Recession is Just Around the Corner

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Economics Matters — the Newsletter/Podcast/Financial Riddler

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President Trump claims that “jobs and factories will come roaring back” thanks to his tariff policies. Trump knows this, one presumes, because his trade triumvirate, Peter Navarro, Steven Miller, and Howard Lutnick, told him so. And the triumvirate knows it, one presumes, because Trump told them so. Together, the four self-annointed trade experts, misapplied, by a factor of four, a trade-tariff formula whose use, in this context, is, to borrow Elon Muck’s description of Navarro, “dumber than a sack of bricks.” Their gross misapplication of an intrinsically ridiculous tariff formula produced astronomical tariff rates.

President Trump announced these rates with great fanfare. First, he took time off from his busy golf schedule — one that’s left him far too busy to attend, for example, the dignified transfer of the remains of four fallen American soldiers — to present his S^2 (stupid-squared) tariffs. Second, he heralded his humongous-tariffs reveal as “Liberation Day.”

The title fit. The event liberated tens of millions of Americans from trillions of dollars of their collective retirement wealth. In quick order, the Gang of Four crashed the stock market, crashed the U.S. Treasuries market, and crashed the dollar market. No one knows where these markets are heading. But given that consumer confidence is now at its second lowest level since 1952 — lower than its nadir in the Great Recession, the markets potentially have miles to plunge before they sleep.

Recessions Can Start on a Dime

Our country has suffered 48 recessions since its birth — one, on average, every five years. The key lesson of these downturns is that if enough people believe a recession is coming, they will make it happen. Economists call this multiple equilibrium — more than one place the economy can land based on self-fulfilling expectations. And many of the potential landing spots are miserable.

What explains multiple equilibrium? It’s as simple as Jane lays off her workers because she thinks Sam is laying off his, and vice-versa, where Jane’s customers are Sam’s workers and Sam’s customers are Jane’s workers. As President Roosevelt put it, at the height of the Great Depression, “The only thing to fear is fear itself.” No macroeconomist has strung together eight words of such profundity.

Coordinated confidence is a public good — one that intelligent policymakers (remember them?) don’t take for granted. Declaring economic war with the entire planet and thermo nuclear economic war with China, the world’s second largest economy, is far beyond what’s needed for Jane and Sam to panic and shed their immediately extinguishable liabilities — their employees. It’s also plenty to trigger financial collapse.

Financial Collapse?

One of today’s major unknowns is whether our trust-me financial system will melt down less than two decades after it last seized up. As argued in my paper, The Big Con, the Great Recession (GR) had no fundamental cause other than politicians, reporters, and, no doubt, short sellers (watch/read The Big Short) screaming FIRE! in an otherwise safe, but dark and crowded theater.

Our trust-me banking system was built to fail and did so spectacularly in 2008 not because of fundamentals, but because trust took a holiday. After the Great Recession, we had the opportunity to build a secure (as in fail-proof), equity-based/non-leveraged financial system, with full, real-time, asset disclosure — called Limited Purpose Banking.

But Senator Chris Dodd and Congressman Barney Frank “saved” the system by papering over its fundamental problem — making promises that can’t be kept, permitting it to die another day. After “fixing banking” with the passage of the Dodd-Frank bill, Frank, get this, joined Silicon Valley Bank’s board. He was there right up to SVB’s last day on earth — when it spectacularly collapsed via a deposit run conducted largely at light speed. Fortunately, trust in then Fed Chair, Janet Yellen, prevented a systemic meltdown involving all eight trillion in uninsured deposits running away from the banking system. Those trillions in uninsured deposits are still sitting in the banking system — poised to run for safety at the stroke of a key.

The Unknown Knowns

Financial collapse comes in endless forms. Leverage built on uninsured deposit was SVB’s flavor. Lehman Brothers and 16 other major financial institutions failed during the GR based on investing in opaque, complex, mortgage-backed securities — securities that were falsely claimed to be worthless. LTCM, a massive hedge fund, failed thanks to a flight to liquidity when Russia defaulted on its government debt. Its failure put both Wall Street and Pennsylvania on full alarm.

