Economic Warning – June 2019

What follows is the Economic Warning portion of this week’s Watch Report.

In this month’s FOMC meeting, Federal Reserve chairman Jerome Powell acknowledged that there was soft economic data emerging — a potential warning sign of recession. Many investors expect a cut to interest rates next month to stave off a recession. Some economists expect two rate cuts this year, regardless of when they happen. One asset manager said he expected four rate cuts this year.

Recession and Trump’s reelection chances

This month, Jeffrey Gundlach, Morgan Stanley, and JPMorgan Chase all revised their expectations of recession forward to 2020. JPMorgan’s Bruce Kasman said it might even start this year. That’s a big shift from what these firms were saying last month, so I agree that we can expect the Fed to cut interest rates in order to stave off a recession. Gundlach, who has no faith in the Fed’s predictive capability, believes that by the time the Fed has to cut rates, it will already be too late.

This, of course, will have major implications for President Trump’s reelection chances. High profile managers like Scott Minerd and Kyle Bass both believe that the recession will be average or mild, respectively. Others, like Gundlach, have warned that this recession is going to present more difficult challenges.

If this recession poses the risks that Gundlach describes (below) then Trump’s chances of reelection will be seriously threatened. If that’s the case, then it’s time to batten down the hatches for higher taxes and wealth redistribution based on what we saw during this week’s Democratic debates and what’s been proposed in the lead up.

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The problem with cutting interest rates this year to stave off a recession next year is that the Fed will have less to cut once a recession does hit, which increases the likelihood that the recession is more painful than “mild.”

This week, Fed chair Jerome Powell acknowledged that’s the case, saying, “Interest rates are lower than in the past and likely to remain so. The persistence of lower rates means that when the economy turns down, interest rates will more likely follow close to zero [which] poses new problems to central banks and calls for new ideas.” (Bold for emphasis.)

In the past two recessions, the Fed has cut interest rates from 5.25 percent to basically zero percent during the 2008 recession, and cut from 6.5 percent prior to the 2001 recession. Today, the federal funds rate sits around 2.25 percent — that’s before any cuts this year. That does not bode well for the Fed’s ability to soften the severity of the next recession. The Fed has 50 percent less to cut, which means that a hard landing during the recession is more likely.

Earlier this year, Bridgewater’s Greg Jensen warned of a period of poor economic conditions in the U.S. “We think that the secular conditions and cyclical conditions are combining to create this situation where you’re going to have this long, protracted weakness in the developed world economies… So basically what we expect to see is weaker growth and a movement to [Quantitative Easing]… The struggle in Europe is probably going to click first.”

That mirrors what billionaire investor Stanley Druckenmiller believes. He said earlier this year that, “The highest probability is we struggle [economically] going forward.”

So who’s right? Are we going to have a mild recession or will this be the beginning of a ‘secular’ — i.e., long term — period of persistently weak growth and economic malaise?

Right now, my money is on what Gundlach had to say earlier this month: “When the next recession comes, there’s going to be a really big problem… with the national debt… [We’re going to see] basically money printing, I think, to combat the next recession.”

Gundlach describes that money printing will lead to increases in long term interest rates, which will actually make the recession worse. And maybe that’s why Fed chair Jerome Powell is openly calling for “new ideas” to reverse the effects of the next recession.

In light of changes to this month’s Recession Matrix (out later today for Warning subscribers), there’s a solid argument to be made that the next recession is closer than previously thought, and that it may rival the duration of the 2008 recession at 18 months, followed by persistently low economic growth in the years following. We could be headed towards the Great Recession 2.0.

Consider that we may have about 12 months before this kicks off, followed by the 2020 election four months later — in other words, at the worst possible time. If you haven’t considered kicking your preparedness into a higher gear, then now is the time. – S.C.

P.S. – If you’re not already a member, you can sign up for a free 7-day trial to the Forward Observer Warning Service and stay ahead of political, social, and economic threats with reports like this one.