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How Scared Should I Be of Another Recession?

There's a bear market, and employment is down a little. So should I be trading all my money for Bitcoins yet?
January 25, 2016, 10:30pm

Photo by the author

In the column "How Scared Should I Be?" VICE staff writer and generalized anxiety disorder sufferer Mike Pearl seeks to quantify the scariness of the world he lives in. We hope it helps you to more wisely allocate that most precious of natural resources: your fear.

I'm not a financial news junkie. In fact, I'm one of those people who tries in vain to delete the "Stocks" app every time there's a new iOS update. But I still keep the global economy in my peripheral vision, like a way-too-shitty driver swerving around in my rear-view mirror. I was one of those job seekers whose prospects were completely T-boned by the 2008 financial crisis, and I'm not looking forward to the next (metaphorical) crash.


So I couldn't help but notice that the stock market has been tanking lately. On Friday, stocks saw a bit of a reprieve after a week's worth of punishment. Driven largely by a decline in energy prices, the Standard & Poor's index suffered a grisly 6.9 percent drop at the worst moment of the recent decline. Even after things improved Friday, Francisco Blanch, researcher at Bank of America-Merrill Lynch told MSNBC this is not the end of the energy decline.

But something scarier than a stock market decline has also been going on: People are getting laid off. Initial unemployment claims—a.k.a. new faces showing up in the unemployment line—increased by 1,000 last week according to the latest report from the Labor Department. That represents the biggest spike in claims since last July. After years of consistent improvement in the employment situation, the trend is showing signs that it could reverse.

Now, in the aftermath of last year's stock market crash in China, and at a time when there's more bad news coming out of the Eurozone, that chilling word "recession" is showing up in headlines. I'll admit it: I've started getting a little scared, regardless of whether or not I should. I already know what President Franklin Roosevelt would say about how scared I should be, so instead of asking him, I asked a financial analyst.

George Pearkes researches and analyzes macroeconomics, credit, and equities for the Bespoke Investment Group. He knows a thing or two about what kind of scary shit is happening to everyone's money. His advice was very encouraging, but it merits a follow-up if there does end up being a recession in 2016. Below is the text of our conversation, lightly edited for length and clarity:


VICE: Let's start from the beginning. When do recessions happen?
George Pearkes: People get carried away, and do too much investment—whether it's in inventories, fixed assets, or what-have-you, or they consume too much. They realize that they've become overextended. They plowed too much into stuff that's going to pay off in the future, and they contract activity. Businesses, households, even governments in some cases, which is regrettable.

And is that happening now?
We haven't seen that. We haven't seen a drastic, economy-sized investment in a single economic sector.

Sounds like you're talking about bubbles. Does there need to be a bubble for there to be a recession?
Since World War II, there's always been some kind of over investment. Sometimes it's really significant, like the housing bubble, and then you get a really significant recession, and sometimes it's just a normal business cycle.

Could a recession happen without a bubble?
It would be unprecedented, I think it's safe to say, for the US economy to be dragged down while consumer final demand is still chugging along. It's really rare to see final demand collapse without a reason for it, without some kind of overextension somewhere—without large numbers of people being fired, without incomes dropping rapidly, without some kind of shock that takes place. It's possible, but it would be very unlikely for that to happen.

The global economy is kind of fucked. Should that scare me?
It's extremely unlikely for a recession to come from abroad. The rest of the global economy isn't looking great, but the US economy is one of the most closed in the world: If you look at trade percentage of global GDP, it's very small—it's us and a couple of African countries [Note: It looks like Brazil is in this club too]. We just don't have that much of a direct economic relationship with the rest of the world, which surprises people.


Let's get to the bad news, though. You've seen some scary headlines, right?Today [January 21], I think I saw my first economic statistic where I thought OK, this I need to pay more attention to, because this is not moving in a direction that I like. That statistic was initial jobless claims.

I saw that too. But the unemployment level is still pretty low on the whole, right?
The level is less important than them rising quickly off of the all-time low. Basically the way initial jobless claims work is people file less and less until you hit the sort of top of the economy, and then the economy quickly deteriorates when people start filing initial claims. We haven't gotten to the point where the data screams We are going into a recession! but it's something to take note of.

Stocks really took a nosedive too. Should I be worried about what I have stashed away in my IRA and 401K plans?
For the average person on the street looking at the stock market, never go and liquidate your 401K, or go all cash, because you'll get back in at the wrong level, and you'll sell low and buy high. You're not going to need retirement money for 30 years at the earliest—probably a lot later. There is no reason at all that you should ever even be looking at the stock market.

So with jobless claims up, along with the declines in the stock market, why shouldn't we all panic?
Typically, going into a recession, commodity prices are rising, or near local peaks; right now, we're the complete opposite. Business investment tends to roll over into a recession, and that hasn't really happened outside of the oil and gas sector. Real final demand from consumers tends to soften; that has not happened at all. You tend to see stuff in the labor flows data that shows people leaving the labor force, and that hasn't happened. Loan growth tends to decelerate from banks. That hasn't happened. Consumer confidence tends to roll over fairly in advance of a recession and that hasn't happened. You tend to see the various points on the Treasury Yield Curve get much narrower.


So let's say it's all true and there's a recession. What happens next?
There's a concept in economics called the Paradox of Thrift. Its turns out that if everyone tries to save money at the same time, everyone earns less. If everyone earns less, people try to save more money, and so on and so fourth, down the chain. When people do that—when they stop buying stuff when their credit cards, and start socking money away in a mattress, when they sell stocks and put the money in a deposit account in the bank—it absolutely makes things worse. The question is, how bad do things get? In a normal recession, this usually doesn't carried too far out of control.

But again, if it does, should we all exchange our money for Bitcoins or something?
Talking to the average person, in a cold, hard, statistical way, it's not likely that you'll get fired. It's not likely that you'll have a massive pay cut dumped on you, and it's not likely that you're going to suffer really, really grievous harm.

Unlikely maybe, but what if I get the worst of it?
You should already have money saved up—whatever you can afford. You shouldn't be trying to time what your savings rate is based on what the Wall Street Journal says in the headlines, or what HuffPo's economy section says about economic data, or what some guy pontificating in an interview in VICE has to say about the economy. You should be saving three months' expenses, or whatever you can afford. You should be contributing to a 401K, and you shouldn't be worrying about what the stock market is doing day to day.

Final Verdict: How Scared Should I Be of a New Recession?

1/5: IDGAF*

*Based on current economic indicators.

Follow Mike Pearl on Twitter.