13 Reasons Why We May Experience a Great Recession

Disclaimer - The below write up is based research and analysis of Author and it is for purely educational purpose, Not an investment advice, Author or the website is no way responsible for actions taken based on this article or any loss suffered by readers.




The BIG Money is moving smartly, what about your money? Every time when a person talks about recession he/ she gets rubbed off saying its just another conspiracy theory, Everyone like to hear all good but not bad. and the problem with truth is it doesn't know what is good and what is bad, it will get exposed when it has to. 

So, here are the 13 Reasons why we are heading towards a recession or even a depression.

1.Indian Rupee

The RBI efforts to tighten the availability of rupees in the market and halt a slide in the currency may squeeze profitability at the nation’s lenders as it raises their funding costs, according to the local unit of Moody’s Investors Service.
The rupee, Asia’s worst-performing currency this year, touched a record low on Thursday with rising oil prices threatening to stoke inflation and worsen government finances. State-run banks probably sold dollars on behalf of the Reserve Bank of India to arrest these declines, local traders said. Creating a shortage of the local currency risks worsening liquidity in India’s banking system, which is already running short of cash.
Liquidity in the financial system is currently at a deficit of around 215.7 billion rupees ($3.14 billion), according to the Bloomberg Economics India Banking Liquidity Index, having moved from a surplus of 5.5 trillion rupees in March 2017. Advance tax outflows in the second half of June sparked the cash crunch.

Going back to Global Markets, many currencies are hitting new lows. Needless to mention the Strong Dollar dominance, There are various reasons for why dollar is on strong uptrend, This article will not be focusing on that.

2.Flattening yield curve

The study, published in the San Francisco Fed’s latest Economic Letter, bolsters that view.

“In light of the evidence on its predictive power for recessions, the recent evolution of the yield curve suggests that recession risk might be rising,” wrote San Francisco Fed research advisers Michael Bauer and Thomas Mertens.

The research relies on an in-depth analysis of the gap between the yield on three-month and 10-year U.S. Treasury securities, a gap that like other measures of short-to-long-term rates has narrowed in recent months.

Several Fed officials have cited this flattening yield curve as a reason to stop raising interest rates, since historically each time it inverts, with short-term rates rising above long-term rates, a recession follows. 

Still, they noted, “the flattening yield curve provides no sign of an impending recession” because long-term rates, though falling relative to short-term rates, remain above them.

3.Global Debt


Global debt has hit another high, climbing to $247 trillion in the first quarter of 2018, according to a report . Of that figure, the non-financial sector accounted for $186 trillion.
The debt-to-gross domestic product (GDP) ratio has exceeded 318 percent, marking its first quarterly rise in two years, the report by the Institute of International Finance (IIF) said. This is amid record levels of corporate and household debt in many mature markets.
The unprecedented debt load is one of several investor concerns, in addition to worries about the Federal Reserve’s monetary policy tightening and the impacts of a trade war.
It's the debt in the corporate sector that market players should be worried about, said Joseph LaVorgna, chief Americas economist at Natixis.
“The corporate sector is highly leveraged and could be very vulnerable to higher interest rates,” he warned, explaining in a research note that a primary reason corporate debt-to-GDP is so high is thanks to interest rates being historically low due to quantitative easing and forward guidance.
“Firms have used artificially low rates to borrow in the capital markets and only buy back stock in the equity market,” LaVorgna said. “The inherent instability of debt over equity financing suggests that the next downturn could hit investment spending unusually hard.”
The Top 3 countries contributing to Global debt are China, America & Japan.

4.Trade Deficit of India

The country's trade deficit widened to its highest level in more than five years in June, driven largely by a surge in oil prices and a weaker rupee, according to official figures. Though merchandise exports rose 17.57 per cent year-on-year in June, the trade deficit widened to $16.6 billion from $14.62 billion in May.



Historically these trade deficits triggered economic crisis domestically & globally


5.Bubble in Markets:


Majority of Global Markets are overvalued with unsustainable optimism,Coming to India, Corporate earnings in India have failed to live up to expectations and do not justify the current market valuations.


6.NIFTY 50-50


NIFTY breaching all previous highs and numbers are too good to be true,Technically Nifty is Topping out the Bullish channel, correction seems inevitable, its not shocking even if NIFTY hits 9000+ levels , any trigger below 9000 level will take nifty to 7500+ levels.





