What will happen in the next recession? – A wealth of common sense

The recession early in the pandemic was the worst quarterly GDP decline since the Great Depression. The unemployment rate shot up from less than 4% to more than 14% in one month.

But this does not count as a real recession.

We turned off the economy like a light switch, but then turned it back on. In addition, the government sent trillions of dollars in aid to households, businesses, and states. Unemployment insurance was so generous that many people made more money by not working.

This is why the “recession” lasted only two months.

As far as I’m concerned, the last real recession we had in America ended in June 2009.

That means it’s been 196 months since the last real economic downturn in the US, or almost sixteen and a half years!

Certainly, certain industries have taken their lumps during this time¹ and growth hasn’t always been robust, but we just keep going.

A lot has changed since the Great Financial Crisis.

New asset classes have emerged. There are many more stock investors than ever before. Households are much richer. Everyone expects to be rescued if something goes wrong. There is a whole new subset of degenerate gamblers playing the market. It’s easier than ever to take leverage and risk in new investment vehicles.

I can’t predict when the next recession will happen, but I do have a lot of questions about what will happen when it does:

Will the prosperity effect make the situation worse? The top 10% are responsible for 50% of consumer spending. High stock prices have a lot to do with this.

Check out this story from Redfin on coming up with a down payment:

“With the housing market in a recession, the people buying are those who are financially comfortable, secure in their jobs and have money in the bank for a down payment,” says Andrew Vallejo, an agent with Redfin Premier in Austin, Texas. “For example, a few months ago I helped a buyer close on an $800,000 home with a 50% down payment. They were able to liquidate stock to make a $400,000 down payment without thinking about it too much, and now their monthly payments are lower.”

There are plenty of households who are spending more freely as their portfolios are higher than expected due to the surging bull market.

I’m curious if it will take a recession to slow down the top 10%.

Will young investors stay invested? Young investors are all-in on the stock market. Most have never experienced the consequences of an actual recession in the working world.

It feels condescending for a middle-aged person to predict that novice investors will hit the eject button during a recession.

But that ultimately happens to a certain segment of each new generation of investors.

Millennials hated the stock market after the 2008 crisis.

Will Gen Z break the trend?

We’ll see.

What happens to the new private investments? There are trillions of dollars in private credit and even more in private equity. How will these funds respond to an economic slowdown?

More importantly, how will investors in these illiquid fund vehicles react?

Will investors continue to buy the dip? Buying the dip is one of the biggest investor trends of the 2020s.

Will that remain the case once the leveraged ETFs are taken to the woodshed? As soon as the speculative stocks come under pressure? As soon as the market does not experience a V-shaped recovery?

You could convince me either way.

Will households increase their borrowing? Remember when everyone was worried about $1 trillion in credit card debt?²

I’ve never worried about that because the borrowing capacity of the American consumer has grown even more than our debt levels.

JP Morgan has some good graphs that tell the story here:

The assets are much greater than the debts. But look at the debt service ratio. Debt payments relative to disposable income are lower now than they were at any time in the 1980s or 1990s.

Household balance sheets are still in reasonably good condition.

In the event of an emergency, consumers have the option to borrow more money if necessary.

I’m curious whether households will want to curb their spending habits or borrow money to keep the party going.

To answer all these questions, we’ll just have to wait for the next recession, whenever it comes.

I was in New York City this week and stopped by The Compound and Friends with Josh, Michael, and Sonali Basak to talk about the impact of a recession on private credit and more:



Or watch the podcast version here:

Further reading:
Can the stock market cause a recession?

¹Living in recent years, technology in 2022, etc.

²Now it is $1.2 trillion.