Posted on by Californiacontrarian

Recession?

From Forbes in March, 2019: “Fears of a U.S. recession are again stalking markets, with the closely-watched and clearly declining spread between the 10-year US Treasury bond yield and the 2-year yield—i.e., the “10 minus 2”—nearing inversion, a historically reliable harbinger of economic downturns.”

Some economist see the Trump economy slowing drastically before a possible recession in 2020 at the earliest because: Economic growth was significant in 2018, boosted by tax cuts, but those benefits should fade in 2019 and growth will get back to its longer-term pace of near 2 percent. A group of 10 economists, including the Fed, have an average forecast of 2.4 percent for 2019, according to a CNBC survey. Three big factors are behind the slower growth — fading impact of tax cuts, trade wars and tariffs, and the Federal Reserve’s rate-hiking policy. Recessions, in general may be triggered by various events, such as a financial crisis, some sort of economic shock, or the bursting of an economic bubble. Back in 2007-08 the economic crisis and the subsequent recession were caused by the mortgage bubble. Are there any potential bubbles out there that we should be aware of ?

What about college loans? Is this a potential bubble? In August, 2018, the New York Times reported that 43% were not making payments on their student loans. The Urban Institute recently pointed out that 250,000 student loan borrowers see their loans go into default for the first time every quarter! Wow! While this involves millions of student loans, in the overall scope of things, this potential bubble is not nearly on the same level. In 2007 the mortgage debt at its peak was about 66% of GDP whereas the present student debt is only about 7% of GDP.

What about credit card debt? Is this a potential bubble? According to Experian’s latest State of Credit report, the average U.S. consumer holds about two bank-issued credit cards and carries a total balance of $5,551. That’s a lot of money, especially if you’re paying interest of 15% to 20%. However, this doesn’t tell the whole story, as there is a big range of indebtedness, and the average includes consumers who don’t owe anything at all — and there are a lot of them. According to a separate study from ValuePenguin (which found a similar average credit card debt of $5,700 per household), only 38.1% of all American households carry any credit card debt at all. This implies that the average household that carries a balance owes a whopping $16,048! Even though these schmos that owe $16K are in trouble, the total amount of indebtedness is not nearly on the same scale as in 2007.

What about high risk mortgage loans? Is this a potential bubble? I would have thought that lenders would have learned a lesson after the debacle of 2007-08, but according to a recent Wall Street Journal article, the FHA (Federal Housing Administration) just reversed a decision that they had made in 2016. In 2016, the FHA loosened underwriting standards when it removed an earlier rule that had required manual underwriting for mortgages with credit scores below 620 and a ratio of debt to income above 43%. (For those that are unaware, the FHA tries to boost home ownership by insuring loans to those with sub-average credit.) Apparently the FHA is now expressing concern that certain lenders are making loans to borrowers who can’t repay. This sounds like déjà vu all over again! Could a similar crisis again occur?

Potential bubbles and a resultant recession are concerns to all of us. For me if this predicted future recession is going to come, I only hope that it doesn’t occur until 2021. I say this for two reasons:

First, I do not want a recession to interfere with President Trump getting re-elected in 2020. Second, when the recession hits, I want Donald Trump in charge as he would be the best person to guide the country through it.

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