The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Semi-Rational

08/24/2019

One so-called market indicator of a recession in six to twelve months, is called interest rate inversions, and it means nothing.  The economic data does not indicate a high-probability of recession, although it does suggest a minor slowdown, which is called a “growth-recession.”  A regular recession produces a decrease in GDP.  In a growth-recession, GDP continues to increase albeit at a slower rate.  A growth-recession is nothing to worry about.  It is an unfortunate choice of words, because people over-react whenever they hear the word “recession.”

Until yesterday, I felt confident that a growth-recession was the worst-possible outcome.  However, China’s small salvo in the trade war was met with an out-pouring of semi-rational tweets, personal attacks, and multiple escalations by the U.S. in that war.  Our President may have the largest ego in the universe but certainly not the only ego.  Calling President Xi an enemy was downright stupid.  The Trump trade war has taken an ominous turn.  While most economic data still does not indicate any pending recession, I expect that to change.

My favorite Wharton professor, Jeremy Siegel, predicts “There’s more room to fall” for the stock market.  (Of course, that’s always true.)  One of his favorite market signals is the “fear index” or VIX.  It jumped to 20 this week but is still far below 30-35, which is is normal during recessions.  A rising VIX is a strong bearish signal.  Another 5-10% fall would not the end of the world.

As I’ve written numerous times, another garden-variety recession is nothing to worry about.  They come and they go.  Fear only another financial crisis or financial recession, and there is no indication of that on the horizon.

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