Will the US economy fall into recession?
If so, when will the recession come?
If so, how deep will the recession be?
How did asset prices behave before a recession?
How do asset prices behave in the early stages of a recession?
How do asset prices behave in the middle of a recession?
What happens to asset prices in the post-recession period?
...
The above series of problems can be said to be the focus of the current global financial market, especially the US capital market.
Recently, I saw an in-depth research report by CICC on the U.S. economic recession, coupled with my own data verification, I got some interesting points of view, and I would like to share them with you.
The National Bureau of Economic Research (NBER) has long been the leader in identifying and classifying the recession stages of the U.S. economy. Its main indicators include:
Personal actual income after deduction of transfer payments;
non-agricultural employment and unemployment rate;
Household Survey Employment;
Actual personal consumption expenditure;
Manufacturing activities and trade sales;
industrial output.
The figure below shows the U.S. recession period since the establishment of the Federal Reserve, as well as the accompanying U.S. CPI inflation rate and ten-year Treasury yield.
Data source: Federal Reserve
It is a pity that NBER does not disclose the specific quantitative indicators by which he defines a recession, and when it confirms a recession, it is usually several months old.
According to NBER, since 1920, the U.S. economy has experienced 18 rounds of recession. The triggering factors of economic recession can be attributed to one or more of the following:
central bank monetary tightening;
government budget cuts;
High leverage in private sector borrowing;
stock market crash;
external shock.
Analyzing these 18 economic recessions one by one, we can find that among the triggering factors of the US economic recession, monetary tightening accounts for 14 times, fiscal spending cuts account for 5 times, high leverage accounts for 2 times, stock market crashes 2 times, and external shocks 7 times. Second-rate.
Furthermore, CICC defines a deep recession as a correction of real GDP exceeding 3% and a mild recession as less than 3% based on the decline in real GDP from the peak in the United States.
According to this division, since 1920, the United States has experienced:
10 deep recessions (1920~1921, 1923~1924, 1926~1927, 1929~1933, 1937~1938, 1945, 1957~1958, 1973~1975, 2007~2009, 2020 ), the median duration of a deep recession, is 13.2 months;
9 mild recessions (1948~1949, 1953~1954, 1960~1961, 1969~1970, 1980, 1981~1982, 1990~1991, 2001), median duration, 10.1 moon.
Source: Haver, CICC Research
For traders, whether they are waiting for the confirmation of NBER or the confirmation of GDP data, it is very likely that the day lily is cold, and we need a single data indicator.
According to my personal observation, the sharp increase in the unemployment rate is basically the best single indicator for confirming the recession in the United States - a sharp increase in the unemployment rate is an inevitable feature of repeated economic recessions in the United States after World War II.
Data source: Federal Reserve
In addition, I personally believe that the collapse of the Bretton Woods system and the complete end of the gold standard in 1973 had a profound impact on human currency, economy, and finance. Since then, mankind has truly entered the era of credit currency. So far, We have only lived for 50 years under the pure credit currency system.
In view of this, in the gold standard era, the recession that was too long before the collapse of the Bretton Woods system is not of great reference significance for today. Therefore, here we will focus on the eight economic recessions after 1968.
Back to the first question mentioned at the beginning of the article: Will the US economy decline? My answer is: yes.
Here I use 1 indicator to tell if the US is nearing a recession:
The difference between the yield on 10-year and 3-month U.S. Treasury bonds.
Data source: Federal Reserve
Since 1968, the yield on the 3-month Treasury note has been higher than the yield on the 10-year Treasury note before any U.S. recession.
Here I summarize the latest 8 US Treasury 10Y3M inversions and economic recessions in the following table.
Data source: Federal Reserve
The current round of U.S. 10-year and 3-month U.S. Treasury yields has inverted, and it will appear in October 2022. It has reached the highest level in 40 years (-1.65%). Therefore, I think the U.S. economic recession is extremely large Probability will come.
Next, the second question at the beginning of the article: When will the recession come? How far away is the recession now?
My answer is: as early as the second quarter of 2023, as late as the fourth quarter of 2023.
According to my previous table summary, the recession will come 3-17 months after the first inversion of the 10Y3M interest rate spread. The first recession should come within 6-12 months after the 10Y3M yield inversion.
Then, back to the third question at the beginning of the article: how deep will the recession be? My answer is: the high probability is a mild recession.
Before the credit currency system was fully implemented, deep economic recessions often occurred in any country because of the forced monetary tightening. However, since the era of the credit currency system began, governments and central banks of various countries have basically achieved random printing of money. The "freedom of printing money" that can be printed freely, boldly, and unlimitedly.
In the case of "freedom to print money", a deep recession in the United States must be matched by a series of economic conditions——
Or, from 1973 to 1975, the international monetary system was in chaos, and the supply of crude oil and other commodities was greatly impacted;
Or, from 2007 to 2009, the debt leverage of the private sector was too high to be tolerated;
Or, in 2020, the impact of the once-in-a-century super epidemic will be superimposed with high corporate leverage.
In addition to the above situations, neither the government nor the central bank will allow a deep economic recession. Even the high leverage crisis in 2008 and the deep recession under the impact of the epidemic in 2020, the United States will soon come out through unlimited money printing, which is the same as 1929 -The Great Depression in 1933 lasted for more than 3 years, and the GDP continued to decline deeply, which was not an order of magnitude at all.
Now, the debt leverage of the U.S. household sector and corporate sector is at a low level in recent years, so it is difficult for a deep recession to break out.
Data source: Federal Reserve, Oriental Fortune Choice
Interestingly, from the short-term epidemic recession in 2020 to the current round of economic recession, the economic situation of the United States is actually a combination of many previous situations:
1) Judging from the level of inflation and the speed at which the Federal Reserve tightens monetary policy, this round of recession may be similar to the recession in 1980 and 1981;
2) Judging from the changes in government spending, government debt and fiscal deficit during the epidemic, the situation of this round of recession is similar to the economic recession in 1948 after the war;
3) Judging from the impact of the Russian-Ukrainian War and production cuts in oil-producing countries on the level of inflation and the supply of crude oil and other commodities, this round of recession is similar to that in 1973;
4) From the perspective of international industrial dividend competition and the hollowing out of American industries, the current economic recession in the United States is similar to the competition between the United States, Japan and the Soviet Union in 1990;
5) From the perspective of the internal problems of the US financial system, especially the balance sheet crisis of small and medium-sized banks represented by Silicon Valley Bank, this round of recession is similar to the recession triggered by the savings and loan crisis in 1990;
6) From the perspective of the overvaluation of technology stocks, there is even a little bit of recession in this round, like the bursting of the Internet bubble in 2000; from the resistance of various countries to the "unlimited money printing" of the US dollar system, there is still a little bit of recession in this round A little bit, like the 1973 International Monetary Chaos Recession...
Next, regarding the last four questions at the beginning of the article, because it involves S&P, Nasdaq, gold, crude oil, treasury bonds, US dollar index (other currencies) and stocks in different industries, the prices of the S&P, Nasdaq, gold, crude oil, U.S. dollar index (other currencies) and stocks in different industries before and after the recession. The changes and data are a little bit complicated, so I will talk about it next time.
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