What Causes a Recession?

With the arrival of June, the stock market summer haze thickens – our attention span shortens as the data arrives in torrents.

And the average holding period these days is in single-digit weeks - not years.

Regardless of direction, right now everything seems to be going poorly.

But it isn’t, in reality. It’s just the way it feels to the mass audience.  

The news is bad, politics are bad, global tensions are bad, "trade wars" seem to be everywhere, and with all that glum as a guide, human nature tells us to be afraid.

Folks, markets don't cause recessions - our reactions do.

When a large enough group begins to fall prey to fear for long enough, the so-called "data" begins to show a slowdown.  

Since the Great Recession, the audience never really escaped the grip of fear embedded in their collective psyche during 2008-2009.  Fear has jumps back to the forefront at a moment’s notice.

Let me explain...

The combined sentiment data and internal moving averages of price action we’ve been sharing over the last few notes suggest extreme levels of fear right across the board.  

That’s despite the fact that we’re Dow Jones points higher than we were on Christmas Eve morning.

Yet, almost all of the news we are reacting too today is specifically worse than what we were "aware of" on Christmas morning.

And speaking of news, technically we are not even listening to it very carefully anymore.

Turn on any financial news channel and you will hear references to the Tariffs on "$500 Billion in imports from China..."  

But it’s simply not correct.  

There were threats of additional tariffs – but the real tariffs are still just 25% of $200 Billion!

That doesn’t stop fear and irrational, shoot-first, ask-questions-later reactions push out over $1.4 TRILLION from equity values from the markets.

What you can be sure about it that there’s nothing rational about this behaviour.

The risk here is that, if the crowd buys into this crap for long enough, we will see a slowdown.  

What’s Being Missed?

The costs are all being covered in the press on a wide scale - no matter where you turn.  

But what’s being missed - and indeed not even mentioned - is the manner in which these things will be mitigated over time.

Do you truly believe that this "Tariff War" and its $50 Billion in additional costs (a year from now) will crater a $21 TRILLION economy?  

Shouldn't we instead think of this as one large movement of capital across the globe in an endless flow moving back and forth into different "buckets" if you will?

Consider what’s unfolded while the trade war has been going on:

• Crude oil has fallen on fears of a slowdown - saving billions in consumer costs.
• Interest rates have fallen off a cliff due to the huge flow of the fear-trade - saving billions of dollars in costs - and setting off the next wave of cost-savings as refi's likely hit new highs in the coming weeks and months.
• Add those two channels alone (above) shave it off the "cost" of the Trade War Tariffs, and bingo - you have a number that is equivalent to a drop in the ocean.

Oddly enough - it could even be a net positive when the dust settles - and settle it will.

Folks, the US economy has made it through every single thing thrown at it - including things we could have never imagined beforehand.  

The higher markets rise, the worse it feels mentally when they hit setbacks.

Equally, the worse it feels, the faster these reactions are triggered.  

The cycle can be exhausting if you permit it to be.

All of those steps in the cycle are the emotional dominos that kill returns, destroy plans, bring on dark views of the horizon and poison the ability to patiently see through the haze.  

But if it were easy, returns would be nearly non-existent.