their debts fall on their already-indebted descendants.
Where do banks collect the money from when junior is already debt-overburdened in the first place?
To me, this has all the hallmarks of catastrophic recessions past:
(1) Lax credit issuance because credit originators might rely on old rules of thumb and past results in the place of actual due diligence ("who doesn't pay their mortgage?" -> "who leaves their debt to their kids?")
(2) Systemic risk:
-Like pre-2008, asset rating agencies are going to underestimate the correlation between default rates on the underlying assets on which securitized instruments are based ("Prices of homes underlying mortgages of a given vintage don't correlate across geographic lines" -> "an entire generation won't just stop paying off their credit card debt all at once")
-like pre-2008, the markets are going to underestimate the cascading effects of deterioration in the quality of credit being issued. In the same way that people failed to anticipate the effects that mark to market and declining CDO prices would have on the overnight repo market for entities like BS and LEH, people will fail to anticipate that it's not just granny who stops paying her loans when she dies, but her son too, as his debt burden just increased twofold. And he, unlike granny, is going to have the worse effect on the economy because he is at an age where we assume his consumer activity is the backbone of our GDP.
(3) The buck stops nowhere:
-On the lenders' side: like the banks that arguably acted in bad faith by taking the short position in a CDS that comprised a CDO they constructed prior to 08, the banks may arguably act in bad faith by issuing a five year loan to an old boomer with three years left on the clock. There's no incentive not to, as the bank is guaranteed a debtor whether the individual who took the original loan survives its term or not. Whose fault will it be when the borrower kicks the bucket before paying his debts? This is an argument that will more likely happen after the crash than before, as it did with Abacus and the like.
On the debtors' side: like those homeowners that took attractive teaser rates and prayed on that refi before 08, I think it's reasonable to argue you're going to see consumers who have been conditioned to live off borrowed money their entire lives taking on more debt right up until they die and not really caring about the feasibility of paying it back. What does it matter to them? They'll be dead, anyway. And like the unsophisticated borrowers of pre-08 who didn't understand a variable rate mortgage, do you think the borrowers of the future are going to be thinking about debt-inheritance laws when they're trying to decide whether to borrow money for their new home/elder care/etc.?
Interesting thesis, but I think you're wrong about the mechanism here. Unless you're co-signing loans with your elderly parents you will not inherit their debt - their estate will. This could still have a significant dampening effect on the economy as homes are siezed and then resold to cover the debts of the diseased and banks are forced to take charges for any remaining debt. However, this would be a drawn out multi-decade effect and its unclear if it catalyzes a discrete recession.
Perhaps - while I haven't seen statistics on the % of co-signers, I can accept for arguments' sake that most of this debt would be paid/written down in probate court. Even so, I think you're only slightly weakening one particular argument about how this would have systemic and cascading effects.
We could hem and haw about the particulars of how this economically adverse event would unfold. However, I am convinced that history hasn't yet borne witness to the advent of a generation so deeply indebted and unprepared for retirement as the one that is currently on deck - nor has this advent occurred in a "financialized" world like the one which spawned the '08 recession. Have you seen the statistics coming out about savings in the 55-65 age bracket? They're terrifying. Quite literally, I wonder how many of these people will face destitution and starvation.
Maybe the government will deem senior citizens as a class "too big to fail" and subsidize their financial mistakes through new/enhanced entitlements. Or, maybe, they'll all keep working until they die, causing economic stagnation as new blood fails to find a spot in the game of musical chairs that is the economy. Either way, I think this is a macroeconomic trend that is just beginning to come to light, and it would be lazy thinking not to recognize that it presages something unprecedented for our economy.
As is always the case, rising interest rates.
:)
Increased demand for CLOs. Lots of "secured" cov-lite deals getting done that shouldn't
There's simply not enough low-hanging fruit in the high-yield corporate debt markets / leveraged debt markets for this to happen. Also, demand for CLOs is dropping like a lead balloon and has been declining since late 2015 thanks, in part, to investors being more realistic about risk.
What the hell are guys talking about? CLO demand dropping? With spreads at 3+yr tights and issuance already ahead of last year? If anything, the increase in covlites will hurt future recoveries
Student loans
This post is way too US centric. People seem to forget that other parts of the world can also f**k things up LOL
My bet is on the collapse of EU or burst of property bubble in China.
Didn't those things happen already?
Don't think the next calamity is going to be able to isolated like '08 or '00 was. It's not going to be something like housing or tech stocks.
It's going to be a repricing of sovereign debt/risk as a whole. I personally don't think people realize how distorted capital markets are. Not just referring to QE and ZIRP, talking about the credit binge that the world has been on since the 70's. We've essentially completed an LBO of the entire world, now the bills are about to come due.
