On the Trey Ware Show this morning, Karl & Trey discussed the possibility of a recession and what signs are showing up of a possible one.
Trey Ware: Karl Eggerss, eggersscapital.com, is joining me now in the Steven’s Roofing Newsmaker Hotline. What about that, Karl? Let’s just say, and keep in mind that mos tgovernment services have been funded through 2019. But what happens if the remainder that they’re talking about … What if it is shuttered? What does themarket do? How does the market respond? What goes on there?
Karl Eggerss: Well, I think you’re right. I don’t think, A, it will be, and B, we’ve seen it so many times lately that it’s a nothing burger. You know? We’ve seen this time and time again. Ithink Wall Street and investors are focused on bigger and better things, whichis the Federal Reserve later this week, and whether they will raise interest rates or not. That’s the big thing. I think they will, but it’s all in whatthey say about going forward. Do they say, “Yes, we’re going to raise it,but we acknowledge that the economy has decelerated a bit, and therefore, we’regoing to hold off until we see more evidence that it can withstand some higher rates.”
Karl Eggerss: If they do that, then the market may go higher.
Trey Ware: Yeah. There were acouple of stories over the weekend that Americans now expect a recession, and now they’re starting to expect the recession next year. Do you see anything on the horizon that would indicate to you as an economist what the market, or what the economy might do, and where we might want to be thinking if in fact any kind of recession does hit?
Karl Eggerss: Well, I don’t see one nextyear, at least early in the year. I think most people see 2020. But I think thebig fear, though, is that it’s not just a garden variety recession. That’s what everybody is trying to price in, meaning they’re selling stocks now in anticipation of the worst. Recessions are a normal part of economic cycles, even if we do have on. But I do think what’s happening is, again, investors price in stuff way in advance. You know? In other words, they’re not looking at data from today or yesterday. They’re trying to project out the next six tonine months. Looking at that, they’re going, “We think things are going to be slower in the next six to nine months.” That’s why you’re seeing stockpricesâ€¦
Trey Ware: What are they basing that on? How do they figure if they look out that far, is this all guesswork,or do they actually have something in a computer somewhere that tells them,”Yeah, six to eight months, it’s going to slow down.” How do they know that?
Karl Eggerss: Well, because remember, every day there’s probably five to ten different economic indicators that comeout. Some are what they call lagging, meaning they’re looking in the rear viewmirror. Some are coincident, things that are happening right now, like retail sales, or things that are happening today. Then some of them are actuallycalled leading indicators, and those are things that literally project outwhat’s going to happen in the next few months. But they also look at things like housing and autos.
Trey Ware: Sure, or orders, manufacturing orders, and things of that nature. Right. Yeah.
Karl Eggerss: Yeah, but the other thingthey look at is they look at where interest rates are. What happens is theylook at how much people are … the rate that they’re paying for loans in the next three to six months versus loans in the next five to ten years. Sometimes that can tell you, again, what people are expecting. It doesn’t mean they’re right, but investors have a funny way of predicting things that are going to happen in the future.
Trey Ware: Well, and I remember 2008, and a lot of guys that sold their stocks and went to cash as they got ready. It seemed very dramatic at that time that the people who were forecasting … I mean, it looked like orders had just basically shut down. Of course, the housing market went into a freeze. People were over leveraged and had too much debt. Obviously, that’s when the crash happened. Do you see anything like that that’s out there right now? Or are the underpinnings to the economy still very, very strong?
Karl Eggerss: They are very strong. Idon’t see that. Again, that’s our recency bias. That’s our reference point, is 2008. That’s the only thing we have to look back at. But if you … I don’twant to say if you take it out of the equation. It’s just, is very unusual tohave a 2008, and it’s not normal to keep repeating that. But what is normal are recessions from time to time and economic slowdowns. Those are normal. As the economy ebbs and flows a little bit, stocks react to that. That’s the bottom line. The market … If investors start to price in a financial crisis like’08, that’s when you could take advantage of it, and in fact it’s happeningright now. There are plenty of investments that are just dirt cheap because of the fact that they’ve been beaten down so much.
Trey Ware: Well, and I also believe … This is another topic for another time … that we can talk ourselves into a recession, and we can talk ourselves into a lower market.
Karl Eggerss: Absolutely.
Trey Ware: I believe that a lot ofpeople in the media are beginning to do that ahead of 2020, that we’ve already started to hear a lot of this about the markets going down, and oh my gosh. Ofcourse, there’s a lot of emotion in the stock market. It reacts to that, and so does the general economy. If all people are hearing from the media is,”You better tighten up. You better get ready, because here it comes.”Well, sure enough, your prophecy there is going to come true, because people are going to start sitting on their cash. Spending is going to go way down,consumer confidence is going to go way down, and now we’ve got a big problem on our hands. Karl, we’ll talk about that another time. Thank you very much for your time, again, this morning, as always. Karl Eggerss, eggersscapital.com.