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While browsing reddit a few days ago I forgot that I wasn't on TheMotte and tried to make a hypothesis post. This led to much screaming and crying and rending of clothes. So I decided to repost it here to see what people think. Am I crazy or am I right?
at leastEdited to "about" 20% within the next 6 months. I have about a 90% certainty in this.Reasoning: The current housing market as it stands is a mirage, not an indicator of growth. The market should have crashed in 2020, but it didn't because COVID. All of a sudden millions of people had the flexibility to move away from their place of employment because of work from home. Fully 60% of the home-buying surge was fueled by this trend according to the Fed, whose numbers I have no reason to mistrust. This sudden surge in home-buying has largely abated. According to RedFin, mortgage rates are their highest since 2002, searches for "homes for sale" are down 35% YoY, the Homebuyer Demand Index is down 25% YoY, and mortgage purchase applications are down 39% YoY. The market is cooling off. I believe the coming crash will be around 20% because historically that's a safe bet. The late-90s crash saw a drop in home prices of 14%, the 08 crash saw a drop of 27%, I think this crash will be somewhere in-between, hence 20%.
We are either in a recession right now, in which case I'm right, or we're about to be, in which case I'm right. Popular opinion defines a recession as two consecutive quarters of negative GDP growth. If that is the case the recession has already started. The National Bureau of Economic Research defines a recession as a "significant decline in economic activity that is spread across the economy and lasts more than a few months". So let's look at a few indicators. Ignoring inflation for the moment, retail and food services sales, total, peaked in May and have been on a slow but definite decline since. The Conference Board Leading Economic Index is down 2.7% since February. The S&P 500 is down 22% YTD. Oh, and almost every single CEO in the country believes there's gonna be a recession.
I predict that this recession will not be "mild", but nor will it be as bad as 2008. Somewhere between the Dotcom bust and 08 is my prediction, which I have about a 70% confidence in.
I predict unemployment will rise by more than 1%, but less than 5%. Somewhere in-between, with about 50% confidence.
These two predictions are functioning from the same basic premise. I'm pulling all my historical numbers from here. The 2008 Recession saw Real GDP fall 8.5%, unemployment reach 10% (a rise of about 6%), and the S&P500 drop 57%. The DotCom crash saw Real GDP fall by 1.6%, unemployment reach 5.9% (a rise of about 2%), and the S&P500 drop 62% (S&P drop pulled from here). I believe that the coming recession (if it happens - see above) will not be as bad as 08 because many of the co-factors that made 2008 so bad do not exist here, but that it'll probably be worse than the Dotcom crash because the Dotcom crash was largely caused by over-speculation on internet companies (hence "dotcom" crash) and low interest rates. We don't have low-interest rates anymore, but I think co-factors here (namely high inflation) will mean this one is going to be worse. My unemployment prediction is similarly predicated on this recession being somewhere between Dotcom and 08 in severity. If we're somewhere between those two numbers (2% and 6%) then a guestimate of between 1 and 5% is reasonable.
corporate, IPEDIT: specifically M&A (bankruptcy could be considered part of the "corporate" umbrella term, and I put IP here by mistake), and tech practice groups will have reduced or frozen hiring.Law firms have taken steps since 2008 to try and avoid mass layoffs. With that in mind, the legal practice has only just recovered from 2008 in terms of raw employment numbers. Recently firms have shifted their recruiting approach. To quote from the Reuters article:
Some practice groups are never busier than during a recession. Bankruptcies surged by just over 30% during the 2008 crash, and firms are preparing for this business to pick up. Similarly litigation is a counter cyclical practice that picks up during periods of a bad economy. It makes sense when you think about it. When the economy is good, people don't want to sue. When times are bad, they do. On the other hand, M&A tends to cool off in a recession.
I was accused of "LARPing as an economist" and "pulling these numbers out of my ass", so I thought I'd post them here for the Motte to give me a more rigorous examination.
As an attorney whose practice includes bankruptcy (though not so much lately), while recessions can certainly cause bankruptcies, the bankruptcies themselves normally don't happen until the recession is over and recovery begins. The one caveat is that this is true of consumer bankruptcies; I can't speak for business bankruptcies since I don't handle them. But basically, a person doesn't immediately go bankrupt upon a recession happening. First, there's normally a lag between the recession hitting and job loss. Sales slowly decline, work dries up, people are gradually let go. Then they get unemployment for six months, which they may or may not be able to make ends meet with. Some people are already overextended and the job loss is a disaster. But either way it takes a while before the credit card charges start to add up. Then it gets to the point where even making minimum payments becomes a challenge. Then the recession ends and they get a job making comparable money to before but there's so much extra debt and various arrearages that it doesn't solve the problem. I would add that if we're still in the throes of recession and an unemployed client approaches me about bankruptcy, I'd probably advise against it for the simple reason that it won't do anything. Bankruptcy is only worth it if the debtor will be on sound financial footing afterwards. If debt is eliminated but the person is immediately forced into taking on more debt due to lack of income, they're quickly back in the same position but without bankruptcy as an option. On average, I'd say it usually takes about 9 months to a year after a recession hits before consumer bankruptcies start to pick up, and they don't really peak until 2 or 3 years afterward, for the simple reason that bankruptcy is the kind of thing people put of as long as possible, even if it isn't the best strategy.
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