Don't think it's worth talking about whether it will be CDO's or CLO's or whatever derivative you want to talk about.
Governments unable to borrow short term to fund their long term liabilities...That's the crisis that we need to worry about.
Also. If anyone wonders where all of the hidden inflation is from QE, spoiler alert: asset price inflation is still inflation.
The next catalyst for our recession will be when all these immigrants take our jobs!
Sure, Susan with your high school degree, Muhammad the neurologist did take your job!
Macro-economically treating "growth in technology, entrepreneurship, etc." as an exogenous variable in determining growth in GDP. I think this is largely the reasoning behind not being able to indicate bubbles/inflation in the past half a century. Further, while student loan debt is ridiculous and it can be argued that the return of a **bachelor's* degree is difficult to measure. The income inequality that tons of Americans set themselves up for is a real problem. To treat a variable that is 50% of the current contribution to the GDP growth formula as exogenous, is in my opinion, to overstate it a ton. Combine that with QE and you have a pretty solid facade, but the chickens will come home to roost. I heard an interesting thing the other day... Robinhood, a trading app saw some ridiculous account opening numbers and trading volume around Snap's IPO. When I think about the kind of person to open a Robinhood account, I think of the kid who majors in polisci, rips a vape pen, gets married at 24 and works in "marketing and sales" for a startup social media advertising company. "Growth in technology" calculated in GDP technically treats this guy the same as someone who actually contributes to production. That's the next recession.
Auto Lending is a catastrophe waiting to happen ..
https://goo.gl/tk5lIG
But the next recession ? No chance, auto loans are much, much, smaller than mortgages, far shorter terms &, unlike a house, nobody buys a car expecting it to go up in value. Auto loan default risk is very manageable for investors.
The next "major" recession in my opinion, will come from a boom in automating jobs - particularly in industries that are highly employable (like driving, couriers, taxi's ect...), and an unequal distribution of the wealth it generates.
i) Companies getting richer as a result of lower overhead costs & staff ii) Unemployment rates skyrocket and the government is unable to subsidize
I think auto loans are a large problem, but I doubt a collapse in the auto loan market will cause a recession. Student loans also ring some alarms because the amount of debt a given student may start with anecdotally seems to be greatest in fields with the lowest propensity to actually pay them back, ie; Student A seems much more willing to take on $75k in debt for a degree with a starting salary around $30k/yr than Student B is to take on $30k in debt for a degree with a $70k/yr starting salary. This inconsistency seems troubling in my opinion.
It likely will not be an isolated incident, but a combination of tumultuous domestic lending conditions and more global instability issues.
I haven't read through all of the comments thoroughly but I am assuming that this has not been mentioned. As of recently central banks have been investing into the stock market. I am no expert in macroeconomics as a whole but I believe that the idea of central governments pouring money into the stock markets could dramatically hurt the global economic scene.
Are you referring to quantitative easing?
A wave of global protectionism begun by USA, runaway inflation, and the bursting of the college loan bubble.
Also I have heard the auto loans thing and don't think it is anywhere near big enough to be systemic. That said if there is a recession, those subprime auto loans will probably be the first thing to go. That and shopping malls. It's important though not to get the cart before the horse with these kinds of things.
Sovereign. Debt. Crisis. #inflationiscoming
I think the spark will be lit by something either China related, or more frighteningly, technology related in the form of creative destruction.
Simple - Trump impeachment or equivalent. Market will turn into a death spiral.
Recession? Easy....textbook credit cycle. Everyone here seems to be looking for the next 2008. Ain't gonna happen!
populism
I don't think that word means what you think it means.
Interesting response as you couldn't possibly glean my definition or interpretation of the word.
I agree with most people above. I'd like to add a couple of other catalyst that has not been mentioned above.
First is cyber security meltdown. I am concerned about strength of current cyber security. More and more companies' client data are breached. All of our computers are probably already hacked and our identifty information already sold on black market maybe to these marketing companies. We live in a world where gigantic amount of data moving everywhere quicker than ever. However, I don't think digital security is catching up to that. What concerns me is that there can be a global meltdown on cyber security where our cyber transactions are collapsed, making online banking insecure. When this happens, will hacker group-who probably already knows our id/pw for our banks-try to freeze our computer and pull our money out of our bank account? If such global meltdown happens, this could wreck havock on global financial system.
Second is dollar's fall as a world key currency. One major reason dollar being world key currency was because it was tied to middle eastern oil. As world transitions and becomes powered by renewable energy, I don't know how that will affect dollar's status as a world key currency. With main advantage over other currency taken off, I think there can be a currency war between currencies of other countries. I think this also can be a big factor.
