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How bad could the next recession be?
- rossdavidh 4y agoOn the one hand, the fact that many "zombie companies" already went bust in 2020 when they had a good excuse, might mean there are fewer now than is normal at the beginning of a slowdown. On the other hand, we have had loose money (interest rates near zero) for most of the last decade or more. I don't think that makes the oncoming recession really "inflation triggered [rather than] caused by credit excesses".
- Siecje 4y agoWhat is a zombie company?
- brailsafe 4y agoI would guess companies that had no hope of showing a profit, and just running on either debt or VC
- kwatsonafter 4y ago>a thing created by credit excesses!
- lumost 4y agoA company which is uncompetitive and potentially unprofitable. In a cheap money environment, it’s easy to pass the buck on these things. In startup land, think about the parts of the business that get humored when the company takes a round. Maybe the business doesn’t work, maybe it’s a vanity project for some executive/board member. Without a compelling reason to upset people, these can be allowed to go on for a long time.
- lubujackson 4y agoCompanies issue corporate bonds, which are basically loans broken up and sold on the open market. So with a near 0% interest rate, many companies took advantage by issuing billions of dollars of bonds at low rates, so much so that even at rates of like 2-3% the companies are struggling to pay the interest on these bonds. Maybe someone can enlighten with hard numbers, but last I looked dead-man-walking companies like Macy's and TJMaxx have billions and billions of bonds outstanding while their annual revenue is a fraction that. Now as rates rise they can't go to the well again and all these bonds will end in default. Who gets hurt? Pension plans, mutual funds, all the "safe" funds... so buyer beware with corporate bonds right now.
- deleted 4y ago[deleted]
- darth_avocado 4y agoI wonder how crypto rolls into all of this. A crypto collapse could have wider impact to the market.
- tjr225 4y agoWhy? Most sane people aren’t leveraged into crypto at all. I suspect this is the crypto bubble burst vs the dotcom burst 2.0. But if you were frisky enough to invest in crypto you deserve what is coming, just like a pets.com investor in 2000.
- hailwren 4y agoI really love the irony of your intended lesson vs the fact that you're posting this on HN in 2022.
- pphysch 4y agoMy question is how much real estate is wrapped up cryptobubble schemes. I assume not much.
- __john 4y agoWasn't Saylor encouraging people to take out loans against their home to buy BTC?
- nostrebored 4y agoPeople have taken out loans against their home to buy crypto and loans against their crypto to buy homes. So many people are insanely leveraged.
- zzgo 4y agoConsidering crypto is down 70% since October, do you think we would have felt that impact by now?
- nostrebored 4y agoPeople have used their crypto and stocks to take out variable rate margin loans. These loans have been used to avoid taxation on capital gains. I know multiple people who have used them to buy houses without a mortgage. As crypto and the stock market deflate, they will have to sell assets to cover their collateral difference. This means tax, which means more sales. This is going to continue all the way down. I would expect housing price crashes in local markets that skew towards tech.
- beckingz 4y agoI thought companies were loaded to the hilt with debt?
- echelon 4y agoAlmost every healthy company has debts. It's more of a question whether they have a generous revolving credit line and whether they can service their existing debts or be allowed to create new ones. All of this debt information is publicly available and the market has "priced it in".
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- MichaelMoser123 4y agoLayoffs.fyi says that in june you got more companies that are firing, but less people fired in total. How do you interpret that datapoint?
- technotony 4y agoPerhaps smaller companies started firing people. so the average per company dropped?
- MichaelMoser123 4y agoshouldn't the layoffs have started with the small companies, to begin with? Why would big companies be the first to let go of their staff?
