Prediction: next recession starts late summer 2018

[ManlyFather]

So this is obviously speculation, but it seems like another recession may be starting at the end of this summer.

There are 2 obvious bubbles that could pop: student loan debt and cheap gas.

1. Student loan debt - this bubble is unlikely to pop in the foreseeable future (it will just be a financial drag on certain consumer spending/investing for at least a few decades).

2. Cheap gas - this isn't exactly a bubble in the traditional sense, but it's imminent increase in price will pop other smaller, less obvious bubbles.

Here's how I predict this will play out and why.  First, why I think gas prices are going to go up:

OPEC and Russia agreed to extend petroleum extraction limits through the end of 2018.  Prior to these agreements, petroleum consumption dipped when the US began fracking in earnest, which resulted in huge stockpiles of petroleum products.  This drove oil prices down to their current absurdly cheap rates.  This put the brakes on fracking in the US.  Now that oil supply production is being artificially kept low, we will start to see oil (and gas) prices begin to increase.  This has already begun (the post-Labor Day dip in gas prices never occurred: they actually went up).

Now that we know gas prices are going up, who cares?  The consumers who bought gas-guzzling SUVs and trucks (the truck buyers constituted 2/3 of all new vehicle sales in 2017 - 'doh!). https://www.nytimes.com/2018/01/14/business/detroit-auto-show.html?_r=0

So a huge number of Americans bought financed gas guzzlers in a time of artificially cheap gas.  Now that gas prices are going up, their discretionary budgets are going to wither, and some will begin to default on their loans.  Almost everyone who bought these vehicles will be forced to spend less.  This will slow the economy.

Fracking infrastructure is still in place, and underutilized at the moment, so we probably won't see $5/gal prices, but we will definitely see some economic slowing.

These spending reductions will begin to offset the artificial rosy quarterly financials of US companies (most of them got an automatic 15% "profit" in the form of reduce taxes).  The stock market may continue to rise, while consumer spending/confidence declines.

I expect this scenario to start as early as late summer 2018. 

Currently, I have about 95% of my capital allocated to stocks, and 5% in bonds (or equivalents).  When gas prices rise ~60%, I'll move my allocations to include more bonds.

After US fracking production increases, I'll shift my allocations back to include more stocks.

I know trying to time the market is stupid, but these scenarios seem pretty obvious and very likely.

Am I missing something?

[ManlyFather]

MOD EDIT: Merged duplicate topics.

[bacchi]

https://finance.yahoo.com/news/oil-near-three-highs-output-042512980.html

US rig count is up 10 from last week. Canada doubled the number of rigs last week. Oil from the US is expected to grow 600k bpd this quarter. Why wouldn't any of this temper any oil tightening from OPEC?

There's a narrow band that works for Saudi and Russia. Go too low and Saudi has to issue bonds; go too high and fracking starts to increase.

[haggard]

Gas in my area of the country has been on a steady incline the last few months.  It is going up along with diesel.  Diesel will be above 3.00 a gallon everywhere by Memorial Day.  I expect gas to be well beyond $2.50 by then as well, but that isn't a drastic jump as it has been slowly creeping up. 

[ketchup]

I know bitching about the price of gas is about as American as it gets, but it really doesn't affect most people's bottom line as much as most people seem to think.

If I drove 15,000 miles a year at 30MPG, that's 500 gallons of gas.  At $2.50/gal, that's ~$1250/yr.  At $5.00/gal, that's $2500/yr.  Sure, an increase of $1250/yr in spending on driving costs isn't nothing, but it's hardly recession-inducing.  Even if you double the numbers assuming a 15MPG bro-dozer.  It's not like your house dropping in value by 30-70% overnight like 2008.  The only real economic damage would be to those who drive for a living.

[boarder42]

so your prediction is worth as much as this one.

https://forum.mrmoneymustache.com/investor-alley/here-it-comes-red-dow/

and this one

https://forum.mrmoneymustache.com/investor-alley/top-is-in

and this one

https://www.cnbc.com/2016/04/19/buckle-up-stocks-could-drop-25-percent-or-more-commentary.html

etc.

but if you make the prediciton enough you're bound to be right some time. 

moving your AA based on anything other than what your IPS says for rebalancing is market timing and you'll lose in the long run.

[nereo]

I know bitching about the price of gas is about as American as it gets, but it really doesn't affect most people's bottom line as much as most people seem to think.

If I drove 15,000 miles a year at 30MPG, that's 500 gallons of gas.  At $2.50/gal, that's ~$1250/yr.  At $5.00/gal, that's $2500/yr.  ...

^this.  For most people even a $1 jump in pump prices would equate to about $50-75 extra per month depending on what they drive and how far. Fuel prices would need to truly go through the roof for it to be recession-inducing.

