From: allin
Recent market movements and job growth data have raised concerns about a potential recession in the US economy, prompting discussion among experts about the future economic outlook [03:45:04].
Initial Market Jitters and the Yen Carry Trade
On a recent Monday, markets saw a significant downturn, with the Dow falling 700 points and the NASDAQ down about 6% [04:02:08]. Social media was rife with predictions of an impending recession or even a depression [04:13:04]. This volatility stemmed from Japan’s Central Bank raising its interest rates by 15 to 25 basis points, a significant move given that Japan’s rates had been near zero or negative since 1999 [04:21:20].
The “Yen carry trade” involves investors borrowing Yen at near-zero interest rates, converting it to another currency, and investing it in assets like stocks or US T-bills (paying 5%) to pocket the difference [04:51:24] [05:27:00] [05:37:37]. This trade is typically leveraged, meaning investors borrow massive amounts (tens or even hundreds of billions of dollars) to make significant profits [06:30:19] [07:35:10]. When interest rates in Japan rise, it puts pressure on these leveraged positions, forcing participants to scramble for collateral and sell other assets, leading to broader market pressure [07:17:15] [07:22:20].
Chamath Palihapitiya highlighted that these “free money trades” can be catastrophic when they unwind suddenly, putting pressure on all asset classes [06:10:04] [07:17:15]. He noted that the stock market is largely influenced by highly leveraged algorithmic trading hedge funds, which can swing trillions of dollars [08:12:00] [08:32:00] [08:38:43]. Goldman Sachs observed that these algorithms sold approximately 160 billion of equity, leading to further declines [09:39:00].
After the initial jitters, the market recovered quickly once the Bank of Japan backed off from further rate hikes [22:46:07]. However, this incident exposed the fragility of the global financial system and the significant leverage within it, with the Yen carry trade injecting an estimated $20 trillion of liquidity [23:09:00] [23:37:34].
US Job Market Analysis
Recent job growth reports indicate a potential “bumpy landing” for the US economy [27:11:00].
- New Jobs: In July, only 114,000 new jobs were added, significantly below the Dow Jones estimate of 185,000 [27:30:00] [27:42:00]. Many job growth estimates from the past year have been revised downwards [27:37:00].
- Unemployment: The unemployment rate rose to 4.3% in July, the highest since October 2021, up from 4.1% in the previous month and 3.5% in July of the prior year [28:04:00] [28:13:00].
- Hourly Earnings Growth: Average hourly earnings growth has declined from nearly 6% to 3.5% [28:40:00].
These trends suggest that Fed interest rate cuts are likely coming, with prediction markets suggesting a 75 to 100 basis point cut this year [28:48:00] [29:00:00].
Expert Perspectives on the Economic Outlook
Chamath Palihapitiya’s View
Chamath believes the US economy is currently in a “low-key recession” [29:34:00]. He anticipates “difficult revisions of old data,” particularly for non-farm payrolls, which are often overestimated and then revised downwards [29:38:00]. He noted that companies in cyclical businesses, like Airbnb, are signaling reduced demand, suggesting that the “excess capital” from stimulus checks has been exhausted [30:30:00] [30:34:00]. He expects the recession to become more obvious in Q3 and Q4, forcing the Fed to cut rates [30:48:00].
David Sacks’s View
Sacks emphasized a sudden “sentiment shift” among professional investors and hedge funds, who are now deeply concerned about the risk of a recession [34:49:00] [35:05:00]. He pointed to Airbnb’s soft demand and the significant increase in unemployment as key indicators of consumer weakness [35:07:00] [35:19:00]. Sacks argues that if government spending were removed, the private sector of the US economy would already be in a recession [35:58:00]. He predicts a recession due to the Federal Reserve’s aggressive interest rate hikes from near zero to 5.5% [41:54:00].
David Friedberg’s View
Friedberg highlighted Japan’s predicament with a 263% debt-to-GDP ratio and 5% of GDP spent annually just on servicing existing debt at near 0% interest rates [11:37:00] [12:00:00]. The Bank of Japan holds 53% of the nation’s outstanding government bonds [12:30:00]. Raising interest rates to combat 4% inflation would make the debt unsustainable [15:15:00] [15:22:00].
Regarding the US economy, Friedberg noted that the federal government’s proposed spending of 25 trillion GDP [31:39:00] [31:50:00]. He questioned how much economic growth is driven by productivity gains versus government’s ability to tax and borrow [31:59:00]. He expressed concern for industrial, manufacturing, and agricultural sectors, which are deeply challenged, unlike services and software sectors that can maintain high margins [32:33:00].
The “Tale of Two Cities” Consumer Behavior
The earning season revealed a divergence in consumer behavior [33:19:00]:
- Low-End Consumers: Show weakness, bargain hunting, and seeking discounts (e.g., Airbnb, Amazon) [33:01:00].
- High-End Consumers: Still showing growth (e.g., Uber, high-end retailers) [33:10:00].
Predictions for the US Economy
There was a unanimous consensus among the panelists that a recession is highly likely in the next year [37:08:00] [40:49:00] [41:52:00].
“I think there’s a great chance of a recession.” [40:49:00] “I’ve been predicting recession for like three years now because I just think when you jack up interest rates so suddenly, so violently, you get recession.” [41:52:00]
However, the market could still rally amidst a recession due to anticipated interest rate cuts by the Fed [37:15:00] [41:16:00]. This is because lower interest rates generally make stocks more attractive [41:36:00].
Concerns were also raised about the transparency of economic data, with speculation that more negative economic news might be hidden until after the election [43:57:00]. Additionally, the possibility of “unknown unknowns” or “Black Swan” events (like the subprime mortgage crisis in 2008) that could significantly impact the global economy was discussed [43:40:00] [44:56:00].
Government Spending and Its Influence
The role of government spending in driving economic growth was a point of contention [31:33:00]. While the US economy is currently running 6% of GDP deficits, proponents of fiscal conservatism argue that without this spending, the private sector would show negative growth [36:06:00].
There is a perceived lack of political will to significantly cut government spending, which is seen as a long-term problem [34:26:00]. Despite the need for efficiency and “rightsizing” businesses across various sectors, which might lead to job losses and reduced growth, these measures are often a response to declining revenue forecasts rather than a source of new economic growth [37:27:00] [38:19:00].
Inflation and Consumer Purchasing Power
High inflation is a significant concern, with essential goods like groceries seeing price increases of 50% to 100% [39:00:00] [39:08:00]. This directly impacts consumer purchasing power and the ability of everyday people to afford healthy living [39:53:00]. It indicates that while some industries have achieved incredible efficiencies, others, particularly those supporting daily life, struggle to reduce costs and improve quality, leading to an unsustainable situation for many [40:26:00].