When Daily Show host Jon Stewart interviewed hedge fund manager and "financial guru" Jim Cramer after the 2008 housing bubble burst, his first question was:
“How the hell did we end up here, Mr. Cramer?”
Stewart’s interview produced one of my favorite one-liners from his show, and if you’re also a fan, you’ll know the reference: “Roll 2:10.”
2:10 is a video timestamp of Jim Cramer (unaware that he is being recorded) discussing how he deliberately pumped stocks to drive the futures of his hedge fund during short times. Cramer called his strategies “a very quick way to make money... very satisfying. No one else in the world would admit that, but I don’t care... and I’m not going to say it here on TV.”
At 2:12, Cramer says, “You can’t foment, that’s a violation. You can’t yourself create an impression that a stock is down, but you do it anyway because the SEC doesn’t understand it... this is illegal.”
At 2:16? “Apple is very important to spread the rumor... it’s very easy because the people who write about Apple want that story, and you can claim it’s credible because you spoke to someone at Apple and they won’t comment.”
Aside from complete disappointment at the failure of our financial infrastructure and a deep sense of betrayal and anger, that interview made me realize one thing:
I’m on my own. No one is going to protect me from financial disaster.
No one will protect you, either.
The financial figureheads that we’re led to believe we can trust are merely dishonest snake oil salesmen. They know what’s going on and pretend it isn’t happening.
Cramer isn’t the only person guilty of deceit, ineptitude, or possibly both:
“It’s virtually impossible to violate the rules.” — Bernie Madoff, 2008
“I don’t anticipate serious failures among large banks.” — Federal Reserve Chairmen Ben Bernanke, 2008
“This is far and away the strongest global economy I’ve seen in my business lifetime.” — Treasury Secretary Henry Paulson, 2008
Millions of people were forced to forfeit their homes in 2008. Even more lost their jobs or their entire retirement funds.
So to answer Stewart’s question, we “ended up here” because American consumers, kept in the dark, were bankrolling the financial adventures of ethically corrupt and phony financiers.
All the signs were there. We should have seen it. We should have been made aware. Still, the 2008 Great Recession took every average American by surprise.
But that ends now. Next time, don’t be blindsided. In order to be prepared for inevitable economic swings, you need to know the facts of what’s happening in the economies around you.
Over the past 50 years, global recessions have occurred in approximately eight-year cycles. That puts the next recession event in our very near future.
This topic is getting almost no media attention, but I guess we shouldn’t be surprised by that anymore.
In reality, there are more than a dozen economic indicators that lead us to expect a $10 trillion loss for American investors. Analysts expect the tipping point to occur either this year or next.
Student Loan Debt
The Great Recession of 2008 was centered on the housing industry. That bubble burst when millions of families were unable to maintain payments on loans that they should not have been granted in the first place. Subsequently, almost $150 billion was pulled from money market funds, and the DOW dropped more than 50% in just 17 months.
This was the closest the United States had ever been to complete financial collapse.
Seven years later, it’s not millions of homeowners, but millions of students, who are drowning in debt.
Student loan debt totals more than $1.2 trillion — a 70% increase from just 10 years ago. 43 million individuals are tied to student loans, and 7 million are already in default. Less than 40% of borrowers are up to date with payments.
Student loans are the only type of consumer debt that is increasing, not decreasing.
The effect of this debt is not isolated to recent graduates.
The economy as a whole is feeling the impact throughout rates of homeownership and consumer spending, both of which have declined to lows not seen in decades. Just two years ago, approximately 30% of all Americans anticipated not being able to buy a home in the foreseeable future. This year, that percentage has increased to over 40%.
Typically, the next financial step for recent graduates is the purchase of a home. It’s the largest purchase most people will ever make. Unfortunately, today’s recent graduates can barely stay afloat.
Most students will be 40 years old before their loans are paid off.
Consumer spending, wholesale factory orders, and retail sales have not dropped this rapidly or to these lows since the last recession eight years ago.
For the last 50 years, the United States economy has set the global tone. When Americans make less and spend less, the entire world slows down with us. However, this has changed since our 2009 recession.
This decade alone, China has accounted for a third of global economic expansion, compared with just 17% from the United States. Other large economies like the EU and Japan only contribute approximately 10%.
Beijing holds the keys to global growth.
Every industry and region of the world is tied in some way to China and therefore depends on its growth. It’s the “workshop of the world,” producing over 13% of global economic output. It is also the largest consumer nation, especially in regards to vehicles and smartphones.
Now, analysts are calling China the "number one threat to the global economy." The nation that was once an ideal destination for capital is now experiencing capital flight.
GDP growth is at its lowest level since 2009. Ford reports a fall in Chinese car sales — the first since 1990.
China is battling to calm the inflation of its "triple bubble": a combination of credit, investment, and real estate.
Chinese factories have not been operating at capacity for quite some time. Since July 2014, exports have decreased by over 8%. Production hovers around 80% capacity, regular workers are put on unpaid leave, and the majority of migrant workers are turned away.
