Is the Economic Cycle Turning?

Dear Reader,


The US economy grew 3.1% on a quarterly annualized basis in the first quarter of 2019. The fastest first quarter growth since long time ago. In previous years US GDP in the fist quarter of the year grew very slow or even contracted on a quarterly annualized basis.

So is a global recession coming soon?

Yes. In 1 to 3 years the global economic cycle will turn and world GDP will contract on an yearly basis. The current strong growth offshoots in America are actually, according to my opinion, the top of the current economic cycle. Basically, it is as good as it is going to get. Financial markets give other kind of evidence of the coming economic slump. 2019 is shaping up to be a banner year for technology IPOs. Private technology firms have waited for higher valuations, but they too seem to think it is as good as going to get and cashing out. Uber, Lyft, Slack are just some of the high profile names that went to public markets recently.

What will cause the recession? This is the million dollar question. I believe it will be just plain fear of not cashing out early enough, so you can collect your money before the economic cycle really turns to a recession. The trigger could be anything - leveraged loans, China, fund redemptions, large bank falling into trouble, the current technology bubble bursting. If one takes a look at the past, too few analysts actually expected anything like the Lehman Brothers default and the ensuing crisis. It is the proverbial frog in boiling water argument. The water will slowly boil the frog and because the process is slow and protracted the frog will not be able to escape. Or as the former CEO of Citigroup Charles Prince famously said: "As long as the music is playing, you've got to stand up and dance".

The next recession will be caused by the plain old thing that caused the previous - greed and fear. Greed to amass the fortune and fear of losing it before cashing out.

I forecast the next economic recession will be long, protracted and shallow one if looked by yearly contractions. But if you look at the total world GDP contraction, the fall in GDP will be close to the level of the Great Recession in 2008-2009.

As usual, during the upcoming recession defensive sectors like consumer staples, pharmaceuticals, utilities will fall less than technology stocks, financials, real estate, commodities, outside gold. Actually, one of the most likely triggers for the coming economic contraction could be a popping of the current dot com bubble. The current technology bubble is smaller than the previous one in 2001 if measured by valuation gauges like Price/Earnings or Price/Sales ratios. Actually, nowadays the leading technology companies have huge yearly revenues, but they are simply overvalued.

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Petar Vladimirov Posledovich is not liable for any investment losses incurred by reading and interpreting blogposts on this blog and posts on social networks.

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Kind regards,

Petar Posledovich