Problem with that scenario is what you've already identified; new fracking capabilities in the US + Canada puts a ceiling on how high crude is likely to go without a huge surge in demand. At somewhere around $100/barrel even Athabasca in Alberta becomes profitable and we'll be churning out North American crude like never before (literally - both our refining and extracting capabilites (US + Canada) are much greater than they've ever been).

I think SL are having a big drag on our economy, but that's already largely priced in as recent grads don't have as much to spend and can't discharge their loans. If the SHTF more people will take economic hardship provisions to hold off on paying their premiums.  That won't do anything to cause a recession, but will prolong any recovery.

I don't disagree with the premise that a recession may be looming.  Lord knows we've never been very good at predicting them even 6 months out.  I do wonder if the next recession will be caused by circumstances outside of the US though - China's arguably overbuilt everything from retail space to homes and infrastrucutre and a shock there could trigger a global recession as they suddenly stop buying raw materials, crude and consumer goods in the quantity that they are now importing.

In a way it will be novel to have more recessions be not the US's "fault" - but we'll suffer along with everyone else.

[TheAnonOne]

YOU figured it out, YOU found the one indicator that no one else is looking at, surely not the market who might have priced it in, surely not the WS bankers, surely not the government and not oil companies.

YOUR prediction is the correct one, the FIRST correct crash prediction in 9 years.

I really do have to congratulate YOU on finding this, YOU will surely be rich because of it.

[ender]

You might get lucky.

Everyone predicting recessions for the past few years was not lucky.

[GuitarStv]

Sounds like the top is in.  :P

[DS]

Sounds like the top is in.  :P

Only 33 pages to go!

[Financial.Velociraptor]

My guess (worth less than $0.02) is the bull has legs to run at least until the yield curve inverts.  I'd finger in air estimate that for no sooner than mid 2019.

[haggard]

2018 looks to be a really good economic year in general.  Would take something out of the ordinary (political, foreign affairs, etc) to derail this in the short term, in my useless uneducated opinion. 

[A Definite Beta Guy]

Oil increasing in price can only happen if overall demand increases. It's what happens when the economy is really revving along. So a high oil price isn't only correlated with, but is caused by, a strong economy....which means it's not going to cause a weak economy.

Also, I doubt student loan debt will cause the same debt crisis as the mortgage market. I mean, would say "impossible," but I would've said the same about sub-prime loans in 2007. Thing is, student debt is smaller, and mostly owned or guaranteed by the government, and there are fewer unregulated hedge funds speculating in the student debt market. So, probably won't explode.

If it DOES...well, we started seeing signs of credit crunch in, like, 2006. I'd imagine in most cases we'll see signs of credit crunch before the credit crunch actually kills the economy.

[anisotropy]

As someone who has arguably the best (most accurate) recent tracking record on this board regarding timing calls, I feel the need to address this:

YOU figured it out, YOU found the one indicator that no one else is looking at, surely not the market who might have priced it in, surely not the WS bankers, surely not the government and not oil companies.

You give the market, WS bankers, and oil companies too much credit. Who did you think loaned the money to the distressed oil companies in 2013-2015 and took a massive haircut on the loans? Who leveraged up to their yin-yangs and fell flat on the faces when the price fell? Who hedged the majority of their productions when WTI first broke 55 and are now regretting that decision? Who didn't hedge their fuels (give you a hint, airlines) costs at 55 and are now wishing that they had? If you had done your research before posting this, a simple glance of net speculator long/short since 2015 from Bloomberg would tell you very few people, in the market, knew which direction the WTI was headed.

I would even go so far to say that most firms hire thousands of "analysts" for the sole purpose to get things wrong. The passive crowd believes that pros (fund managers) can't beat the market, yet by the same logic, all the sudden you think these guys (oil market pros) could?

Note I am not agreeing with the OP; I just find this "priced in" attitude/belief to be lazy and borderline dishonest, not to mention it adds nothing of value. Just because YOU can't figure out a way doesn't no one else can. Now I will address the OP:

I have been tracking and timing the crude market in 2016-2017. The crude market is currently quite tight, but supplies are slowly increasing. Whether it's in the frozen north of Canada, the mid-land desert of USA, or the tropical paradise of Venezuela and Colombia, the productions are increasing. I label many shale companies as "zombie" companies, they pump to maintain their cash flow to service the debts, unable to turn a profit. These guys will pump even when WTI drops below 40, it's about survival, prices will not impact their productions much. It remains to be seen whether the demand will also increase, as by some calculation the current world econ could sustain WTI price of ~$73/bbl. Sustaining means not placing excessive strain on the economy in current credit conditions.

The rate of growth (USA) has been slowing since 2014/15, but the fundamentals remain strong-ish. If the gas price goes up, truck buyers might dip into debt to maintain their "cashflow" not unlike the zombie companies. After all, they had done so in the past. Just my thoughts.