In order to entice exports, Beijing devalued its own currency by 3.6% last week — a strategy saturated with panic. It was a vote of no confidence, putting even further downward pressure on the economy.
China is also seeing stagnation in the housing market, which accounts for almost a quarter of the nation’s GDP. Property values are already declining, even in major cities. There are quite literally not enough people to fill the vacant housing space. Entire "ghost cities" are scattered across the mainland.
Investments in the housing infrastructure, however, continue to increase by 11% each year. The overvaluation of this market will lead to an inevitable correction, which will easily (and quickly) trigger global recession.
Even further, China is considering providing another major stimulus package to the EU, an action that contributes even further to outside concerns about its debt and future economic health.
No country has accumulated debt as rapidly as China has since 2009. While the American economy suffered, China embraced the position of global economic leader. Its stimulus packages mitigated the effects of the global recession but also sunk the nation into record levels of debt.
“China’s debt as a share of its economy increased by 80 percentage points between 2008 and 2013 and currently stands at around 300%, with no sign of abating.” -The Wall Street Journal
Analysts predict that a continuation of China’s slowdown will pull global economic growth below 2% — a threshold that many consider equivalent to a worldwide recession.
The global economy rarely contracts as a whole. The International Monetary Fund has identified just four global recessions in the last 50 years. However, in all four cases, the global GDP growth in market-determined exchange rate terms fell below that 2% threshold.
“It would be the first global slump over the past 50 years without the U.S contracting.” -Bloomberg Business
Unfortunately for the global economy...
The United States Economy is Contracting
We learned just a few weeks ago that the U.S. annualized GDP growth between January and March was a paltry 0.2%. It’s been consistently disappointing for the past several years and was actually negative last quarter.
Just like China, the American economy is experiencing a significant disparity between imports and exports. The trade deficit puts a downward pressure on the cumulative real growth — pushing it about 8% lower, according to experts.
Stagnation in productivity has been more damaging to the real living standards of Americans than the Great Recession.
Wage growth has been wavering around 2% since the recession. Easy monetary policy has been great for investors, especially with the S&P up 210% since 2009, but it’s a very different story for the larger labor force.
A recent survey shows that almost 65% of Americans are living paycheck to paycheck.
The Bureau of Labor Statistics released a report in April of this year revealing that in 20% of American households actively seeking work, no one has a job.
Unemployment rates in the United States, which propagate levels hovering around 5.5%, do not account for the underemployed — fully capable Americans who must accept part-time or underpaid work because there are no openings in their intended field or level of qualification.
...And We’re Weaponless
When the recession arrives — and it will definitely arrive — the United States has very few defense mechanisms to mitigate the fallout.
Historically, the U.S. has responded to economic contractions through cash injections, interest-rate and tax cuts, or increased federal spending.
This time, those are not feasible options.
Interest rates are already near zero, and we’ll have to wait until mid-September to see in which direction Janet Yellen decides to go.
Increased government debt reduces the odds of federal spending.
Ultimately, it looks like monetary policymakers are out of resources. In the face of global recession, the United States will have to look to fiscal policymakers who, with stark ideological disagreements, generally struggle to enact effective reforms.
Instability in the European Union
Everyone should at least be somewhat aware of the economic disaster that is Greece. In the last five years, the country’s GDP plummeted by 25%.
The nation is in debt to the point of over $36,000 per citizen.
Rates of unemployment among the younger demographic exceed 60%.
Catastrophe has been avoided for now, after an agreed bailout package from Germany and other EU members.
However, the conditions in Europe over the past several years have fostered an overall lack of confidence in the financial sector. Even more detrimental to the Union is a loss of faith in the ability of established governments to provide efficient oversight.
Germany is iron-fisted, declaring that Greece would be better off leaving the EU than submitting to its demands. Other Union members are committed to salvaging the euro and the integrity of the Union. The ideological clash has huge potential to fester and grow over time, leading to even more instability.
Overall growth in the EU has been lackluster at best.
France, Italy, Spain, and Portugal are fractured, with public debt nearing or already more than 100% of GDP.
“The debt and entitlement obligations are not manageable, period.” — Forbes
Economics and finance are usually fairly calculated fields. Experts use history, statistics, and concrete evidence to respond to and mitigate economic movements.
However, there are a few cases when we, too, must look at our version of a crystal ball. In those cases, we have what are known as "financial seers."
David Levy oversees the Levy Forecast, owned by his family for decades. His grandfather predicted the 1929 crash and liquidated his entire company in anticipation of it.
After WWII, Levy’s father predicted expansion when all others predicted recession.
His uncle predicted “a new generation of wealthy would be laid low in a dot com crash.”
David himself predicted the 2008 housing bubble and subsequent recession.
His family has never been wrong about economic swings. He’s now predicting a global recession in 2015 that will be worse than 2009.
These factors (and there are plenty others) beg the question not of if we will experience another recession but when.
Is the global economy going to feel this multitrillion-dollar loss this year or next?
No matter when it happens, don’t let those snake oil salesmen tell you that everything is fine — get your own information, keep your head up, and always remember to be a healthy skeptic.