10 Reasons Why The Economy Will Crash

In the late 1990s, I helped a young couple buy a home in San Ramon, CA for $330,000.

By 2007, that couple owed over $800,000 against that same house – and THAT is why we did not see a recession until 2008.

Every Home Was a Giant ATM Machine

They rode an appreciation wave, continually pulling cash from their home over a ten-year period.

In 2007, economist David Rosenberg was persona non grata (aka pretty much hated) at Merrill Lynch because he was calling for a bad recession – killing his sales team’s efforts to unload stocks and mortgage-backed securities.

In 2008, however, after the U.S. was slammed with the worst recession ever, Mr. Rosenberg was a hero – getting more airtime than anyone.

Mr. Rosenberg was recently on this Thoughtful Money podcast: David Rosenberg: Bad Data & Bad Policy Will Force Fed To Scramble To Cut Rates, telling the above story and explaining why he is again predicting a bad recession.

And, his track record gives him a lot of credibility.

In the early 2000s, the economy was artificially inflated by the continual pulling of cash from homes, while in recent years our economy was artificially inflated by a level of government spending we have never before seen in peacetime.

TLDR: Stimulus spending, whether from cash-out refinances or from government spending, can’t propel an economy forever – particularly when the spending is from borrowed money.

10 Reasons Why We’re in for a Crash!

1. Employment Situation. Both David Rosenberg?and?Danielle DiMartino Booth? constantly point out how the government’s employment data is ridiculously and obviously flawed. In the podcast I link to above, Rosenberg mentions that much broader and more accurate employment surveys indicate that layoffs and job losses are much more prevalent than the government would like us to believe.
2. Buy Now; Pay Later. Consumers are employing “buy now; pay later” plans at levels never before seen in our economy – many consumers are starting to miss pay later payments. While this is partly a function of the many new applications that offer this service, it is also a very strong indication of stress among lower-tier consumers, as this Bloomberg article explains – Americans Are Racking Up ‘Phantom Debt’ That Wall Street Can’t Track. What makes this particularly worrisome is that this debt can’t be accurately measured – so the problem could be much worse than anyone recognizes.
3. Surging Credit Card Debt. We’re seeing credit borrowing and defaults hit levels we have not seen since 2008, as Delinquencies Spike to 2008 Levels. This credit card borrowing is also what has helped keep our economy afloat in recent years.
4. Plummeting Savings Levels. Economist Lacy Hunt points out in this Thoughtful Money podcast how declining savings rates always portend recessions, and America’s savings rates have been declining faster than ever.
5. 10 Year/3 Month Yield Curve Inversion. The 3 Month T-Bill yield has been higher than the 10 Month Treasury Yield for over 500 days – a near-record amount of time not seen since 1929 and 2008 (momentous years to say the least). This particular inversion always predicts recessions too – so this time is probably NOT different.
6. M2 Money Supply Shrinking. Famed economist Stephen Hanke points out how we’re seeing a record decrease in M2 money supply levels, not seen since the Great Depression. And this too always portends recessions. Steve Hanke: Shrinking Money Supply = Recession And Sub-2% Inflation By End Of Year.
7. Commercial Real Estate Crisis. Commercial landlords are getting whacked in two ways: (1) work from home and the exodus from cities is leaving buildings empty or vastly under-occupied; and (2) higher interest rates are forcing landlords to refinance short-term debt into new debt with much higher payments – in the face of lost rents. This crisis is only surfacing, as illuminated in this video: Trump Is Getting CRUSHED By Commercial Real Estate Bust.
8. Crashing Japanese Yen. I frequently reference potential “currency crises” as threats to the world economy, and most people don’t realize how serious they are. Former Hedge Fund Manager, Hugh Hendry, does, however, and he explains as much in this Odd Lots podcast: Hugh Hendry on the “Terrifying” Yen Move, and Risk of “Mad Max” Deflation | Odd Lots. TLDR: Japan’s Yen continues to weaken despite massive government intervention, and it could easily bring Japan to its knees if it cannot afford to import oil and other necessary items.
9. Stimulus Running Out. Much of the stimulus to consumers and businesses that surged during COVID is running out.
10. Banking Crisis: Billionaire Real Estate Investor Predicts “Weekly Bank Failures”. Banks are the lifeblood of our economy – quite literally. And the problems above are threatening much of our banking system.

BONUS CONCERN: Warren Buffett Is Bearish! Warren Buffett Is Now “The Most Bearish He’s Ever Been” (Here’s Why). Mr. Buffett tends to be very optimistic about the American economy in general, so when he’s bearish – it’s time to be concerned.

In Conclusion:

There is no way we’re going to avoid a bad recession; things are worse than we’re being led to believe; and this time is not different.

It’s just a matter of how long the Fed and our government can postpone the inevitable. I know I beat this dead horse often, but I haven’t beaten it for a few weeks and there is so much data surfacing on social media right now that I thought it was high time for another beating.

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