Forbes: Current U.S. Recession Odds Are The Same As During The Big Short Heyday

July 01, 2019

Article by Jesse Colombo in Forbes

The current U.S. economic expansion turned ten-years-old in June and is poised to become the longest U.S. economic expansion in history in July. Considering all of the threats that the economy has faced in the past decade, it's practically a miracle that the expansion has gone for so long without any hiccups. Unfortunately, there are an increasing number of signs that are warning that the expansion is soon coming to end and that a recession is not far away. Particularly alarming is the fact that the New York Fed's very accurate recession probability model is warning that the current odds of a recession in the next year are the same as they were in July 2007, which is when the subprime debt crisis kicked into high gear.

The New York Fed’s recession probability model is currently warning that there is a 30% probability of a recession in the next 12 months. The last time that recession odds were the same as they are now was in July 2007, which was just five months before the Great Recession officially started in December 2007.

Though a 30% probability of a recession in the next 12 months may not seem very high, the reality is that the New York Fed’s model has had a strong tendency to underestimate the probability of recessions in the past three decades. For example, this model only gave a 33% probability of a recession in July 1990, which is when the early 1990s recession started. It only gave a 21% probability of a recession in March 2001, which is when the early-2000s recession started. It also only gave a 39% probability of a recession in December 2007, which is when the Great Recession started.

I am very concerned that the coming recession will not be a typical, garden-variety recession because an incredible number of new bubbles have formed in the past decade thanks to global central banks' stimulative monetary policies.

One of the bubbles that I am warning about is the U.S. stock market bubble. This bubble has caused the S&P 500 stock index to soar 300% in the past decade.

To summarize, U.S. recession risk is rising at an alarming rate and there are an incredible number of dangerous new bubbles that are poised to burst in the coming downturn. This is the time for vigilance, not complacency. Central banks have lulled everyone to sleep in the past decade with easy money, but that easy money has created an artificial economy and tremendous distortions that are going to rear their ugly heads very soon.

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