Mike Lipper’s Monday Morning Musings
Risks: Recession/Cyclical, Depression/Structural
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018
Fears
Recessions are a cyclical phenomenon, largely due to price
and debt imbalances. They occur regularly within a ten-to-twenty-year period. Subsequent
recoveries are usually as quick as recessions. Depressions are much rarer, leaving
societies changed and altering the distribution of wealth and power.
Based on elapsed time the world is due a recession, which
may have already started. Liz Ann Sonders of Charles Schwab points out that the
US Government tracks the profitability of both public and private companies. In
both the first and second quarters of 2025 earnings declined. She believes that
when data for the third quarter comes out it will be below trend. This may be
different than more publicly reported GDP results because the wholesale sector
is absorbing the bulk of the costs of the tariffs which foreign exporters don’t
pick up.
There are lots of private indicators of economic business
troubles. One that has been around a long time is the production of boxes,
which declined. A new one to me is the trading multiples on the sale of
trucking companies, which I have been told dropped in the first half of this
year. This is important because it not only indicates a decline in the demand
for goods, but it is a signal that they are having difficulty getting
experienced drivers. Many drivers are on expiring or expired visas, demonstrating
the impact of tightening regulations on many business activities.
Below the surface other concerns are becoming more visible.
One can’t avoid a discussion of what AI (Artificial Intelligence) will do for
global industry and consumption. While a lot of money and talent is being spent
under this rubric, there are still no identified profits or sales from its use.
In a recent study by MIT, they found a low return on AI’s use. From an overall
economic viewpoint, I have not seen a study showing if AI’s replacement of the work
of people benefits society.
With relatively small changes in price and debt levels there
will be a recovery from the recession. However, every couple of generations those
responsible for curing recessions believe the quickest solution is structural,
which society rejects over an extended period.
My Fear
We have all heard that history does not repeat, but rhymes.
My fear is that we are generally following a pattern like the 1920s and early
1930s, which led to the Great Depression. (You’ll recognize the term depression
more from the study of psychology than economics.)
The US has suffered numerous recessions, most of which were in
the one-two year range. For a recession to become a depression there needs a
force trying to fix how society and the economy work. Unfortunately, previous commanded
decisions didn’t work and prolonged the impact of the recession. Over our
history we have had four presidents who have tried to make meaningful changes
to our society/economy: Andrew Jackson, Teddy Rosevelt, FDR, and Trump. Through
executive orders and legislation these Presidents tried to change how people
lived and worked but ran into significant opposition from the courts and
elements of the business community. Because of the US’s market and military
power, we have an impact on what other nations do. They either resist or go
along with the strategy but will be impacted either way.
What should Investors do?
This advice is for long-term investors looking to make
returns for future generations. Traders who invest to make relatively fast
returns should follow the momentum of the markets, while investors should move
slowly with portions of their wealth and responsibilities.
Each will be subject to the cyclical behavior of the market,
world economy, and changes in needs. While a trader may guess correctly regarding
cyclical moves and early structural changes, an investor should wait for some
understanding of the major implications of the change and be willing to be
wrong before being right.
Whatever discussions occur today, they will likely be
different a year from now. Major differences will result from views on the 2028
election.
Odds
These are my analog thoughts that lack the precision of
digital work, but that is the way I feel very early on Sunday morning:
- The odds of a recession before the next Presidential election appear to be 65%.
- In dealing with a recession, the odds of government converting it into a depression is 50%, although it may take longer. Human nature almost guarantees future recessions and depressions due to over expansion of debt and other unsustainable commitments.
As usual, please let me know what you are thinking.
Did you miss my blog last week? Click here to read.
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