The Coming Recession, Explained Using Six and a Half Bikinis.

“Well, just find yourself a man with a spotless genetic makeup and a really high tolerance for being second guessed and start pumping out the little uber Scullys.” – The X-Files

FIRST

After the next recession, most people will be on their feet in no time, after the bank repossesses the cars.

This wasn’t my originally planned topic. My originally planned topic was a discussion of PEZ® seed pricing mechanisms in 1850’s Great Britain, complete with discussion on how many orphans could be traded per bushel of finished PEZ™. Alas, I’ll have to return to that exciting topic some other time, since the world financial system seems to be imploding.

Okay, imploding isn’t the right word. And it really may not be as bad as it looks.

But today? It looks bad. Maybe not implosion bad, but I heard that some bankers had been discouraged. I guess they lost interest.

How bad could it be?

If it just stays at a financial level, the worst I would expect would be a W.I.L.D.E.R.™ Level 4 (Great Depression) in the United States, though it might hit a W.I.L.D.E.R.™ Level 5 (National Collapse) in China. You can read all about the W.I.L.D.E.R.™ Levels here (The Lighter Side of the Apocalypse) in an article praised by critics as “one of the best things ever written by a man with such questionable levels of personal hygiene, fashion sense, and grooming.”

In order to understand and guess at the future, let’s take a look at the past. The most recent past economic downturn was the Great Recession. What happened then?

sp500

As you can see from this chart, the S&P 500 experienced a big downturn right around the calf and knee area. Feel free to enlarge – just explain that the study of economics is really interesting.

Several things: first, lowered interest rates and the idea that anyone could and should get a mortgage led to a massive mis-investment in housing. Part of the cause were things called stealing and looting mortgage-backed securities and collateralized debt obligations. I won’t go into technical details, but it was a way that Harvard® educated MBAs convinced themselves that a strawberry picker making $14,000 a year could afford a $720,000 mortgage (LINK). And, yes, this really happened.

Second, the world was awash in money after the Fed flooded the fields with money after the Dotcom Bubble. Where did that money go? Everywhere. Houses. And . . . oil. Oil prices skyrocketed during that time. Companies rented oil tankers and kept them full, sitting at sea, continually selling futures on the oil in the tanker. They made fortunes by pretending to sell oil. I know that sounds like I’m making an obscure joke, but no, that really happened.

The price of housing hit the financial system like a mousetrap on a cat’s tail. Or a cat with a mousetrap on its tail? Or . . . nevermind. People kept borrowing more on their houses as their houses appreciated. They spent that money on pickups and boats and child care and food and vacations. The people weren’t evil, but they thought that the value of their house could never go down, so the risk was small. Rational people, like bankers, were telling them this. Heck, some even invested in more houses so they could double or triple their magic ATM.

30year

This view of 30 year mortgage rates explains that there have been mortgage rates. Look closely, and you can see them.

Finally, one day the music stopped on the housing prices. Was there a cause in particular? Not really. But the market lost the one thing required to keep it afloat – belief. Every market rises as the beliefs of the participants overcomes the worry of loss. Wow, that sounded poetic and cool. But it’s also true.

In many ways, the stock market is a barometer not only of the actual underlying economic performance, but how people feel about the future. It keeps going up as long as people keep being optimistic and has proven to be a much better barometer of economic activity than the amount of leg hair I grow before each winter and then form into a nice, soft nest to sleep in when it gets cold.

crude

Crude oil prices had Exxon® jumping for joy in 2008!

One thing that brought the mood of people down in 2008 was the price of oil. In the midst of the recession that came from the housing bubble, the secondary oil bubble inflated. Prices increased more than double in a single year – from $70 per barrel to over $140 per barrel at the peak. Oil acts as a tax on everything to do with physical goods. To move a Tom Brady’s booty dinghy from where it’s made in by incontinent baboons in Romania to his rump mechanic in Massachusetts requires energy – energy from oil.

So that’s the “why” for 2008. How does that relate to today?

The Great Recession was brought about by an actual recession – things slowed down in the country because there were only so many houses that could be made. That’s different than today’s trouble. The stock market is tanking not because of a recession, but because the worry about Corona-Chan locking up the flow of physical goods from China. I wrote about that last week (Corona Virus, with a Slice of Recession?).

What have we seen so far?

stand

This was a pretty good miniseries documentary.

