The 10th Man

Recessions Are Forbidden

May 30, 2019

We haven’t had a recession in a while in the United States. The last one was pretty bad, so it stands to reason we might want to avoid a repeat of that experience.

President Trump is working very hard to ensure that we do not have a recession (at least until the 2020 election). The Fed no longer seems to believe that inflation is the greater risk. We are basically running the economy at full speed all the time.

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It is hard to have a recession when monetary and fiscal policy have buried the needle.

Over time, the business cycle has been getting longer and longer. We have gone ten years without a recession. The record, currently held by Australia, is 28 years. Who’s to say that the US can’t go 28 years without a recession? If you think the bears have a bad reputation now…

Spend any time listening to some bearish folks and the message is that a recession is right around the corner. People (myself included) like to call this economy “late cycle,” but it has been late cycle for a while now.

I do think we are closer to the next recession than the last one, but that is not something you can trade on.

Still, that doesn’t mean you can’t prepare. This week, my colleague Robert Ross opened up a blog-style conversation for those of you who are:

  1. Looking to learn some portfolio self-defense
     
  2. Wondering what income opportunities are around right now (and what will be around in the event of a recession)

Sounds good to me. If you want to take part in the conversation, ask Robert your question, or even just get a good gauge on recession sentiment among your fellow readers, I encourage you to get on over there.

Anyway, in my 20 years on Wall Street, I have yet to see a recession prediction model that works. I am observing one in real time that might. My guess is that recessions are a psychological phenomenon, much in the same way that inflations are a psychological phenomenon. It will happen when we say it happens.

Silicon Valley

The next recession will probably happen when Silicon Valley blows up.

Back in the very early days of The Daily Dirtnap (December 29th, 2008, to be exact), I made a bullish call on Amazon. In 2012, I changed my mind and turned bearish on the stock, right before the blast-off. But the original bullish call was pretty smart.

You see, in 2008, I wanted to get long companies without debt. And Amazon was basically without debt. I also wanted to get long companies that were remote from the wave of regulation that I knew was coming. Amazon was without regulation.

Plus, Amazon was growing rapidly—and this was when it was mostly books and records, before the push to become The Everything Store. I had more vision than most—nobody was interested in Amazon at the time.

But in 2012, I failed to see that a company such as Amazon can get pretty big by running at an economic loss in a zero cost of capital world. I have a pretty big imagination—but not that big.

I wrote a piece about this recently in Bloomberg, talking about the economic impacts of the Silicon Valley business model. When Silicon Valley goes into a recession, the rest of the country will. And inflation will probably go up, among other things. We have a tech-driven economy. Look at the top holdings of any major index ETF—all tech companies. If you thought the banks drove us into recession into 2008, and camped out in a park for two weeks about it, wait until Silicon Valley unravels. Because someday, it will.

Some Silicon Valley luminaries, like Marc Andreessen, have recently received approval to form a Silicon Valley Stock Exchange, which is intended to be for companies who need more time to become profitable. The goal is that it will be a stock exchange for long-term investors.

Except, of course, that there is absolutely zero evidence that the stock market rewards short-term performance at the expense of long-term performance. The stock market tolerated 23 years of losses at Amazon, which is just now beginning to show profits (but not in its core business). There are dozens of profitless dot-coms.

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All of this raises an interesting question: how long should the market wait for a company to become profitable? 50 years? 100 years? 200 years? Maybe a good business is profitable in the short, medium, and long-term.

     
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A recession's coming

When will it hit? How bad will it be? How can you protect yourself?

Income expert Robert Ross has real answers.
Ask questions & get feedback on Robert’s interactive blog.

Join the conversation today

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The Big Idea

You can point to the last few recessions and point to a specific reason as to why they started:

2008: Housing
2001: Dot-com
1991: Commercial real estate
1982: Interest rates

Recessions don’t just happen. There is a cause. Recessions happens when overinvestment turns into malinvestment, which turns into losses, which are transmitted throughout the economy.

Look around and it is not too hard to find the malinvestment. I like to pick on the scooter companies. The scooter companies are worth billions. In a just world they are microcap stocks with an $80 million market cap. Not every business has to revolutionize something or change the world. Scooters are just scooters.

Stochastic in the House

All 10th Man subscribers are invited to Hotel Chantelle at 92 Ludlow St in New York next Thursday June 6th for a night of music and fun. You get to meet me, and you get to hang out with a bunch of TDD subscribers, who are the best people in the world. Proceeds will benefit charities that help kids and cats.

Here’s the link for tickets. Hope to see you there!