Black Tuesday — October 29, 1929 — witnessed a 25 percent drop (coupled with the prior day’s losses) in stock values. It kicked off three years of banking panics that consumed a third of our nation’s banks. In 1909, the Heinz brothers tried to corner the cooper market. Their failure led to runs on their banks and those of associates. Some 5000 businesses dropped dead in short succession. The failure of Jay Cooke & Company ushered in the Panic of 1873. The Panic of 1857 was kicked off by the bankruptcy of the Ohio Life Insurance and Trust Company. The list goes on. Of our four dozen past recessions, over 20 either bear the name “Panic of” or were sparked by the spectacular financial failure of someone or something very big.

The key point here is that there are lots of big banks, big insurance companies, big mortgage lenders, big hedge funds, big private equity funds, and big financial players who can go under over night and trigger alarms that trigger alarms that trigger … . This is a known. What’s unknown is which major U.S. financial entities and financial players may already be near collapse and which may fold as the gang of four continues to play dice with the economy’s atoms.

Yes, the Fed has access to the balances sheets of many financial institutions. But, as in 2008, the shadow banking system remains large and largely opaque. Nor does knowledge lead to action. SVB is a prime example. The various federal and state regulators supervising SVB each let their counterparts take charge. Hence, no one took charge.

To summarize, no one in or outside government knows, for sure, what parts of the financial system can fail, what would make them fail, and when they might fail. In recent exchanges with some of the most knowledgable financial players in the country, including former top-level government officials, the message is clear: “I can’t say who, what, where, or when, but something will break.”

When whatever it is that’s financially big breaks, the economy will get yet another blow to the head with further knock-on effects.

Not Deciding Is Deciding

Policy uncertainty spells economic indecision. Businesses wait to invest and consumers wait to spend. It also spells unemployment as businesses wait to hire and, as indicated, fire in advance of a potential decline in demand. Thus, announcing a massive tariff and then pausing it and then lowering it and then warning that the lowering may be temporary — all invite recession.

The gang of four may think they are playing it smart by keeping their options open. What they are doing is telling the public, which includes everyone on the planet, that nothing they do or say today will necessarily hold tomorrow. Their decision not to decide is the private sector’s decision to sit on its economic hands — potentially for the next four years.

The icing on the spoiled cake is Trump’s well deserved reputation for lying. No one can trust a single word that comes out of his mouth. The only thing anyone can reasonably count on is recession. At least Trump will get his name on it.

Saving Your Financial Hide

Short of Trump explicitly or implicitly defaulting on U.S. Treasuries, using some, much, or most of your assets to build a ladder of Treasury Inflation Protected Securities (TIPS), whose yields are historically high, appears the safest move. It’s safer for Americans who are less likely to face a Treasuries interest withholding tax or some other form of foreigner-lender default cooked up by Trump’s “economists” to lower spending. It’s safer to hold TIPS in retirement accounts as it defers taxation on the phantom income — the inflation adjustments — provided by TIPS. And it’s safer to hold TIPS to maturity, which guarantees, again, short of default, that what you’ll receive in real terms (hot dogs) in each future years is what your paid for.

We are in unchartered territories. Economic and financial risk is bad enough. Trump has added a huge layer of political risk. Hence, securing your base living standard through time with a TIPS ladder or some similar safe security makes common economic sense. There are other Trump hedges, like foreign bonds and gold, but these securities are no longer cheap. Your safest asset is your labor earnings. Doing whatever you can to stay employed, including postponing recession, makes lots of sense. If you are nearing Social Security eligibility, working longer will let you delay taking benefits and, thereby, receive a far higher monthly benefit when you do start to collect. You can also purchase now things you’d otherwise buy in the near term, be it a car, a dishwasher, or toilet paper. Inflation is coming and holding real assets is holding something that’s for sure.

My now 32-year-old, economics-based financial planning company’s name is Economic Security Planning, Inc. That’s the main goal of our company’s two extraordinary tools — MaxiFi Planner and Maximize My Social Security. I wouldn’t make a move without their guidance (MaxiFi does, btw, everything Maximize does and far more.) Re building a TIPS ladder and leaving only investments at risk that you can afford to lose — run MaxiFi’s Upside Investing, which is presented here. Also, MaxiFi’s sign up page offers personalized services, including my guidance, to help you weather what we’re facing — the perfect financial storm.

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