[DS]

When you take the CAPE + Random news articles + Random speculation based on personal observations on the sidewalk, and divide it by number of years to retirement + annual salary, you get a pretty good idea where the market stands!! (Disclaimer: proprietary formula, not for public use)

[Cowardly Toaster]

Has everyone heard the famous story about the big time investor in the 1920s who sat down to get his shoes shined? The shoe shine boy started giving the investor advice on stocks. So when he was done, the investor ran right back to his office and pulled all of his money out. He said that when even shoe shine boys were giving stock advice, the market was over valued. As it turned out, the crash came just a week later.

So I really don't know if 2018 is the year of the big correction. What I do know is that I see a lot of (nonMustachian) people who are less than savvy making big bucks in the stock market, and that indicates to me that something is awry.

[TheAnonOne]

As someone who has arguably the best (most accurate) recent tracking record on this board regarding timing calls, I feel the need to address this:

YOU figured it out, YOU found the one indicator that no one else is looking at, surely not the market who might have priced it in, surely not the WS bankers, surely not the government and not oil companies.

You give the market, WS bankers, and oil companies too much credit. Who did you think loaned the money to the distressed oil companies in 2013-2015 and took a massive haircut on the loans? Who leveraged up to their yin-yangs and fell flat on the faces when the price fell? Who hedged the majority of their productions when WTI first broke 55 and are now regretting that decision? Who didn't hedge their fuels (give you a hint, airlines) costs at 55 and are now wishing that they had? If you had done your research before posting this, a simple glance of net speculator long/short since 2015 from Bloomberg would tell you very few people, in the market, knew which direction the WTI was headed.

I would even go so far to say that most firms hire thousands of "analysts" for the sole purpose to get things wrong. The passive crowd believes that pros (fund managers) can't beat the market, yet by the same logic, all the sudden you think these guys (oil market pros) could?

I think you are reading a little too deep into my trust in XYZ organizations for prediction skills. I simply wanted to point out as many parties as I could to show that, if it was something as obvious as oil prices, chances are it would be priced in.

Again, EVEN IF the OP gets this one right (which is already unlikely) it would still be luck unless he had some sort of track record (in which case he would likely be extremely rich already)

We are sitting in the hotbed of index investing, of course we are going to rip to shreds any sort of market timing GUESSES.

Also, yes OP this is market timing, correct or not, surely a losing battle over your lifetime.

[anisotropy]

I think you are reading a little too deep into my trust in XYZ organizations for prediction skills. I simply wanted to point out as many parties as I could to show that, if it was something as obvious as oil prices, chances are it would be priced in.

I re-read it several times, I see your point now. My mistake. Generally I agree, oil price is only one piece of the puzzle.

[tralfamadorian]

I understand. I really do- it's so hard to resist the siren song of market timing. I'm also concerned about student loan debt (and car debt) and its effect on the market.

What you're aiming for is this:



You think- Hey, it's not so hard to avoid at least some of these terrible days. And look at the rewards!

But the problem is that this is happening at the same time:




Ouch! But then you think- Hey, I'm pretty smart. I can tell the difference between the bear market and a bull market. How hard could it be to be 100% in during the best days and somewhat out during the worst? Very, very hard.

Below is a chart showing how often the best and worst days are clumped together:

[daverobev]

Triggers are more likely to be NAFTA stuff.

Honestly I'm beginning to think that, because everyone is expecting a recession soon, it won't happen - just low but slow growth. Same with the stock market. "TINA" - there is no alternative place to put money if you want a return.

In a couple of years if central bank rates are up 2-3%, bonds will be worth looking at, IMHO.

[Ocinfo]

Things feel much more like 1996 or 2004, crazy but not quite frothy and not completely disconnected from reality. I’d more expect a 10-15% correction and then a quick resumption of up, up, and away. I think we have another 1.5 years until we’re in a recession and about 2 to 2.5 years until we fully realize it and stocks/homes fall in value. It could even be longer than that as we haven’t finished the first part of the cycle with inflation and rates still super low. Once rates go up and inflation is up, I’ll start being concerned.

For now, I just keep buying index funds and somewhat hoping for the opportunity to buy cheaper stocks over the next 3 years so I don’t end up working longer as I expect to be FI but not RE by end of 2021.


Sent from my iPhone using Tapatalk

[shuffler]

Am I missing something?

Yeah.  Don't double-post.

[BlueMR2]

The more I look at the trends I just don't see it happening until late 2018/early 2019.  Wouldn't even be surprised if we were able to hang on until very early 2020.

That said I will NOT put my money where my mouth is.  Timing is a fool's game, so I keep running my investment plan.  :-)

[ysette9]

I’m thinking our next correction will happen before I pull the plug on work. As much as I would hate to see my balances go down, I feel it is inevitable and would rather get it out of the way sooner while I am still working than later. Can I order up a 2-year correction starting soon, please?