How Private Sector Balance Sheets Changed Recessions

Joe Weisenthal (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:18)

And I'm Tracy Alloway.

Joe Weisenthal (0:20)

Tracy, obviously, we're in a moment in which there's a lot of debate about whether we're headed for an imminent recession, maybe in the next few months, or maybe in the next year.

Tracy Alloway (0:34)

Right, I think we're recording in the week that Jamie Dimon was talking about how we're definitely heading for a recession. The only question is timing, which is kind of always true, I guess. But it definitely feels like the chorus of people talking about a potential recession is getting louder.

Joe Weisenthal (0:52)

Yeah, between the trade war, the curve inversion, which as of right now is actually uninverted, some weak data in the US, there's clearly, we're back on recession watch. There's no real doubt about that.

But as you point out, we're always heading for recession and Jamie Dimon pointed out, it's only a matter of time. At some point, we'll have another one. So to say we're headed for one, but we don't know when is kind of obvious.

Tracy Alloway (1:21)

Right, and I think we're still in the longest economic recovery on record now, right? So we're kind of due for something to happen.

Joe Weisenthal (1:30)

But I think there's a more perhaps interesting and consequential question for investors in the economy than merely when will the recession happen?

Tracy Alloway (1:43)

What's that?

Joe Weisenthal (1:45)

Well, I think the bigger question is when the recession hits, what's it going to look like? Because we've been scarred recently, or recent recessions have all been pretty brutal in some sense. So if you think about the recession that started in 2007, the financial crisis, that was horrible.

The recession that came after the.com boom, it wasn't really devastating overall, and it was kind of quick, but it was a tremendous loss of wealth due to the crash in the stock market. And prior to that, we had a recession following the savings and loan crisis. So we don't seem to have these sort of old style recessions anymore. They always seem to be accompanied by something big and systemic.

Tracy Alloway (2:37)

Well, people who talk about recession now do seem sort of oddly hopeful that the next one is going to be what they call a shallow recession, right? You hear people who talk about it every once in a while and say, just because it's a recession, that doesn't mean it's going to be like 2008 all over again. We can have a contraction in economic growth without a huge crisis in the financial sector.

But I think what you're getting at is whether or not that's true and whether the examples of recession slash financial crises that we've seen over the nearest past decades suggests that maybe that can't happen anymore.

Joe Weisenthal (3:16)

Yeah, this really is the big question. We don't want to be too, I guess, scarred by recent events to say, oh, every recession now is going to be a crisis. But on the other hand, we don't want to dismiss the fact that the sort of old business cycles as we know them have given way to financial market cycles.

And that sort of is seeming to be the main driver. And in fact, there's not a novel concept. Jerome Powell at Jackson Hole two summers ago kind of said the same thing, that whereas the Fed and our traditional models think about trade-offs of inflation and jobs and the sort of very sort of standard view of the economy overheating and then slowing down, the real game in town is what happens with asset prices and how a decline in asset prices spills over into real economic activity.

Tracy Alloway (4:12)

Right, so if you think that the economy has become financialized, which a lot of people do seem to think nowadays, then it would stand to reason that when we get recessions, they're going to be financialized as well. I like this topic, Joe.

Joe Weisenthal (4:26)

I like this topic too, and we have the perfect guest for it today. Today we are going to be speaking with David Levy. He is the chairman of the Jerome Levy Forecasting Center, and he recently came out with a very interesting report called Bubble Or Nothing, and it talks about how the private sector's swelling balance sheets compel increasingly risky financial behavior, and it really addresses the role, the growing role that financial assets themselves play in the economy and in economic cycles. So maybe in this conversation, we'll get an answer to can we have old fashioned recessions, or are we doomed to have big crises or mini crises that are a result in swings in prices? So without further ado, I want to bring in David Levy.