The stock market has decreased in value. In general, a stock price has two components – the first is the value of the factories and land and machinery that the company owns. This is boring, it’s like saying a Stradivarius violin worth less than a piece of firewood because the firewood weighs more – in the hands of a genius, the violin can make masterful music, though in the hands of my kids it just made me contemplate the positives of being deaf.

The second and often biggest component of value to a stock is the assumed growth of that stock. This is why older, boring stocks like Ford® are priced closer to the value of the assets they own – no one thinks that Ford™ will end up tripling in size in the next three years. There’s an ex-wife “tripling size in three years” joke, but I’m bigger than that.

But people do think that Tesla© can triple in size in three years. Therefore, people value Tesla™ more than Ford® even though it sells about six million cars a year and Tesla© sold only 370,000 cars in the last year. You’d think that Ford™ would be worth about 10 times what Tesla® is. But in reality, Ford© is valued at $28 billion, while Tesla™ is valued at $147 billion. Is Tesla™ really worth that much? That’s up to Tesla®. But give me $147 billion and I bet I could sell 380,000 cars a year, too. And they would be pretty neat ones and they wouldn’t look like they were designed by a third grader with limited imagination.

cyber

Elon took a lot of heat for the Cyber Truck design, primarily because it looks like something that no human would buy. Thankfully, Elon’s next advance will be robotic customers.

Tesla© has convinced people it is almost six times more valuable than Ford©. That’s what I call optimism. Or a con, but at least a con for a good cause (Elon Musk: The Man Who Sold Mars).

Since the stock market is based on optimism, this latest decline in February of 2020 shows that investors are shaken. The world hasn’t (yet) changed but the implications are now becoming concerning enough to cause the market to drop. Is this going to be a big drop, like in 2008, or another head fake?

I can’t be sure. But I do know that this seems like a good time to trot out what I learned the last time the economy went south.

Lesson One:

Market bubbles aren’t rational. Companies rise faster and farther in a bubble without regard to, well, anything. Uber®, which is basically “Taxi App” is worth $61 billion dollars, which is more than Elon Musk spends in a typical year on hair plugs. Uber© lost $8.5 billion dollars last year while generating tons of bad publicity because its founder is a douche and it treats drivers worse than Mongolian bull milkers. There are tons of companies just like Uber™, and all with an idea that they’ll “disrupt” segments of society. Essentially, disrupting involves an app, a smart phone, and booting someone out of a job. Some are, I assume, legitimate ideas that will be profitable in the future. Others are like GoPro™, which is (in Karl Denninger’s words) just “camera on a stick.”

I heard someone call this the Disruption Bubble, and it’s as good a name as any to describe the distortions and irrational money flows as everyone tries to find the next Amazon™, Facebook© or Google®. In a real panic, stupidly valued things like Uber® deflate, and deflate quickly. But companies that are really worth something will fall in value, too.

The best time to buy a company is when it is cheap. It will never be cheaper than when people are panicking like Godzilla® is hungry for Japanese take-out and orders Tokyo. Finding quality companies that are selling at a 90% discount is possible during a real panic.

Lesson Two:

When the market falls, investors have less money. But they still have bills. So what will they do? If this is like 2008, they’ll sell other things. What kinds of things? Cool cars will be cheap, but not everyone is in the market for a Lambo. But gold dropped, too. During 2008, gold went from $1000 per ounce to as low as $720.

gold

You can see the price of gold really drop around the shoulder area, and take off afterwards.

I can’t guarantee that gold will drop, but I’d be watching if you want to buy some – there might be a great opportunity to buy gold at a lower price than the current $1655 per ounce.

Lesson Three:

In past recessions, the interest rate that is charged for the 10 Year T-Bill generally dropped. Why? People wanted to get to a safer asset. That asset has generally been the dollar. The most likely candidates to replace the dollar were the Chinese whatever-they-call-it and the Euro. As China is now in the grip of Corona, it’s not a flight to safety. Every European country with a beach is thinking about dumping the Euro and exiting the EU so they can print wrapping paper and call it money, the Euro isn’t a great one, either. The Swiss Franc is kinda awesome, but they only make so many of those.

10year

Look closely and you can see that the Fed doesn’t have a lot of room to lower rates.

Nope. It’s the dollar. In times of economic uncertainty, the dollar will increase in value relative to other currencies. Does it make sense? Maybe? It seems that the world notices the Navy, Army, Marines, and all of those nuclear weapons and those make the banks in New York seem a bit more secure.

