Author Topic: Schwab starts talking about recession  (Read 445 times)

ergophobe

  • Inner Core
  • Hero Member
  • *
  • Posts: 4362
    • View Profile
Schwab starts talking about recession
« on: October 18, 2018, 05:36:19 PM »
I get the Schwab newsletter, which I almost always ignore for the simple reason that it seems like no matter how dire things, get, they always say "Despite the chatter, everything is rosy, stay the course, keep pouring money into your brokerage account, buy buy buy."

But something caught my eye in the current on and suddenly, there's a lot of talk of recession that isn't flat out dismissive. It's cautious.

https://www.schwab.com/resource-center/insights/content/end-has-start-keeping-eye-on-recession-indicators
https://www.schwab.com/resource-center/insights/content/on-watch-is-there-more-trouble-ahead-stocks
https://www.schwab.com/resource-center/insights/content/will-fed-go-too-far-this-cycle-3-indicators-to-watch

It's not so much that their analysis is amazing. It's that there has been a sudden shift in tone in the newsletter, which is what I see as the real indicator that worry is growing.

The odd one is the idea that recessions are typically timed to when unemployment rate is equal to the inflation rate. I'd never heard that before. My first reaction was that there were so few data points, that could be a spurious correlation (and it might be), but it seems to hold pretty well since 1990 across a half-dozen countries.

I don't think my economics brain is sophisticated enough to see why that in particular would provoke/indicate recession
« Last Edit: October 18, 2018, 05:39:24 PM by ergophobe »

Travoli

  • Global Moderator
  • Hero Member
  • *****
  • Posts: 673
    • View Profile
Re: Schwab starts talking about recession
« Reply #1 on: October 18, 2018, 06:06:11 PM »
I'm working my way through Howard Marks "Mastering the Cycle" book. It is macro, philosophical, boring, level-headed observation of history and human nature from the perspective of a Warren Buffett-style value investor. Basically, nobody knows what will cause the next downturn. But you can make an educated guess where we are in the current cycle.

Here's another take on the flavor-of-the-day.

https://www.bloomberg.com/news/articles/2018-10-18/as-fed-to-oaktree-fret-risks-leveraged-loans-hit-new-milestone

"The total of outstanding U.S. dollar leveraged loans has hit $1.27 trillion, according to data compiled by Bloomberg, overtaking high-yield bonds in the past week to cement their status as the go-to financing source for speculative-grade companies."

rcjordan

  • I'm consulting the authorities on the subject
  • Global Moderator
  • Hero Member
  • *****
  • Posts: 7275
  • Debbie says...
    • View Profile
Re: Schwab starts talking about recession
« Reply #2 on: October 18, 2018, 06:33:04 PM »
Where I read, they've been hollering for 6 weeks now. (As opposed to where Mackin reads, where they're *always* hollerin'. hhh)

Housing starts are down. New construction sales are down.  Mortgage rates up.  Consumer debt going off the charts again.  All fundamental signs pointing to downturn.

> macro, philosophical, boring, level-headed observation

Yep. That's why the "C School" was the hardest major at W&L.

Mackin USA

  • Inner Core
  • Hero Member
  • *
  • Posts: 2268
  • Abstract Artist
    • View Profile
Re: Schwab starts talking about recession
« Reply #3 on: October 18, 2018, 07:00:52 PM »
RC:
Where I read it says...
"Traders seem to be unduly traumatized by recent equity weakness. The Fed is motivated by actual economic numbers that allow them to pursue the imperative of continuing to normalize rates.

It was refreshing that the minutes didn’t feature an overly tortured debate on exactly where the neutral rate lies. It is an example of pragmatism over theory. Much better that they acknowledged leveraged loans, tariffs and emerging market strains. Those are things that actually affect people’s lives. I think the notion of raising rates above neutral is a brilliant tour de force. I doubt they want to meaningfully do it, but it certainly stops the ceaseless speculation about when this hiking cycle will end. This is your first actually data-dependent Fed. Embrace it."
Mr. Mackin

littleman

  • Administrator
  • Hero Member
  • *****
  • Posts: 3996
    • View Profile
Re: Schwab starts talking about recession
« Reply #4 on: October 18, 2018, 07:09:10 PM »
We're at about 40% liquid atm, waiting. 