7.INDEX PE 


The Current NIFTY PE is above 25+ and historically, Nifty or any other global index for that matter have not sustained above PE 25 Levels hinting a strong correction Bias 




8.Foreign Inflows -> Outflows

Foreign investors, who have pulled out nearly $240 million from Indian stocks since the beginning of the year, may continue selling after Fed’s interest rate increase in the US


FIIs are net sellers from last few months, Still the markets are on Rising trend ? Who is buying all the stuff which FFIs are selling ? a common question among many .

The simple answer for this , is Domestic institutional investors (DIIs) and especially Indian Mutual fund houses. These mutual fund house helping BIG money making sure that they have a decent exit with a good liquidity cushion.

If you have invested in mutual funds, stay aware that your fund manager may be buying all the crap sold by FIIs


9.Nifty above 11700+

I Strongly believe there is huge manipulation going on in Indices, Many stocks in NIFTY 50 are on declining path but still the INDEX is witnessing higher highs, Its just the illusion that markets are on up trend and are bullish but the fact is only High weighted stocks are going up and are near 52wk high. where in reality portfolio of many investors bleeding blood red and are in net loss.




10.Trade Wars

For the trade war to trigger a recession, then, it would need to escalate to a much larger scale than the limited tariffs on steel, aluminum, solar cells, washing machines and $34 billion in Chinese products currently covered.


Even if it were to expand to encompass hundreds of billions of dollars worth of imports, as President Trump has threatened, in order to cause a recession it would need to prompt a broader crisis of confidence.



Perhaps the economic damage will be higher in other countries that are more reliant on trade than the United States, causing a slowdown in the global economy that reduces demand for American products over and beyond what tariffs might cause.


For the trade war to cause a recession, it would probably need to do major damage to business confidence, and lead companies to hold back from capital investments because of uncertainty over the future of trade policy.
So a trade war alone might not directly cause a recession in the United States. But a trade war that causes a global economic slowdown, a market sell-off and an evaporation of business confidence certainly could.

11.Slow down in Europe

Europe’s economy slowed further in the second quarter amid concerns over global trade disputes.
Growth in the 19 countries that use the euro currency eased to a quarterly rate of 0.3 per cent, weaker than markets had expected and down from 0.4 per cent in the first quarter. Fear that new tariffs will slow global commerce has been weighing on the outlook in the Europe, which is heavily dependent on trade.

12.US Markets 

US Federal reserve has started Quantitative Tightening, and the money which was flushed in emerging economies now getting back to US markets 

All the money which is fleeing from emerging economies like India , is getting pumped in US Markets, while Indian Mid and Small Caps bleeding , the scenario is completely different in US Markets, Money Flow into the US Equity hit 13 week high in June.

13.Oil Mayhem

“Quickly rising oil prices have been a contributing factor to every recession since World War II,” said Moody's chief economist Mark Zandi.

Oil gained more than 20 percent in the first half of 2018, and odds have been rising that higher crude oil prices will spark the next economic downturn. The last five U.S. recessions were also preceded by a rise in oil prices.
The seeds of the next downturn have almost certainly already been planted. The question is which of them will grow into a problem big enough to matter.

you might be thinking, "When will things turn more ugly  and ring the bell for recession?"

Next financial year gonna be a rocky ride, investors should have a close watch on things going around .

All the above reasons are interlinked with each other, its just a Butterfly effect, that a single occurrence, no matter how small it may be, can change the course of the universe forever.

Author's personal financial opinion - If i have to take a prudent decision i would have pulled all my investments to my bank's savings account. and would re-invest when markets get back to proper or decent valuations.

Sources:
The above research and analysis would not be possible without inputs from below valuable and prestigious sources.

  • Livemint
  • Marketwatch
  • Marketcalls
  • Zerodha Kite
  • Trading Economics
  • NIFTY PE Ratio
  • NY Times
  • Bloomberg
  • Reuters
  • Wall street journal
  • CNBC
The author is a CA Final Student from Hyderabad and can be reached at click here
Comment your opinions below, suggestions are always welcomed .!! 😃

Comments

Follow by Email