According to CEO of Mauldin Economics John Mauldin, the Global Recession Probability Model, an indicator from Ned Davis Research, shows that after one of the largest economic expansions in history, it’s time for a recession.
Since economists aren’t able to identify recessions in real time, we may already be in one.
“We are in an area where there’s been a recession every time in the past,” says Mauldin, a New York Times best-selling author and publisher of Thoughts from the Frontline. “What it’s telling us is that we’re closer than we were in 2010.”
YPO recently held a global conference call to “Get an Economic Overview for 2019” with Mauldin. He shared insights on growing central bank debt, leading and lagging indicator data for the United States and global economies, and the possibility of the next recession.
The world has gone debt crazy
The No. 1 risk to the U.S. and global economies is central bank debt, and it continues to rise in both emerging and mature markets. As CIO of Bleakley Advisory Group and editor of Boock Report, Peter Boockvar says, “we no longer have business cycles, we have credit cycles.”
A growing economy expands and then contracts during a recession, and the cycle repeats, often hitting even higher peaks during a subsequent rise. Since the late 1980s, central banks have stepped in to smooth out these business cycles by manipulating the interest rate.
The result: Fed-driven credit cycles and the rapid rise of global debt of non-financial corporates, government, household and financial sector, comprising USD174 trillion in mature markets and USD63 trillion in emerging markets in 2017.
Credit standards are falling
Companies have taken advantage of low interest rates to grow their businesses and reward shareholders. As a result, corporate debt represents a substantial risk to the economy. The corporate bond market is nearly three times larger than it was in 2007, and the quality has dropped.
Nearly half of investment-grade companies in the United States are currently rated BBB.
“That’s the lowest rating that the rating agencies give that can actually be considered an investment grade,” says Mauldin. “And that’s important because there are a significant number of pension funds, insurance companies, government institutions that are only allowed to invest in investment grade bonds. All these bonds have to do is be reduced by one rating and they become junk.”
The debt must be resolved
Pensions around the world are promises governments make to their citizens that the citizens consider a debt they are owed. The unfunded pension liability in the United States today is USD28 trillion and the total global debt is USD70 trillion. By 2050, these numbers are expected to rise to USD137 trillion and USD400 trillion, respectively. During a recession, these numbers will increase even more as stocks go down.
“Those unfunded liabilities are an asset to the people that think they’re going to get paid and that’s how they’re going to live their lives,” says Mauldin. “All of the debt, just like in the 1930s, has to be resolved. The 1930s seared the souls of a generation for 30 to 40 years. We’re going to have that soul searing and it’s called the end of the debt super cycle.”
“The 1930s seared the souls of a generation for 30 to 40 years. We’re going to have that soul searing and it’s called the end of the debt super cycle.”—
Unforced errors aren’t helping
Political challenges are creating unforced errors in the U.S. and global economies that might force a global recession. The tariff and trade wars, and the demographic trend to restrict immigration are two challenges significantly impacting economic growth.
“Global trade is slowing and global trade has been the engine that has lifted the world in the last 200 to 250 years,” says Mauldin. “Global trade is good and we’re going to come back to that realization at some point.”
All countries need a growing population in order to grow economically. Immigration restrictions are stifling growth and compounding pension issues around the world.
“We need immigrants, we need young people,” says Mauldin. “They’ve got to pay the social security benefits so we can all have our retirement.”
Business leaders can prepare for a recession
Business leaders are part of the recovery solution. When a recession hits, businesses are challenged and owners of all types of enterprises have to find solutions to their individual issues. All of that, Mauldin says, helps with recovery.
A recession can be a crisis as well as an opportunity for those who can look towards future expansion. “This is a time where you can take market share,” says Mauldin. “This is a time where you can grow your business at the bottom. Think about where you can go to expand and grow when everybody else is fearful. Recognize your own potential and make sure that you have adequate capital, adequate cash to be able to take advantage of that.”