Third is China's Great Fall. This can be long so I won't provide my reasoning. However, China has avoided structural reform on their economy. Their financial system seem, to me, in the verge of collapse. If China fall, I think it's going to be in a global-scale affecting global economy.
Points 1: This isn't Mr. Robot... Yes, security is an issue and we've heard about the UK NHS, Bangladesh Central Bank, Russian Central Bank, etc.etc., but I highly doubt that a group has the capability to completely throw off the financial markets for the long-term. That would require a bank(s) to lose a massive portion of deposits forcing a major liquidity issue. Banks have deposits spread across a lot of different avenues, across international borders, across different branches, etc.
Point 2: Oil has been down for over a year and the dollar is still standing. Renewables employ more people than O&G and there have been numerous articles saying it's set to stimulate more growth. The oil industry doesn't just impact the dollar, it impacts every currency, so it's all relative.
Point 3: China has over 1.3bill people and a government that has proven to be able to transition through troubles very quickly (enforcing capital controls, investing more than any other country in rewewables, etc.). China will not let themselves collapse and they still have the potential for a lot of growth.. Can they slow down? Of course, but every country has peaks and troughs throughout their, hopefully upward,economic cycles.
Small recession caused through China slowdown/S&P Crash -> Central Banks will literally have no instruments left, interest rates already at 0 -> Stock Market Crash -> all the QE money that went into capital markets over the last years flows into the real economy -> Hyperinflation
Lets see. North Korea tensions, Trump's delaying of agenda, record consumer debt levels, weak producer data, record withdraw from domestic funds, massive global ransom hacking, new ebola outbreak, absolute chaos in Venezuela.
2-3 years ago, just one of those catalysts would've called for a ~5% pullback. yet we're trading at all time highs.
it'll take a true black swan event, something outside our economic/political sphere.
a tweet
Next Recession, which Ivy League school and top firm will get the honor (Originally Posted: 02/12/2016)
It might be a crass subject but here I Go. We have some of our brilliant Ivy leagueres working in the likes of Godlamn and Morgan, working hard, to cause the next recession. Wondering out loud which ivy league school and which prestigious firm will get the honor to cause the next recession. Which firm is the next lehman? Out with predictions...
I want to slap you
Lol, why? By the way, What is your prediction?
10/10 shit post
Guess someone is not paying attention to the market, negative interest rates and too busy stuck on their excel financial models.
Nah, this recession is obviously the result of the unholy union between the Church of the Latter Day Saints and Starbucks. Howard Schultz and Mitt Romney were trying to corner the market in frozen concentrated orange juice when they got into a fight over the virtues, or lack thereof, of caffeinated beverages and caused a flash crash that caused China's economy to slow down. Then Obama and George W called up the Masons and told them it was time to enact Order 69 to rollout the New World Order protocol. It's all quite simple but I'm sure Harvard and Goldman will take the fall, again. Poor GS, always taking the rap even when they weren't even in town that weekend.
In all seriousness, I wanted to get 30,000+ feet view from the smart brains on the forum. My intent is as follows: Is the next crisis avoidable, with the QE, negative rates, slow china, commodity, ISIS, Russia.. Which firm is acting like lehman, what are the inside issues that are being ignored.. In these shops, there is herd mentality, tremendous pressure and weird loyal attitude where people don't say the right thing because they worry their head would get chopped off..which causes all of them to fall over the cliff. I told Rick Rieder of BlackRock in early November that Trump will be formidable and may be nominee or president, elites who were huddled around him shrugged it off. I have sent him a note couple weeks ago again.. Any ways, I think hiring people who think alike from IVY are a big disaster waiting to happen for the country and world economy.
You sir, must've hit puberty when you turned 18 yesterday. The next recession is unforeseable by anyone on this thread and anyone in the world, for that matter. You read your little articles and they tell you that they predict a recession, but they are basing their opinions based on facts of experience. It's all historical.
The crisis of 2007-08 was the first to be caused strictly by the financial sector. And if you look at the history, the framework for it was created by the government.
GS didn't create the recession, GS responded to those government incentives and kept its shareholders happy by providing value where they saw they could, and did what the government wanted to do which was to provide liquidity and drop mortgage rates.
No one firm will. It's going to be the result of a sovereign debt crisis, the effects of which are already being felt in the form of aggressive attempts by governments around the world to track every single dollar being moved so that they can extract the maximum amount of cash.
Hell, in Australia the government is now putting people in car parks watching for anyone using a personal business vehicle to go to spots games, so they can hit them up for a tax violation and fine them. In Italy they tried cash sniffing dogs at the airports.
That's where the next recession is coming from.
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