- labrador 4y ago> In this case, extreme levels of COVID-related fiscal and monetary stimulus pumped money into households and investment markets, contributing to inflation and driving speculation in financial assets This is common wisdom but I wonder how true it is. A majority of Americans live paycheck to paycheck [1] so it stands to reason the stimulus paid about a month's rent and groceries. I'm having trouble understanding how this stimulus is responsible for today's inflation. [1] What percent of Americans live paycheck to paycheck? https://www.google.com/search?q=what+percent+of+american+live+paycheck+to+paycheck https://www.google.com/search?q=what+percent+of+american+liv...
- __john 4y agoConsider one aspect of "stimulus" is that a bunch of people suddenly no longer had to worry about rent. All that money they would have gone to rent instead when to Dogecoin and GME.
- sp527 4y agoThis is not how money works and I've seen so many people make deeply flawed arguments because they misunderstand it. Money flows continuously and is only at rest when it's held in vehicles like bank accounts, money market funds, and bank reserves. When you increase the money supply dramatically, that money is in circulation, and various factors determine its average velocity. There's also a multiplier effect in the form of debt created on top of base money. But the key point is that almost all money is continuously flowing through an economy. Incidentally, disincentivizing people from leaving money at rest for too long is precisely why it's important for a currency to be inflationary.
- cortesoft 4y ago> Money flows continuously and is only at rest when it's held in vehicles like bank accounts and money market funds. It isn’t at rest when it is in bank accounts, either. A large percentage of that is loaned out.
- 4y ago
- 300bps 4y agoThe US Government is $30.5 trillion in debt. It currently pays $437 billion in interest on that debt per year. The US government takes in $4.37 trillion in tax revenue per year. https://www.usdebtclock.org/ https://www.usdebtclock.org/ So we pay 10% of our revenue each year in interest. Not too bad. But do some simple arithmetic… $437 billion is 1.43% of $30.5 trillion. As interest rates rise, that percentage rate will go up: 2.86% = $874 billion interest 5.72% = $1.78 trillion interest We are almost assuredly going to hit these rates across Treasury yield curve over the next year or two. Series I Treasury bonds are already paying 9.6%!! What’s going to happen when we’re paying almost half of revenue on interest on our debt?
- jaredhallen 4y ago
- moltar 4y agoEasy! You “restructure” it /s
- williadc 4y agoThat's all new debt. The old debt would be paid at the old rates
- 300bps 4y agoThat’s not how bonds work. Bonds have an analytic property called duration. Most people interpret that to mean the amount of time until the bond matures. The true definition of duration though is a bond’s interest rate risk. “Old debt” interest rate can go up because of: 1. A bond matures and must be refinanced at current market rates 2. A bond has a variable interest rate and simply goes up at the next reset period A higher average interest rate on the “old debt” will be coming across the treasury curve, it’s simply a matter of time.
- adamius 4y agoThose billion dollar per day camping trips were fun though, right? The big sneeze involved some fancy face decorations as well. These things aren't cheap either.
- superb-owl 4y agoThis is a weirdly simplistic analysis from a major financial institution. I always wonder to what degree financial institutions say what they're thinking, versus what they want the public (or other financial institutions) to think. Or even what they want others to think their beliefs are. Games in Type II chaotic systems get confusing quickly.
- _uy6i 4y agoIt’s the free version for their mass affluent clientele that their retail brokers (sorry “financial advisors”) can parrot
- steveBK123 4y agoThis remains a pretty reasonable consensus view right now. Current issues are largely not debt driven like the 2008 (and other large) recession. Mostly inflationary environment of low interest rates, heavy stimulus, high consumer spending, supply chain disruptions, and irrational exuberance. Probably looks more like the 2000 cycle than the 2008 cycle as a result. 2008 and other debt driven recessions are much worse - https://en.wikipedia.org/wiki/Balance_sheet_recession https://en.wikipedia.org/wiki/Balance_sheet_recession
- superb-owl 4y ago> In short, we are positive about the economy’s fundamentals and believe they can provide ballast in the event of a recession. Nonetheless, the bear-market bottom for stocks may still be 5%-10% away. This is a bold prediction given that multiples are near all time highs [1]. The Schiller PE ratio suggests that in historically normal times stocks would be worth 50-60% less than they are today, and monetary policy is quickly returning to normal. [1] https://www.multpl.com/shiller-pe https://www.multpl.com/shiller-pe
- _uy6i 4y agoWhile I’m not bullish I think markets are now closer to fairly valued than extreme over valuation, on a Schiller PE basis we are somewhere between the 5 and 10 year trailing averages, the 20 year average puts you at 25.9x which is a 12% drop from here. Sure the 40 year average is at 23.8x but if you used that as a gauge of fair value the only time you would have been below that was the depths of the financial crisis.
