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Real Vision, the “Netflix of Finance”, started a series of episodes exploring the possibility of a recession on the horizon. Raoul Pal, Real Vision cofounder and mastermind behind the Global Macro Investor newsletter, opens the series with Is a U.S. Recession Coming?. What follows are my notes.


  • The Fed possibly over tightened with interest rate raises and balance sheet tightening going into September 2018.
  • Rates of change on 2 YoY peaked.
  • Credit card interest rates at highs, while corporate rates are at lows (negative rates for some international junk bonds).
  • Possible catalyst event with U.S. – China trade wars. Trump has targeted a lot of countries, now it’s China’s turn.
    • Knock-On Effect: Companies trying to figure out what happens to supply chains developed in China. Can they shift to another country? What if Trump targets that country next?
    • Instead of investing, companies sit on the sidelines, hire consultants to study their options. They’re wondering if they can outlast Trump.
    • Spending freezes ➡ lower growth ➡ Recession

manufacturing + business cycle

  • Raoul Pal (R.P.) uses ECRI instead of ISM to measure the business cycle.
  • ECRI weekly YoY or QoQ rates of change
  • ECRI vs Cass Freight Index, vs Capital Good Orders (non-Defense)
  • Suggesting ECRI downturn
  • Car sales⬇, Clothing ⬇, Retail Sales ⬇, Semiconductors ⬇.Weakness in house prices and new constructionThe aforementioned forward-looking indicators are gloomy, suggesting turnover in ECRI

global picture

  • World PMI (Purchasing Managers’ Index) ⬇ (looking weak)
  • Tariffs starting to impact trade volume ⬇
  • Big problem if USD ⬆ much higher
  • Germany headed toward recession + Italy + France (the top 3 European economies)
  • China focused domestically this time, trying to unwind their own bubble from all the cash they pumped out after 2008 financial crisis.
    • Negative imports (no longer driving other countries’ GDP growth)
    • Not in a position to provide global liquidity
  • No single country can save the world this time.

bond market

  • Yield Curve flattened, then inverted.
  • UST 2-10Y curve is a predictor of recession.
  • UST 1-2Y curve second most inverted in history ➡ typically followed by Fed cutting rates twice by 50 bps.


  • Collapse in inflation expectations: much lower than desired by Fed
  • Global deflation is happening despite low interest rates. Normally central banks lower rates to create inflation.
  • Lower inflation means global debt becomes more expensive.
  • Copper ⬇ , CRB (commodities index) possibly topping. Commodities about to bust?

specific risks

  • China: Probably won’t implode, looks relatively stable. Starved for USD, which could grow much stronger against the RMB (China’s currency)
  • Strong Dollar
    • Euro Stoxx chart looking dangerously like it’s heading to zero. (Index of European banks).
    • Shortage of USD ➡ liquidity crisis
  • European Central Bank (ECB) can cut rates, but inflation is still falling
  • Doom loop (see below)
  • ECB: Christine Lagarde (formerly of IMF) is taking over. Possible indication bank bailouts will be more important than monetary policy. This requires someone better in politics, like Lagarde, to cut deals.

tech problems

  • Ridiculous tech company valuations with leverage.
  • Over ownership of Tech
  • Facebook + Google anti-trust actions increasingly possible

doom loop

  • Corporate Debt = “Poster Child of Recession”
  • Corporate debt is a function of the business cycle.
  • New York Fed probability of recession at 30% (in this past, this has been a rock solid indicator of recession)
  • Size of corporate debt as a % of GDP at all-time-high (a huge explosion to $10 trillion)
    • Used for stock buybacks ➡ stock prices ⬆
    • Globally 50% of all corporate bonds are Junk + BBB
    • Biggest BBB + Junk bond market ever
    • GE, GM, AT&T, Ford, Dell = huge debts
  • Debt/Equity rations get really bad if stocks ⬇
  • Cash flows ⬇ when business cycle ⬇
  • If big companies are downgraded to Junk (from BBB) ➡ Junk market gets obliterated
  • A lot of debt will roll over during a recession
  • Nearly all the debt is in USD, and there isn’t enough USD to go around.
  • If USD ⬆ debt gets more expensive for everyone
  • Business cycle ⬇ ➡ cash flows ⬇ ➡ can’t service debt ➡ stock sell off to raise funds to pay debt ➡ stocks ⬇
  • Pension system is buying a lot of corporate bonds
    • Using tax receipts to buy bonds
    • Business cycle ⬇ ➡ tax receipts ⬇ ➡ corporate bonds ⬇
  • Baby boomers could become net seller to reduce risk. This could lower equities (stocks) for decades.
  • Doom Loop
    • BBB + Junk ➡ debt markets freeze ➡pensions sell (take losses) ➡ pensions switch to Treasuries at 1% or less ➡ bankrupts the pension system ➡ Boomers sell assets ➡ no buyers of equity or debt ➡ corporations are stuck + EU banking system fails ➡ Entire Financial System Freezes.
    • Phase 1: Started October 2018. Business cycle weakens ➡ credit spreads widen ➡ corporate cash flow ⬇ ➡ stocks ⬇
    • Phase 2: Coming Soon (after summer). Business cycle weakens more ➡ credit spreads widen more ➡ corporate cash flow + profits ⬇ ➡ tax receipts ⬇ ➡ pensions stop buying debt ➡ BBB & stocks ⬇ (hard)
    • Phase 3: Boomers sell stocks ➡ BBB downgrades to Junk ➡ ECB bails out banks ➡ credit spreads explode + credit seizes up ➡ stocks collapse ➡ pension funds default + big companies in bankruptcy
  • In the end, the Fed needs to take on debt (debt monetization) and underwrite the pension system.


  • Buy bonds (especially shorter-term)
  • Too dangerous to short stocks
  • Buy Gold
  • Buy Bitcoin