In recent years, the U.S. economy has performed at seemingly incredible levels. Even as stubborn inflation and rising rates of interest weigh on consumers and businesses across the country, and wars within the Middle East and Europe dampen global growth, there are few signs of an American recession.
The downturn in the trendy business cycle, which until recently was described as inevitable by many Wall Street forecasters, appears to have disappeared. And it is just not just the economy that’s defying this conventional economic wisdom – US stocks have also soared lately despite significant headwinds.
Wall Street bulls argue that that is all an unusual but not unheard of economic “soft landing” driven by consumers and businesses which can be now structurally more resilient to higher borrowing costs. Some even argue that we live through a period of American economic and market exceptionalism, or the “Golden 2020s,” as a result of aspects corresponding to the U.S.’s relative energy independence and exposure to the AI boom.
But for Mark Spitznagel, co-founder and CIO of personal hedge fund Universa Investments, all of those ideas are only attempts to invent a story that explains why “it’s different this time.” In reality, history tends to repeat itself, or a minimum of rhyme.
“This time it is no different, and whoever says that really hasn’t been paying attention,” said Spitznagel in an interview with Assetsand added: “The only difference is that the scale of this bubble bursting is larger than anything we have ever seen.”
Spitznagel has been claiming for years that the US Federal Reserve contributed to the bursting of the “biggest credit bubble in the history of mankind” through its years of loose monetary policy. And he warns that every one bubbles burst sooner or later, which has earned him the repute of a perpetual bear, which he’s now trying with all his might to do away with.
Although most Wall Street experts are optimistic this 12 months, the veteran hedge fund manager is anxious in regards to the economy. He believes the negative effects of the Fed’s monetary tightening have only been postponed at a time of high corporate, consumer and government debt.
Recent signs of an economic slowdown and a stock market peak – including rising unemployment, an increasingly cautious consumer and volatile market activity – mustn’t be ignored, says Spitznagel, who uses his patented strategy called “tail-risk hedging” to attempt to make the most of sharp market downturns.
“This is a completely normal tightening process, a process that is reaching its peak, a reversal process that is taking us into a recession. I would be surprised if we were not in a recession by the end of the year,” he said.
A powder keg economy
Not way back, many Wall Street forecasters were in Spitznagel’s pessimistic camp, warning of an impending recession. But most not see any imminent danger of an economic or stock market crash. After years of predicting impending pain, Bank of America isn’t any longer predicting a U.S. recession in any respect this 12 months, while JPMorgan and Goldman Sachs have reduced the probability of a recession to only 35% and 25% over the following 12 months, which is just not much above the historical average of 15%.
Still, Spitznagel – who employs Nassim Taleb, the statistician and academic who popularized the concept of the rare and unexpected event often called a “black swan,” as a “respected scientific advisor” – dismissed Wall Street’s optimistic views. He argues that the present, relatively stable economy is “not at odds” with the delayed effects of the Fed’s tightening of monetary policy. “It takes time for the higher cost of debt to filter into the system,” the hedge fund manager explained.
We are temporarily stuck in a Goldilocks zone while higher borrowing costs impact the economy, but that may soon end.
Why? Spitznagel says the Fed created a “powder keg” economy by keeping rates of interest near zero for therefore long and stimulating the economy with quantitative easing – a policy of shopping for mortgage-backed securities and U.S. Treasury bonds. Those policies created an environment where businesses and consumers borrowed heavily to speculate and spend since it was low cost, he says, and that led to high levels of debt and artificially kept unsustainable business models afloat.
In his view, US non-financial firms had a record $13.7 trillion in debt in the primary quarter of this 12 months, as Fed dataAnd total global debt also reached a record high of $315 trillion in the primary quarter, based on the Institute of International FinanceMuch of this debt is government debt, but Spitznagel can be concerned about its sustainability.
The US national debt exceeded the $35.1 trillion mark this summer, and the ratio of national debt to gross domestic product is predicted to succeed in 116 percent by 2034, based on the Congressional Budget Office – greater than during World War II. The situation is comparable abroad.
Rising government debt could make it tougher to implement latest, large-scale spending programs to stimulate the economy, thereby slowing economic growth.
With the Fed keeping rates of interest high for years, Spitznagel fears the impact of rising debt costs on businesses, consumers, And Governments all over the world will soon raise their heads. “You can’t deepen the biggest credit bubble in human history without feeling it,” he said, repeating something that has turn out to be something of a mantra for him lately.
The key indicator to keep watch over
The key indicator Spitznagel watches as an indication of an impending recession is the yield curve, which tracks rates of interest on bonds, typically U.S. Treasuries, with the identical credit quality but different maturities. When the yield curve inverts, meaning short-term bonds offer more interest than long-term ones, it’s historically a sign that a recession is coming.
Each of the last eight recessions within the US because the Nineteen Sixties occurred after the 10-year Treasury yield, for instance, fell below the 3-month Treasury yield. And currently, the 3-month Treasury yield has been above the 10-year Treasury yield for 22 months – the longest inversion in history.
However, the inversion of this yield curve is just not the true recession indicator, says Spitznagel; it’s the return to normality or disinversion. “It is one of the most important [recession] Indicators that there is a disinversion of the yield curve, look at the historical data,” he said.
Historically, it took a mean of nearly a 12 months for a recession to start after the primary inversion of the 3-month/10-year yield curve. But to refute Spitznagel’s argument, it took a mean of just 66 days from the yield curve inversion to the collapse of the economy. Reuters First reportedciting data from Jim Bianco, president and macro strategist at Bianco Research.
For the outspoken hedge fund, the present trend of yield curve disinversion is an indication that a recession is coming, and certain this 12 months. “Will the yield curve inversion be meaningless this time? It never has been,” Spitznagel said. “Will the turnaround on the employment front be meaningless this time? It never has been.”
Doomed to a stagflationary future
If the bubble bursts and a recession occurs, Spitznagel fears that the excessive indebtedness of the worldwide economy and the Fed’s “money printing” will ultimately result in a period of low growth and high inflation.
He argues the Fed can be forced to “do something heroic” to save lots of the economy and markets once they collapse, but that may only be a “Pyrrhic victory.” Cutting rates of interest, reviving quantitative easing, and even starting latest, untested stimulus measures is not going to be enough to stop significant pain for consumers and investors. And if the Fed’s efforts take effect and help stabilize the economy, stagflation will turn out to be an issue.
“It will appear like a recovery, but there may be just a lot that [money] what printing money can do before it actually weakens growth,” Spitznagel said. “As Friedman wrote within the late Nineteen Sixties, printing money is ultimately stagflationary once printing and inflation are expected.”
“Printing money has never created wealth and it never will, so it’s safe to assume that after the next epic crash, gold and commodities will once again become a real commodity,” he added.
Although Spitznagel fears an impending recession, an imminent bursting of the stock market bubble and the danger of stagflation in the long run, he also expressed reservations about his pessimistic long-term forecast.
“I don’t think we’re heading for a Great Depression. I’m not one to predict the end of the world. I just don’t think we’re going to like the things that have to be done to save this artificial, massively manipulated bubble that we all live in,” he said.
Finally, Spitznagel, who has been bullish lately, warned that bubbles are inclined to end on euphoric highs, and he believes the last leg of our current bubble still has room to run. For investors, because of this shorting the market is a foul idea.
“I just want to ease my conscience here,” he said. “If your readers short the market and end up having to buy back 20% or whatever it is higher, that’s not on me. I think a blowoff [to the peak] is coming. It will squeeze [bearish investors].”