- deleted 4y ago[deleted]
- formerkrogemp 4y agoI find it amusing that most people in the comments are discussing previous mistakes as they interpret them but mostly not addressing their perception of how bad the next/current recession will be. I think some higher prices in things like food will be elevated for some time. I also expect the economy to recover in a year or so, but I don't expect the recovery will last long for various reasons. My predictions are that the federal government will step in dramatically in the American southwest next year. Water and crop issues will persist next year just as they've been getting worse for over a decade now, which will increase migration rates, conflicts, and elevate food prices. More people will move from the American southwest to the northwest and eastern US. The Russian war will drag on. To the world's hunger and pain, the US will reduce agricultural and growth exports due to water issues. US efforts to 'reshore' manufacturing and chip fabs in particular will falter and slow as shipping rates fall, as cheap labor centers become available and more cost efficient again, as labor costs in the US increase and labor actions increase year over year even with poor economic conditions, and as water issues prevent or delay Intel and others from building their water intensive chip factories in the US. I could go on but hopefully you get the picture. As I've said before, I'm just an accountant with some light studies in economics and mild curiosity, so maybe take some these predictions with a grain of salt.
- mikewarot 4y agoGoing into the great depression, we had hard currency, excess manufacturing capacity, and were the worlds largest supplier of oil. This time, we have fiat currency, we've offshored most of our manufacturing, and find ourselves dependent on a failing globalized just in time supply chain. We're now dependent on continually drilling and fracking new oil wells to keep up with demand. (Fracked wells go dry in a few years, instead of a few decades) It's not looking good. Especially when you have a public with zero trust in institutions. Nobody is worried about "The Great Simplification" that's rapidly coming down the pike, as the easy to reach oil runs out and it takes too much energy to get at the rest.
- MichaelMoser123 4y ago> find ourselves dependent on a failing globalized just in time supply chain That one hasn't failed yet. But it might happen, in case that there is a conflict between China and Taiwan. Everybody is in deep shit, if that one happens... Right now we got: - rising energy prices and rising 'commodity' prices; Now these trickle down to every product, so that there is rising inflation. - it is harder to raise money, due to rising interest rates
- gorjusborg 4y ago> That one hasn't failed yet. He said 'failing' not failed. Supply shortages are still being felt in local industries based on anecdotes I'm hearing. I'm pretty sure that'd qualify as 'failing'.
- MichaelMoser123 4y agoI was answering to GP; my point is that it could have been much worse. I don't see a reason for a great depression, unless there is another war.
- deeptote 4y agoI remain unconvinced of a major recession, I think there are a lot of elites out there who are just angry that they now just can't borrow money for free, so they throw a tantrum. The fed was consistently raising interest rates from 2016 up to the pandemic, and the u-6 rate was consistently falling, and median weekly earnings rising, all in the same time frame.
- motbus3 4y agowe also need to remember ln digital unregulated currencies which consumed lots of energy that could be used for tangible items production and also created a value from something that was not tangible. this dangerous combination means that when people realize or convert their investments a tangible, or at least backed up asset, like money, should come to life . do not get me wrong, I think decentralized approach is good and we do have the same problems with banks serving more credit that they should. just saying that this is another factor in this pile. as well as mega billionaires who themselves unbalance the system without any resistance. at least, the damage they cause should be reverted back to society in someway.