Dealing With the Timing and Type of the Next Recession -- And -- Is There a Game Changer On the Horizon?

Hedge fund legend Ray Dalio has been making the rounds this week promoting his latest book Big Debt Crises (already can't put it down!).

Having built and managed the world's largest hedge fund, and being a deep-thinking, exceedingly well studied and insightful individual, Dalio is one of the world's few market players who I go out of my way to read and listen to. 

In an interview yesterday he echoed a concern we've expressed herein several times over the past few months; that the Fed is presently in no position to do battle with recession. 

He said:

".... two types of monetary policy used; lowering interest rates, we can't lower interest rates, and the second is quantitative easing -- and it's maximized its effect."

He went on to say:

"I think that the next downturn is going to be a different type of downturn."

"I think it'll be more difficult to handle. It won't be the same in terms of the big bang debt crisis, it'll be a slower growing, more constricting sort of debt crisis."

While, again, I sympathize entirely with the notion that the Fed presently lacks the positioning to effectively do battle with recession, and I therefore agree that the next downturn (should it occur in the relatively near future) will be difficult to handle; I think it's too soon to suggest that it'll be "slower growing". I think that all depends on how long the present expansion lasts (Dalio predicts 2 more years) and its pace between now and then.

Clients know that, in terms of correlation, 2017 looked a lot like 1995. I can virtually assure you that in 1995 there was a plethora of prognosticators calling the near end of the then expansion. That's not the chorus we joined then, nor is it the tune we're singing at this juncture. Not that we, then or now, were, or are projecting more (or less) than two years to recession, we were/are simply assessing current conditions and investing accordingly. And, by the way, current conditions (in the aggregate) are a long way (I'm talking signals, not time frame) from signaling recession.

In '95 there was the internet proliferation, and my how it changed the world as we knew it at the time. The efficiencies gained were sufficient to propel corporate profits, government tax revenues and personal prosperity for another 5 years or so before an economic contraction finally took hold. So is there such a phenomenon on the horizon as we sit here in 2018? Of course we don't know, but I can tell you that 5G has our attention.

"5G mmWave's massive bandwidth, super high speeds and ultra-low latency will revolutionize the ways people live, work, learn and play. This most recent test demonstrated what 5G NR technology is capable of and the throughput tomorrow's next-generation networks could deliver."

The  next couple of years will be interesting!