2020 is the day of reckoning. If there is a day of reckoning that's when
the economic expansion will end and a recession will ensue.
No recession in 2019. In large part because we do have more fiscal stimulus
in 2019 it's mostly deficit financed increases in government spending and
that allowed a lot to growth. And also we're in a self reinforcing
virtuous cycle. Lots of jobs low unemployment wage growth is accelerating.
Supporting more consumer spending which is causing businesses to hire
which is pushing unemployment down so we're in a very virtuous cycle. But
it can get broken. And in my view that probably would occur in 2020 so if
I had to pick a date for the next recession it would be sometime in 2020.
By 2020 there is no more fiscal stimulus it's all gone unless Congress and
the Trump administration get it together and do something else. But given
the politics here I doubt that very much. And also by 2020 interest rates
will be higher. The Fed will have raised rates of several more times.
That'll put pressure on interest sensitive sectors of the economy like
housing in the vehicle sector. And you know I do think there are
imbalances developing in the economy and financial system more broadly
that will become exposed as the economy growth slows and interest rates
rise. The most obvious is non-financial corporate debt so called leverage
lending.
That is a problem and I think that will become more obvious as we make our
way into 2020. So if I had to identify the thing that does this economic
expansion in it will be high leverage over borrowing in the corporate
sector. You've got some companies multinationals doing fabulously well.
You know the tech companies a lot of the healthcare companies
pharmaceuticals they got cash everywhere and they're fine no problem.
Balance sheets very strong. Then on the other side of the distribution
you've got companies that are highly levered and a lot of it's related
to engineering. You've got private equity firms and other nonbank entities
coming in leveraging up these companies trying to increase the returns to
shareholders through the leverage. So if you add up all of the debt issued
by companies that are already highly leveraged it's comes close to two
point eight trillion dollars worth that. That's a lot. And if you get into
an environment where growth is slowing sales growth is slowing. Interest
rates are higher so interest payments on that debt are rising. It's going
to put a lot of pressure on those companies because they've got a Hobson's
choice. Do I make my debt payment or do I cut back hiring. Do I cut back
investment. In most cases they're going to have to cut back on hiring and
investment.
Of course that's the fodder for a recession.
I think the Trump administration's economic policies are significantly
dangerously misplaced. The federal government is borrowing hand over fist
the debt load is ballooning as we use that money to pay for tax cuts and
increases in government spending. That's only temporary and it provides
juice for a short period of time and then it goes away. But of course
we're left with the higher debt loads. Now here's the thing. Deficits and
debt don't matter a whole lot in any given year it's like climate change.
We know climate change is a real problem and if we don't do something
about it it's gonna be cataclysmic. We don't know exactly when the crisis
is going to hit but we know it will if we don't change something. That's
exactly what the fiscal situation is if we know it's a problem. It's
already hurting the economy. We don't know when it's gonna send us off the
cliff but we better do something before it does. And then we also have the
Trade War which you know feels like it might be moderating. But who knows.
I mean if that escalates any further it's already doing damage to the
stock market and to the broader economy it will do a lot of damage. So the
economic policies that the administration pursuing is doing damage to the
economy and that's going to become increasingly more obvious as we move
through 2019 and 2020 and that's why I think 2020 is the day of reckoning.
If there is a day of reckoning that's when the economic expansion will end
and a recession will ensue.