Jared Dillian

 

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Comments

Sixty2nds@yahoo.com

June 13, 10:34 a.m.

Hello Jared.

I appreciate the non political stance you take in your analysis.

You work with what you got.

That is a tough trait to hone…
can you say street savy?

“You don’t need to be a weatherman to know which way the wind blows”
B.Dylan

I agree it is late cycle and it is not possible to trade on that.

How does one define late cycle…impossible

IMO…
Most are taking a much to close up view of the “tariff wars”
Lets go to 30,000 feet and observe events.

Trump has stated that the race for 5G must be won by the US.

China IS a Totalitarian nation.

Trump understands that.

The 1st crackdown in China was solidified when The Chinese Banker to the Bankers was captured several years ago.
He was in Hong Kong staying in a 5 star hotel on business…with his security detail.
His security detail was not small.
It would have to have been ELITE given the Banker to the Bankers Elite status.

A couple squads of heavily armed Chinese troops in masks and UNIFORM captured him in broad daylight.
The rolled up out front in clearly marked Chinese Army troop carriers.
They walked into the lobby weapons ready.
They gave the security team guarding the elevator a choice.
Not a shot was fired weapons were surrendered.
They proceeded to the Penthouse where they again gave the security team a choice.
They walked the Bankers Banker out through the lobby.
I have not read about him since.

Following this abduction in broad daylight…a message sent to the people of Hong Kong…

There has been a purge (I’m being polite)of high level finance figures.

There are a large number of Gulags that are heavily populated with Christians,  Muslims, and other dissidents….
or suspected dissidents.

Families vanish.

Over 1 million Muslim families have State appointed “Relatives” living with them…

They are spies and are paid to tempt the Muslims with alcohol, porn, tobacco, for starters.

Don’t drink…you are anti social and reported.
There is little or no private conversation.

Then there is the disappearance of the highly paid Social Elite.
The biggest movie and media stars were rounded up…most were reeducated…
They returned after various lengths of time…
they admitted to tax evasion.
They committed to donating the overwhelming majority of their pay to the state for the people.

Shades of the new Saudi King rounding up possible dissident Sheiks and placing them under house arrest.
After an appropriate amount of “negotiation” the tax was paid…Let’s assume an ongoing “tax” was agreed to. 

The Chines Social Elite also agreed to repay past taxes plus penalties.

Let us not forget the recent massive surveillance rollout and the Chinese Social Scoring system.
Be a good citizen or you could lose your J O B, even access to public schools and transportation.

Now we have riots in Hong Kong under reported in the US.

They have been escalating.
The Drudge headlines in the last 48 hours are late to the game.

China is pushing the HK gov’t to pass an extradition treaty.
This E Treaty is described as for criminals….hmmm…
just maybe crime has a nebulous definition.

This is just a sample of what is happening.

The above can ALL be verified and cross verified with a little research.

But wait…
it is soooo much easier to wail, scream, nash teeth, obstruct, and deny.

It is my Opinion…
The trade war is about fighting Ideology with munee.
Totalitarian vs USA.

reminds me a lot of Star Wars and USSR.
Nato vs the Eastern Block.

Those days are long gone.

Trump is challenging other nations to choose a side.

He is fighting the current war not the last war.

Kim thank doe the link.

60

Kim Rampling

May 31, 4:37 a.m.

‘The Huawei Sanction Might Just Pop the Tech Bubble’ from Owen Williams, writing in Medium https://onezero.medium.com/the-huawei-sanction-might-just-pop-the-tech-bubble-f7e800e3174

Hmmm…as it could be said, DOTCOM II. Well, they always did like sequels down there.

usaetso1@icloud.com

May 30, 11:06 p.m.

You just lost all credibility in my book with one comment. Your comment “President Trump is working very hard to ensure that we do not have a recession .” is laughable. Everyone knows the guy spends less time and effort on formal, Presidential business than any previous President in modern times. He is a lazy, gfn, frittata who is precariously close to dementia type behavior, similar to my uncle. Please keep your political biased commentary out of this or I will be out out this. The entire paragraph with the sentence above could be eliminated and it would not alter it one bit, which means it was meaningless gibberish.

jack goldman

May 30, 3:05 p.m.

Jared, I was wondering if America is really a capitalistic nation or a Communist nation since the Federal Reserve, an unelected, private, secret, foreign owned bank, seems to have control of the United States right now. Is the Fed the Politburo and in control of our legally counterfeited currency and credit markets, controlling the economy, giving the dot com’s unlimited credit so they can take over the United States with a new form of control as a nation within a nation? Just wondering.