Expect that if this goes like 2008 for a while you can buy foreign stuff like a king. For grins I track the New Zealand dollar – it’s right now at its lowest value in five years. I bet it goes even lower soon, so sheep should be quite a bargain. Remember New Zealand’s national motto: “We’re not Australia.”

Don’t expect to find a great place to get a good yield anytime soon if Uncle Sam is paying less than a 1%, you’re not going to get even that good of a deal. Negative interest rates have already hit Europe, and there’s no reason they won’t hit the rest of the world. Investing in cash in mason jars buried in the backyard might be a good idea. Send me your map, and I’ll keep it safe.

Lesson Four:

No financial collapse looks the same. Each one of them is unique, and this one has been a long time in coming so, if it’s hitting right now, it could be really bad. Each of the above lessons might be wrong, so look for opportunities where you see them, not where an Internet humorist thinks they might be, no matter how charming and freshly showered he might be. Oh, if you have cash, it does no good if it’s in a bank that collapses. Just sayin’.

A friend of mine made the joke in 2008 that “when the tide goes out, you see who isn’t wearing a swimsuit.” There are vulnerabilities that very few people know about right now that will (in hindsight) become obvious in the days or years ahead. Just nod sagely and pretend like you expected it would happen all along. That’s what I’ll be doing.

Wildcards:

Desperate people sometimes do desperate things. As the Soviet Union collapsed, there was some small risk that an official decided he was better dead than not red, and pushed the button. That didn’t happen – in large part because by the time the Soviet Union collapsed, nobody believed in it anymore: it was as tired as Joe Biden’s campaign.

mankini

Okay, I’m sorry.

sorry

If China were to teeter near collapse, would they decide to launch a regional war to keep the people together so the nation didn’t collapse or fall into civil war? Hopefully not, but the chances of it happening are greater than zero. As you prepare for a world where there is a financial dislocation, don’t forget to prepare for a cultural dislocation as well. Buying food now when it’s cheap and easy to get doesn’t make you a hoarder – it makes you one less person who is drawing on system resources if things go bad. Preparing for bad times when times are good is a profoundly moral thing to do. But don’t forget to complain like everyone else.

Nobody likes a smug prepper.

Disclaimer:

Keep in mind, this is NOT INVESTMENT ADVICE. I make fun of Johnny Depp and PEZ® and post pictures of girls in bikinis over economic graphs and am even writing this sober. Consult someone who has those credentials and maybe drinks martinis at lunch since that seems pretty swanky. Also, I don’t own any direct positions in any of the stocks discussed, and don’t plan on taking any positions in them (maybe ever), though I do own a Ford™ truck. I’m betting that maybe some of my 401k money is investing in, well, something and might include these stocks, but I don’t know. Maybe it’s just invested in magic beans?

Author: John

Nobel-Prize Winning, MacArthur Genius Grant Near Recipient writing to you regularly about Fitness, Wealth, and Wisdom - How to be happy and how to be healthy. Oh, and rich.

20 thoughts on “The Coming Recession, Explained Using Six and a Half Bikinis.”

  1. I’ve always looked at the stock market as a giant crap table, with my 401k as the stakes, and a drunk hooker throwing the dice. Everything looks good, until the sun comes up, the money is gone, the 50 mile trip home requires more gas for my car, and I only have a five spot. It was all fun, while it lasted, but the free drinks, and complimentary breakfast, sure ruined my shoes when they came back up.

    1. Ha! Yeah, the market is like that when you look at individual stocks, though buying index funds seems much safer.

      Most weeks.

  2. … in the hands of a genius, the violin can make masterful music, though in the hands of my kids it just made me contemplate the positives of being deaf.

    Off topic: I’m reminded of my late father. Way back when I was just a little-bitty physicist in the fourth grade, I started “taking violin,” as they said in my elementary school. This meant I was carrying home my school-issued violin every night to practice. My long-suffering father would smile stoically and request a particular number. He’d say, “Can you please play ‘Over the Hill and Far Away’?”

    Back on topic, here’s a suggestion. The graphs are necessary. The bikini pictures are likewise necessary — nay, vital. Maybe you could separate them? I’d probably pay way more attention to the data that way.

    1. That’s a wonderful dad joke. Need to remember it!

      See, I can sell the graphs to The Mrs. I can sell the bikini graphs to The Mrs. But just plain bikinis?

      Hmmmm.

