In the next week I flew to New York where my usual wont is to call dinner with a small group of friends, at which we talk all things economic, political, and social. One of the fixtures seems to be Art Cashin, but busy schedules insure a fresh rotation. This week, in addition to Art I got to have dinner with great friends Jack Rivkin, a longtime PaineWebber partner and now the brains at Altegris; Peter Boockvar of the Lindsey Group; Rich Yamarone, chief economist at Bloomberg; Lakshman Achuthan, the guiding light at ECRI; and Vikram Mansharamani, a Yale professor and author of Boombustology.

One of the questions I posed was, “When do you expect to see the next recession?” And the calls were all over the board. There is hardly a better group to ask about the timing of a recession. One person thought the recession will start in the fourth quarter of this year; another suggested that it will start in January of next year; several others thought 12 to 18 months; and the outlier anticipated that recession is still two to three years off. As I reflected on the responses later that night, I realized I could create my own dot chart, similar to what the Fed does with its interest-rate and economic forecasts.

Now seven people is a group, but it doesn’t give us the “wisdom of the crowd.” So I spent Thursday and Friday making phone calls. I got ahold of David Rosenberg, Martin Barnes (of the Bank Credit Analyst), Lacy Hunt, and Jim Bianco, among others. I didn’t need to call Albert Edwards of Societe Generale, as (a) he is always bearish, and (b) he just came out with a newsletter saying that a recession is imminent, which in his terminology and reading of the data means fourth quarter. You can read his take here.

And then Mish Shedlock shared this chart that supports his own recession call.

If the jobs trend follows what we saw in the last recession, it is about to get much worse.

Not all of the forecasts from the group I polled by phone were as bearish. A couple didn’t think a recession would start for another five years absent an “exogenous” shock (i.e., one originating outside this country). But that caveat was also invoked by nearly all of those who didn’t think the recession would start later this year: in their next breath they explained that their forecast would be brought quickly forward if there is an external shock from, say, Europe or China; and some mentioned policy mistakes from central banks as a potential shock.

So what does my “dot plot” look like? It’s actually pretty strung out over the next 2½ years, with the outliers being the two five-year calls. Again, the longer-term views on recession always had an * behind them that said “absent a shock.”

The center dot would be at about 18 months, which is fourth quarter 2017. For whatever reason, that pretty much squared with my own prediction at dinner. Again, with the caveat of “absent a shock.”

Why do I keep repeating that phrase? Precisely because Brexit, as explained above, could deliver an enormous exogenous shock. And it is something that could happen on June 23 – 12 days from now – triggering repercussions throughout Europe and then the rest of the world.

Can anyone in their right mind imagine Janet Yellen looking at Mish’s chart above and deciding to raise interest rates anyway? And then realizing that the polling ahead of Britain’s vote on leaving the EU now suggests that Brexit’s going to happen? I sure can’t. The Fed surely won’t pull the trigger at next week’s meeting; and if we see Brexit, then a rate increase won’t come at the late-July meeting either. We will still be digesting the consequences of Brexit. Then we get past Labor Day and into the heat of a particularly hot and nasty election. Will the Fed throw fuel on that fire?

Maybe we’ll see a rate hike in one of the winter meetings IF the data turns around.

Fact is, we have just lived through the most significant policy error committed by a central bank in our lifetimes. The Fed did not raise rates in the latter part of 2013 and throughout 2014 when they had the opportunity, and now that moment may have slipped past them. We could plunge into the next grizzly recession while the Fed still has no ammo to load in their monetary policy gun other than the rubber bullets of further quantitative easing and, gods forbid, negative rates in the world’s reserve currency.

All the data show that quantitative easing is not all that effective for doing anything other than raising asset prices for the rich. I want to reiterate a point that I’ve made in past letters. The Federal Reserve is not authorized to do anything but buy government debt. They are not authorized to do a “helicopter drop” or buy equities or even corporate paper. Those moves would require a change in the Federal Reserve Act, and that means action by Congress in an environment where elements of both parties would like to change the Federal Reserve Act significantly in ways that the Fed would not find particularly helpful. Not that anybody agrees on much of anything.

I agree with the gentleman from Deutsche Bank. We have relied on monetary policy to such an extent that we no longer hold our elected leaders responsible for their inaction. Yet somehow we think that monetary policy is going to save our bacon once again if we slide into a recession. Gentle reader, this time it won’t. We need to start Thinking the Unthinkable, which was the title of my speech at the Strategic Investment Conference. I said something along these lines:

If I had gone to people four years ago and said that 40 percent of the world's sovereign bonds would be at negative rates, that central banks would expand their balance sheets by $10 trillion, and that the world would still look somewhat normal, even with all of the geopolitical risks that we have with ISIS, etc., people would have said, “John, what are you thinking?” And yet all of those unthinkable things have come about.

In a future letter I will summarize that speech. Even contemplating what should truly be unthinkable is enough to give us economic heartburn. Perhaps we’ve sailed past the era of conventional monetary policy, off the edge of the known world.

Home for the Summer and Hopefully Cleveland?

My doctor and friend Michael Roizen (author of a number of bestselling books, with 28 million copies now sold), head of wellness at the Cleveland Clinic and one of their directors, is a huge Cleveland Cavaliers fan, having box seats right on the floor. He invited me to come up to watch a game, and I decided I would wait for a game six. After last night’s game, won decisively by the Warriors (they are now 3-1), it looks like I may have made a bad decision. Now I can only hope that Cleveland somehow pulls it together on San Francisco’s home court to force a game six. I have not booked my tickets to Cleveland just yet.

Other than that, my general intent is to stay home for the summer, writing my book and letting my body recover from all the traveling I have done over the past 10 years. The thought of a summer at home is very pleasant, although I know I will have to do some quick shots here and there. Just comes with the territory.

Researching what the world will look like in 20 years has led to some remarkable surprises. Las Vegas may soon be employing a remarkable flying taxi, designed in China, which will fit one person. When you start looking into such ventures, you find that Larry Page of Google has funded his own flying car project, and there are actually half a dozen other serious – and by serious I mean there is major money backing them – companies all looking to bring us various novel forms of flying transport.

Quite a few people grew up watching the Jetsons and wondering when we were going to get our flying cars. Now, some of them have decided to go ahead and build one themselves. I don’t think I will be looking to put my money into these ventures, but I’m glad  other people have that kind of risk capital and are willing to spend it on cutting-edge technologies. Actually, though, flying cars are not as far-fetched now as they once seemed. Electric motors and batteries have removed the obstacle of heavy combustion engines. Many of the designs look just like much larger versions of the drones you see flying over your backyard.

Uber? Lyft? Automated cars? And now automated flying cars? If I drove a taxi for a living, I might feel just a little paranoid.

You have a great week. I’m looking forward to getting more acquainted with my neighbors, catching up with friends here in the area, and for sure doing my workouts more regularly. It’s looking as if it’s going to be a good summer.

John Mauldin is editor of Mauldin Economics' Outside The Box.

This article was originally published at Mauldin Economics.

 

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