The End is Nigh? 2020 Recession?

There's a lot of talk lately about a recession in 2020. What's all the fuss about?

Reasons Why A Recession Might Happen in 2020

We're Overdue for a Recession

The United States has not had a recession in over 10 years, the last one having ended in June 2009. Since 1900, the average time between recessions has been just under four years. Since the end of World War II, the average time between recessions has been around five years. With the longest time between recessions having been 10 years (from March 1991 to March 2001, when the Dot Com bubble burst), it looks like we're overdue for a recession. Some experts even say we're already in one.

Consumers are Overleveraged

Before the last recession, aka The Great Recession or The Financial Crisis, there were luxury sedans, mostly BMWs and Mercedes Benzes, everywhere. I couldn't believe so many people could afford to drive those cars. There were also ads on TV by dubious loan providers where the actor would say how great his life was despite being in debt up to his eyeballs.

Fast forward to today, and I see Infinitis and Lexuses everywhere. While I stopped watching TV completely (one of the most positive changes in my life), I have been made aware of new consumer debt products. There are now payment plans for vacations. People who can't afford vacations and thus should not be going on any are borrowing from companies like Funjet, Bookit, and UpLift for their trips. I suppose that's better than putting the trip on the credit card, but it's easy to see how this spells doom in the future.

Credit card companies are also introducing lay away type options (but you get the thing you want immediately--where would we be without instant gratification?). For example, American Express has something called Plan It, where you can buy a bunch of stuff you don't really need and certainly can't afford, and then for a set fee, you make monthly payments on it. It's just another way of collecting interest (which might be worthwhile for people that carry credit card balances if the set fee is lower than the interest they would've paid).

The Yield Curve is Inverted

The Treasury bond yield curve is a chart of yields that are currently paid by Treasury bonds of various maturities.

In a normal yield curve, shorter term bonds have lower yields than longer term bonds, so the curve ascends from the shorter maturities on the bottom left to the longer maturities on the upper right. This is normal because there is less interest rate risk with shorter maturity bonds than with longer term ones, so bond investors usually demand less return for shorter maturity bonds than longer term ones.

In an inverted yield curve, on the other hand, shorter maturity bonds have higher yields than longer term bonds. This happens when there is greater demand for longer term maturities than shorter ones. It is an indication that bond investors anticipate bond yields will go down. Yield inversions have often preceded recessions by six to 24 months. Since 1955, an inverted yield curve predicted all nine US recessions.

Trump's Trade Wars

President Trump has been imposing tariffs on various foreign goods. Whether you agree with the policy or not, a tariff is a tax on the product on which it is levied. Taxes are pretty much never borne by the producer of the product that is taxed. The tax is usually passed off on the last seller or the end buyer. This raises the cost of the product (which is what a tariff is supposed to do--raise prices of foreign products to encourage people to buy from a domestic producer instead). With the cost of products going up, retailers will have smaller profit margins and/or consumers will ultimately have less to spend, which might decrease economic output and thus contribute to a recession.

Reasons Why A Recession Might Not Happen in 2020

Firstly, everyone's talking about it.

2020 Recession videos on Youtube are suddenly about as ubiquitous as those with people making stupid faces on the cover. Indeed, many of the 2020 recession videos have people making stupid faces. Traditional media is also hyping up the possibility of a 2020 recession, dragging out everyone and anyone who thinks there will be one. This is because doomsday news sells better and it makes Trump look bad.

Unless they make it into a self-fulfilling prophesy, all this hoopla may indicate that a recession won't happen. Regular people and the experts for whom the mainstream media provides a platform have a notoriously bad record at predicting the future, especially future economic events. When the regular people are discussing the economy and future, it's often profitable to do the opposite of what they're doing.

Second, there are no rules for how long it should be between recessions. Since the Great Depression, the time between recessions has ranged from as little as one year to the current 10 years and counting. The recession that started in July 1981 didn't care that it had only been one year since the recession that ended in July 1980. Likewise, the next recession doesn't care how long it's been since the last one.

Additionally, our data set is quite small and today's economy is not the same as that of the past. To say that we're overdue for a recession implies that the future will be like the past. It may very well be, but we can't know that until it happens.

The inverted yield curve predicting all nine recessions since 1955 may sound scary, but does it even mean anything? We know with near 100% certainty that there will be a recession in the future. There's a chance that the economy will continue growing in perpetuity, but that is unlikely. So, an inverted yield curve will always predict the next recession. Why? Because the yield curve is inverted and at some point in the future we will surely have a recession. That's like me predicting that you will die. I'm hardly a psychic, but my prediction will come true. The trick is to get the timing right.

So when, according to the inverted yield curve, is the next recession due? From six to 24 months. That's quite a range. I bet, if the next recession comes 36 months after the inversion, future financial news articles will be about how an inverted yield curve presages a recession by 6 to 36 months.


There may or may not be a recession in 2020. We might be in a recession already. No one knows. I repeat, no one knows.

The way you invest should not change according to the economic forecast. You have nothing to gain from trying to time the market. People have been waiting for the economy to collapse for years now. Let me repeat again, no one knows the future.

That said, always be prepared. Whether the economic outlook is rosy or grey, you should always have an emergency fund and you shouldn't be investing if you don't have one. You should always be updating your skills to stay competitive in the marketplace. You should never be buying things you don't need and can't afford. And you should never take risks with money you can't afford to lose.

Finally, never worry about things you can't control. As long as you're always prepared, you will always be as ready as you'll ever be, so why worry?

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