A news story yesterday jumped out: Experts say next recession in US will begin in 2020.
The experts were in property and had been surveyed by Zillow, the real estate website (for Britons, it is the equivalent of Zoopla.) Since the last recession was triggered by a property downturn in the US, the implications for the rest of us are obvious.
But it isn’t just Zillow. Google “recession in 2020” and vast wodges of links repeating Zillow's opinion come up. It is the view of people at the rating agency Moody’s, at the huge fixed-interest fund manager PIMCO, at Guggenheim Investments, at the hedge fund Bridgewater Associates... the list goes on and on.
The one I like most is a J P Morgan survey of its ultra-rich clients – i.e. those with more than $30m of investments. Three-quarters of them expect a recession within two years and half in 2020. If getting the timing of the investment cycle right is a good way of becoming ultra-rich, the rest of us should indeed take notice.
The trouble is that when everyone expects something to happen it usually doesn’t (full disclosure: I am on record as predicting recession in 2020 too). So how should we think about this? Why are there recessions anyway? And can we say anything sensible about both the business cycle and the investment one?
Some thoughts. The first is that the business cycle is one of the few enduring features of economic life, but there is no single satisfactory explanation of it. Crop cycles – the Bible’s seven fat years and seven lean ones? Well, not now surely. An investment cycle, where there is a lag between an investment decision and the investment coming on stream, by which time production floods the market? And/or a property cycle, driven by the same motivation and mathematics? Well maybe, but surely businesses ought to be wise to that and to some extent at least invest counter-cyclically.
That leads to a second thought. The financial cycle seems to lead the economic one by about 18 months. In other words, markets turn down – or up – a year or more before the economy does.
Think about the UK now. Equities are now at, or close to, their all-time highs, with the FT100 index hitting its peak on Tuesday. On the other hand, while London property is down quite a bit from its highest point, UK property in general is still quite strong. Maybe close to a peak there?
And a third thought. For shares, the best returns often come in the final quarter of a bull market, so it is dangerous to be out of equities too soon. If the downturn is not until 2020, then the coming months should see present market strength sustained. But no one should try and be too clever. Sometimes an asset class is clearly wrongly priced, but, in general, getting the timing right is really a matter of luck.
If all this sounds a bit unhelpful, here is a more positive thought. This is not so much about timing, either of financial markets or of the real economy, but more about amplitude.
Economy first. There will be a downturn and 2020 is as good a time to expect it as any. But there is no need for it to be a serious one, at least for the US, for a number of reasons. One is that the high-tech industries of the US are as vigorous as ever. I happen to think their stratospheric share valuations are expecting too much of them, but the actual products and services are racing ahead and will continue to do so.
Another is that the memory of the crash of 2008 is so searing that a similar financial catastrophe will not happen again for, gosh, another generation – until the memory of 2008 fades.
SAlso, the US energy industry is transforming US competiveness. America’s access to cheap energy makes it an attractive place to build things again. Finally, the Fed is independent, competent and experienced. It will not make big mistakes.
Now financial markets. There will always be swings and bumps in the property sector. But valuations are not ridiculous and so the downturn, as and when it comes, need not be too serious. Equities are equities and are hugely resilient. We all know they go up and down, and we know that even a sharp fall need not do too much damage to the real economy. Bonds I am worried about, but so far the US has adjusted to a necessary repricing with calm acceptance. I am much more worried about European bonds, which have not repriced – but that is another matter.
In short: yes, there will be a downturn, but no, it won’t be a bad one. Fingers crossed I am right.