I Am Not an Economist

I am not an economist. That’s probably for the best because economists aren’t any better at predicting shifts in the economy than I am. Nassim once referred to economists as “entertainers.” They go on TV and provide explanations for things, but none of it has any predictive value.

The reason I bring this up is because we’ve had a series of jobs reports that are getting successively worse, and it sure looks like we are going into a recession, at least a jobs recession, and the Fed is prepared to cut interest rates some. Isn’t this economist thing easy? Wait for things to get bad and then cut rates, instead of predicting that things will get bad, cutting rates, and then maybe things won’t get as bad. As one of my Twitter mutuals likes to say, nobody knows anything.

I am saying something true here: The stock market usually does a pretty good job of discounting whether we are going into a recession before the data starts to get bad. This time, the data is starting to get bad, and the stock market is still more or less on the all-time highs.

Well, the level of the stock market is more a function of money flowing into the stock market, and investors have not been disabused of the notion that the stock market is the best way to save for retirement, so they continue to plow money into stocks regardless of what happens with the economy. Which is weird. It’s very possible that the economy will circle the drain, and stocks will continue to put in new highs. I’d like to say that stranger things have happened, but they haven’t.

Recession

Having said all that, I don’t really see what the fuss is all about. The unemployment rate is still only 4.3%—very low by historical standards. I never thought I’d see the day where the Fed was ready to embark on a prolonged rate-cutting campaign with the unemployment rate at 4.3%. 

We’ve only had one recession since 2008, and that was the very brief recession during the pandemic. There was another one in 2022, which had two quarters of negative growth that allegedly didn’t count as a recession, and I actually agree with that. I’d go as far as to say we haven’t had a real recession since the financial crisis, though we’ve had a few stock market panics along the way. How will people feel about a real recession, if we have one? What are the political implications of that? What will people do if the unemployment rate gets to 6–7%, which is still historically not that bad? Answer: People will freak out.

I haven’t talked about private equity in a while, but I can tell you that the one thing that is most leveraged to the real economy is private equity. If portfolio companies begin to fail, it will be a disaster for private equity, and they won’t be able to extend and pretend. It’s funny—I have a short position in Blackstone, and therefore I watch the stock every day, and it is a very volatile stock given that it is in a slow boring business like private equity. If you think about it, private equity is really leveraged microcaps. Tiny businesses at the bleeding edge of the economy with debt applied to them. I said this after the financial crisis: To err is equities; to really screw things up takes fixed income. 

Anytime you see debt piling up in one sector of the economy, you know where the structural weakness is. Debt on top of debt on top of debt. Debt in places we didn’t know we had debt. We have increased the fragility of the economy. And private equity will remorselessly cut staffing in the event of a downturn. I’ve been on a bunch of podcasts talking about private equity, and one thing I’ve consistently said is that layoffs will happen faster in the next downturn.

So, I don’t know whether we are going into a recession! We are all looking at the same data, and I don’t have any additional insight. I don’t have a gut feel for it either. I thought the last payroll report would be stronger, so what do I know? 

I will tell you how we will know if we are going into a recession: if credit spreads start gapping wider. That seems impossible, with the wall of money that goes into credit every day, but I don’t think the credit cycle has been repealed. I remember in 2008 when corporate bonds were all trading at double-digit yields and trading at 60 cents on the dollar, and people were wondering if these companies would even be able to refinance. Scary times.

In 2007, I was convinced we were going into recession. Now, I am not so sure.

Jared Dillian, MFA