  3. The stock market today is far different than the stock market many years ago, thanks to a fire-hose of new money coming into 401k plans every payday and automated trading. Never fear, Comrade Bernie has a plan to siphon off some of your earnings to fund his “free” college!

    1. Also if you want some cheap laughs, I was reading more of Bernie’s platform today and not only is Bernie going to make sure no senior citizens get lonely (not kidding), he is also going to magically fix the pension problem by saying “Shazaam, it’s fixed!”. It is amazing the number of things Bernie promises to fix while at the same time having no clue about the issues he is fixing.

      It is easy to laugh at Bernie, but people laughed when Trump was running too. I have been staring at the nightmare of Bernie’s plans for America all day and it is making me think I definitely don’t have enough ammo.

      1. Even more: “After 2035 electricity will be virtually free, aside from operations and maintenance costs.”

        If you think electricity is expensive now, just wait until it is free!

    2. The sad thing is, he could make real inroads on this by offering to go full commie and make the “billionaires”, e.g. Harvard, Yale, et al. pay off everyone’s student loan debt.

      It’s be hilarious.

  4. I’ve seen what would most likely be called ‘irrational exuberance’ by a few people at work. Younger guys, fully invested, starting late last year, and have no idea what they are investing in. Im fairly certain (without actually asking) that not one of them knows what present interest rates look like beyond what they paid when taking out a mortgage, their relationship to asset prices, who controls them, how, etc. I said a while back that I sold the last position I had in ‘normal’ stocks and they didn’t understand what I meant when I said the downside risk drastically outweighs the upside potential in my opinion. All I said was that while I’d never tell anyone else what to do with their own money, I personally think piling all my money into a market thats already the longest bull market in recent (any?) history is extremely risky, and that more than anything, your stock portfolio’s value rests on whether or not Trump’s fed chair wants to see him reelected or not (this was before the Kung-flu was a big deal).

  5. I noticed two things in the news last weekend. One was a potential pandemic; the other was Bernie Sanders winning the Nevada caucus. As far as I can tell, either one could have provoked stock traders to push the SELL button. Either one could provoke ordinary American citizens to irrational violence. Either one creates massive uncertainties in future economic and social conditions. But only COVID-19 is taking the blame in the mainstream media. (I wonder why that is?)

  6. Two points, maestro, both absolutely true:

    1) Gold never goes down. Never, ever, ever, ever, ever, ever, ever, ever.
    (Yes, that’s more evers than Churchill used. For a reason.)
    Write that on your palm with a Sharpie in case you forget that lesson.
    The currency you’re rating it against may (will) fluctuate, but gold is always gold.
    The value of gold is a flat line, since before Moses or Hammurabi.

    As proof, an ounce of gold from 1600 or 1800 bought just about exactly what an ounce of gold buys in 2020.
    As Casey Stengel said, “You could look it up.”
    (And dragging in items that didn’t exist in 1600 or 1800 doesn’t count.)
    That is not a fluke. It’s how money works, versus how currency works.
    Gold is always gold.
    Silver is always silver.
    These are money.
    Paper money is frequently just highly decorated toilet paper. (I’m looking at you Venezuela, Zimbabwe, Weimar. And the Fed. Your turn is coming too.)
    These are currency.
    Note the difference.

    Object lesson?
    Look up the price of gold when the dollar was tied to it with steel hoops:
    http://piketty.pse.ens.fr/files/capital21c/xls/RawDataFiles/GoldPrices17922012.pdf
    Within a few cents of $19/oz. from 1833-1918, for instance. This is why a 1 oz. gold U.S. Eagle was a $20 gold piece.
    Then look at it when FDR took it off the table. Then again, when Nixon totally decoupled the dollar from it.
    Whoa, Nelly.
    Then look at it now.
    Holy Schnikes!

    Gold is not nearly 1000 times more valuable now. Au contraire, mon ami, in point of fact, your dollar is nearly 1000 times more worthless.
    In real terms over time, your dollar now is worth just about the $0.03 it costs to print one, and nothing more, compared to that same dollar from 1918. Inflation is always a hidden tax, and the thief of savers since ever.
    This is why banks, both national and private, lend dollars, but hoard gold.
    They’re not stupid.

    If no one has explained this to you before, let me be the first.
    Thus endeth the lesson.

    2) Any moderately gifted violinist can play Mozart on a Stradivarius.
    But it takes a real musical genius to play a concerto on firewood.

    1. Agree 100%. Probably should buy another coin or two.

      Do they have firewood classes at Julliard now? Asking for a friend.

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