Travoli

  • Global Moderator
  • Hero Member
  • *****
  • Posts: 673
    • View Profile
Re: Schwab starts talking about recession
« Reply #5 on: October 18, 2018, 07:35:55 PM »
>This is your first actually data-dependent Fed.

Here's an interesting post about the fed's current hawkishness.
https://wolfstreet.com/2018/10/17/my-proprietary-fed-hawkometer-is-redlining/

Wolf Richter thinks the current fed will keep tightening (toward normalization) in the face of asset deflation, but they'll flinch if credit freezes.

ergophobe

  • Inner Core
  • Hero Member
  • *
  • Posts: 4362
    • View Profile
Re: Schwab starts talking about recession
« Reply #6 on: October 18, 2018, 07:51:44 PM »
I'm working my way through Howard Marks "Mastering the Cycle" book.

I had never heard of him before, until last week when I listened to this
https://tim.blog/2018/09/25/howard-marks/

ergophobe

  • Inner Core
  • Hero Member
  • *
  • Posts: 4362
    • View Profile
Re: Schwab starts talking about recession
« Reply #7 on: October 18, 2018, 07:54:15 PM »
Where I read, they've been hollering for 6 weeks now. (As opposed to where Mackin reads, where they're *always* hollerin'. hhh)

Yeah, that was sort of my point. Schwab always responds to those hollers with "No, it's all okay. People aren't understanding X," to the point that I recently said to Theresa that I wasn't sure there was any market signal short of actual recession that would get them to say they are starting to worry.

Suddenly, they're not saying that. Suddenly, even Schwab, whose newsletter's purpose seems to be to calm investors and prevent them from withdrawing money from their accounts, seems kind of nervous.

rcjordan

  • I'm consulting the authorities on the subject
  • Global Moderator
  • Hero Member
  • *****
  • Posts: 7275
  • Debbie says...
    • View Profile
Re: Schwab starts talking about recession
« Reply #8 on: October 19, 2018, 02:40:22 AM »
Analyst who predicted the 2008 crash warns of bubble brewing in U.S. household wealth

https://www.marketwatch.com/story/analyst-who-predicted-the-2008-crash-warns-of-bubble-brewing-in-us-household-wealth-2018-10-18

Mackin USA

  • Inner Core
  • Hero Member
  • *
  • Posts: 2268
  • Abstract Artist
    • View Profile
Re: Schwab starts talking about recession
« Reply #9 on: October 19, 2018, 10:28:08 AM »
No money down: Department of Veterans Affairs
No money down: Navy Federal Credit Union
No money down: USDA
Little down: Buy private mortgage insurance
Little down: Federal Housing Administration
"With a minimum down payment of 3.5 percent, an FHA loan is the low-down-payment option for people with tainted credit histories."

https://www.bankrate.com/finance/mortgages/mortgages-no-or-small-down-payment-1.aspx
Mr. Mackin

rcjordan

  • I'm consulting the authorities on the subject
  • Global Moderator
  • Hero Member
  • *****
  • Posts: 7275
  • Debbie says...
    • View Profile
Re: Schwab starts talking about recession
« Reply #10 on: October 19, 2018, 02:13:57 PM »
And keep in mind that people are now buying suvs & pickups that are well north of $40k. $60-80k is not unheard of in my neighborhood.  Travoli posted somewhere that 60% (??) are upside-down and just continue to roll it forward.

What really haunts me is that th3core nailed the last housing recession months before it happened ---and did nothing.  Laughed it off as impossible that housing values could drop (a mere) 25%.

littleman

  • Administrator
  • Hero Member
  • *****
  • Posts: 3996
    • View Profile
Re: Schwab starts talking about recession
« Reply #11 on: October 19, 2018, 03:46:06 PM »
That conversation back then spurred us to pull completely out before the crash.  A lot of people I know pulled out at the bottom and then went back into stocks many months after they started going up again -- they would have been so better just holding.
« Last Edit: October 19, 2018, 04:10:05 PM by littleman »

rcjordan

  • I'm consulting the authorities on the subject
  • Global Moderator
  • Hero Member
  • *****
  • Posts: 7275
  • Debbie says...
    • View Profile
Re: Schwab starts talking about recession
« Reply #12 on: October 21, 2018, 11:46:55 AM »
<saved you a click>

