The Next Recession

What recessions all have in common is that they’re unexpected.

The only people you’ll hear yelling “get out” beforehand are a few cranks, and the usual rascals who think they can profit from the panic.

Why have I suddenly become one of the cranks? Because I know bad economic policy leads to bad results, and Trump economic policies are stupid. But there are other signs.

I went for a bike ride over the weekend, and the most amazing thing happened. I was nearly run over. Several times. (Not by one of Thomas Friedman’s Third World cabbies, either.) One idiot screamed “sidewalk” at me as he blew past, 20 miles over the speed limit. While it was nice to be thought 25 again – I felt the same disregard on my bike when Houston’s oil boom was peaking – disregard is a symptom of a larger economic problem.

Greed.

Greed is good, except where greed ignores risk. A lot of people are ignoring risk. I’m seeing street spam from home flippers again, for the first time in a decade. Silicon Valley’s “bro” culture is all about guys who didn’t get in earlier in the boom impatient to get in before the door shuts, so they can shut the door behind them.

Asset prices represent a danger signal. Some think there’s no problem, since gold is not out of line. But Bitcoin prices are. When people think that an encryption key in a database is worth more than something real, we have a problem. Stock prices are also way too high, especially on high-quality Internet-related stocks, as are real estate prices in many areas.

But the biggest sign of trouble ahead lies in the Trump road to riches.

His idea is to control the global oil market while, at the same time, raising oil prices. We already know, from the market, that this is stupid. U.S. shale supplies are keeping prices low. OPEC cutbacks can make U.S. shale profitable, but these can’t be sustained because the people producing the oil need the cash to pay off old loans and will increase drilling at the first sign of a $50 barrel they can hedge somewhere. There’s also the cold, hard reality of renewable energy, especially efficiency, keeping demand from rising, eventually cooling it down.

Cutting imports through tariffs, never mind that they’re called a “Border Adjustment Tax,” is just asking for a trade war. Going after tech companies with cuts to H-1B visas and the expectation that they’ll all stupidly hand their cash to Wall Street in exchange for a tax break is equally stupid. Wilbur Ross and his cronies seem to think that what makes them richer in the short term makes everyone else richer in the long term, and that’s asinine.

Let’s add it up. You have an aging recovery, almost 8 ½ years old now and counting. You have people who don’t respect the roots of that recovery, and think they can change them on a whim. You have the greed of the get rich quick crowd. You have skyrocketing asset prices.

The last thing that happens before any market crash is that prices go parabolic, out of sync with reality. That’s happening now. We don’t see it, in part, because of where it’s happening. San Francisco real estate. Amazon.com common. Stuff that should be worth big money, true, but that money is now too big to be sustained.

When the music stops, prices will adjust quite suddenly. Everyone rushes for the exits, nobody gets out, and those millions you thought you had could be gone in an afternoon. I’ve seen it and seen it. I saw it in 1981, in Houston. I saw it in 2000, from my home in Atlanta. Saw it again in 2008. Each time you think you find a stable floor the bottom drops out again, a few days or weeks later. The real floor is 50% BELOW fair market value.

What I face now is a careful balancing act. You don’t want to miss on the last set of gains, but you don’t want to risk losing everything either. I’m at 20% cash now and looking to sell more. I’m mostly down to the last hold-outs before the crash – Internet stocks, foreign mutual funds, low-cost mutual funds and companies like QSR, run by Brazilians who know how to handle a panic. I will sell off slowly, starting with the stocks, and may be down to just the mutual funds by September. I know the rest of my family will be hurt because they don’t pay attention to their holdings as closely as I do, but I’ll have enough cash at the end of the year to get us through until the recovery.

Oh, the recovery. There will be a recovery. I suspect the actual recession will come months after the market crash, possibly as late as next year, and that it will be compounded by the same stupidity that is causing it. You think Trump is crazy now, with the market still going up? Wait until the market goes down.

Expect some very long faces as we approach 2019. Some companies are going to collapse that you don’t expect to – they always do. From here I’d guess that a lot of Internet dinosaurs are going the way of the dodo, that the values of Internet leaders will be cut in half, and that the catalyst for the next recovery will be global happenings, the creation of new business models to meet the challenges of our children’s time. I won’t be sad to see Uber go the way of Pets.com, and Travis Kalanick end his days selling reverse mortgages to his Gen X peers.

I won’t claim my crystal ball is 100% accurate. There are things I’m getting wrong, especially regarding timing. I can’t predict how people will react to trouble either in terms of society or even politics. I’ll think about that in another piece.

Let me finish with this. If you’re doing well, get protection for your assets now. You won’t get out with everything you’ve got – no one will – but be conservative now in the best possible way. Don’t chase. Have patient cash to buy the bargains that emerge after the crash. Don’t buy until you see blood in the streets. There will be blood.

If you’re not doing well, get what you can. Pay down loans, try to sock something into the bank, and try not to take on any major new expenses. Don’t buy a new house or car when you can get them for less in a year or two. The worst that can happen this way is you miss some gains. But you will be ready when it all turns to dust for everyone else.