Katsenelson Predicts

1. The US economy will slip into a recession which will last longer than those of the past. The longer this recession lasts – the longer it will last. Economic weakness will feed on itself and cause higher unemployment, which will cause further defaults on loans, and so on.


2. The defaults in the financial sector will reach higher levels than we saw in the last recession.


3. Lending standards will go from extreme promiscuity to the level of a store manager in the sitcom Married with Children, when a store manager, tired of Al Bundy’s bounced checks, asked him for “cash and three forms of ID”.


4. This will also spill over into corporate sector. In many instances it already has: access to capital markets has of late been considered a birthright, but it is quickly turning into a privilege reserved for elite few and, in many, cases a source of competitive advantage.


5. Oversupply of houses and tighter lending standards will cause the housing market to recover slower than many expect (or are hoping).


6. Worst case, we will take the rest of the world into a recession. Slowdown in growth will send the Chinese economy into deflationary spiral. We’ll learn that the prosperity of the Chinese economy came at the expense of a pile of bad loans which were covered up by high growth. Exposure to BRIC countries that used to be considered an asset may quickly turn into a liability. The global commodity boom will turn into a bust.


7. Finally, corporate profit margins will prove unsustainable. They are at all time high (40% above the mean), soon to embark on the journey toward mean reversion, where corporate earnings will either decline or growth will decelerate. Stock may not appear so cheap anymore. Some of these scenarios are possible; a lot of them are probable. The economy (and especially the global economy) is too complex, with too many forces working against each other. Their sequence, timing, the weight of the impact, the unintended consequences… all is impossible to predict, though economists will try. Yogi Berra said “It is hard to make predictions, especially about the future”, and he is so right. I don’t know, nor does anyone else. But identifying very possible risks is a very important part of money management, so they must be hypothetically considered.