"The mortgage pain point
Interest rates on the most common type of mortgage topped 5 percent last week for the first time since January 2011, said Wolf Richter at WolfStreet, and another point higher will hit the "pain threshold" for the housing market. Thirty-year fixed rates for "conforming loans" — mortgages for single family homes priced below $453,100, with a 20 percent down payment — are now at 5.05 percent, up from below 4 percent in 2016. While that's still a historically low number, it's likely to rise as the Federal Reserve steadily lifts the interest rate it charges to banks. A 6 percent rate would take mortgages close to where they stood in the housing bubble. That "will block a considerable number of potential buyers from buying at current prices." Cities where prices have "surged" as much as 55 percent from their housing bubble peak — including Seattle, San Francisco, and Denver — could be hit particularly hard."

http://theweek.com/articles/802647/mortgage-pain-point

ergophobe

  • Inner Core
  • Hero Member
  • *
  • Posts: 4362
    • View Profile
Re: Schwab starts talking about recession
« Reply #13 on: October 21, 2018, 03:30:45 PM »
Housing prices are not set by sticker prices, but monthly payments (obviously). So as insurance goes sky high in California (I'm at $7000 for a fairly modest home) and interest rates go up, sticker price has got to come down. Unfortunately, that drop in sticker price does nothing to make those houses more affordable.

A $500K loan (not uncommon in California) has a $2387 payment at 4%
A $2387/mo payment gets you $398,200 at 6%

If, as happened to us, your insurance goes from 2000 to 7100, that's another 425/mo, that takes you down to roughly $325,000 for your $2387/mo.

So, assume 
 - you are in a fire area and you are grandfathered in with a main line insurer
 - got your loan at 4% down at the bottom
 - new buyer will have to insure with a supplemental line (as we do now)
 - interest rate is 6%

The same payment that bought you a $625K house with 20% down and a $500K loan, that person now gets a $406,250 house with 20% down and a $325,000 loan.

They will be able to afford a bit more, because their tax bill will drop by roughly $2000. So roughly speaking, the can now afford more like $450. Still, for someone in the early stage of the loan where they haven't paid much principle, they'll either need to find a buyer who can afford an extra $1000 per month (600 in interest and 400 in insurance) or they will be underwater.

It's a lot less dire for people in large cities in CA without the insurance issues.

aaron

  • Inner Core
  • Full Member
  • *
  • Posts: 202
    • View Profile
Re: Schwab starts talking about recession
« Reply #14 on: October 22, 2018, 07:25:22 PM »
Quote
The odd one is the idea that recessions are typically timed to when unemployment rate is equal to the inflation rate. I'd never heard that before. My first reaction was that there were so few data points, that could be a spurious correlation (and it might be), but it seems to hold pretty well since 1990 across a half-dozen countries.

I don't think my economics brain is sophisticated enough to see why that in particular would provoke/indicate recession
If the unemployment rate is low it suggests there might not be a lot of slack in the economy (or that the economy might already be overheating) & that inflation might pick up (as rate shifts take about 3 to 6 months to work their way through the economy, they care just as much about the trend as the level), which would encourage the central bank to lift rates, which in turn would cause credit growth to slow & financial asset prices to fall.

Quote
Analyst who predicted the 2008 crash warns of bubble brewing in U.S. household wealth
Assets are priced at some multiple of earnings based on discounting forward cash flows, but many/most assets are either highly illiquid or are priced on the margin based on a small portion of the market turning over. Each stock transaction changes the imputed market cap of the company & even a few percent of a company's shares being sold can have a dramatic impact on its value. Check out the trade volume of Yandex over the last couple days compared against their float & look at how much their market cap has dropped in a couple days. On Thursday they opened at $35.50 and by Friday they had fallen to $24.90, a 30% slide in 2 days. 

Some assets are priced based entirely on ponzi pricing where almost everyone hopes they'll be able to sell to the greater fool. But ultimately financial asset prices are based as much (or more) on debt leverage than financial savings.  Look at Netflix today announcing another $2 billion bond offering. And how any hundreds of billions of debt have their competitors (AT&T, Disney, Comcast, etc) took on to beef up to compete.

As interest rates rise the cost of carrying debt goes up when it needs to be rolled over. If the cost of market rates at the time of roll over is too high it might need to be paid down rather than rolled over. Money spent on debt servicing or paying down debt lowers the amount of money that can be spent on share buybacks, acquisitions, etc.