This One Is Going To Last

 US economic contractions don't last long. Since 1945 recessions have lasted 10 months on average, while expansions lasted almost six times longer, 57 months.  The longest ever expansion lasted 129 months and ended with the COVID pandemic.  If we exclude the COVID recession (and we should, if we don't count exogenous factors), we are currently in an unprecedented economic expansion (again excluding the two most recent quarters of faux contraction) of 161 months.

Think about it.. over 13 years.  If reversion to mean holds any sway here, things are going to get seriously recessionary, and for a long time, too.  But, statistical means mean nothing without first examining the facts on the ground. These are today’s facts:

1. Inflation has soared to 40 year extremes, and it doesn't look likely to recede to manageable levels any time soon. Negative
2. Personal income is not rising nearly enough to cover inflation.  Tight purses mean less consumer spending until the situation is reversed. Negative 
3. The labor market is extremely strong, particularly in lower pay service industries (hotels, restaurants, bars, etc).  The Great Resignation from young GenZ-ers is mostly to blame, and it doesn't look like it will recede any time soon. Young Americans are quitting the rat race in millions - or, they are not entering it at all, preferring the gig economy, instead.  This creates counter-recessionary forces that partially offset 1 and 2 above. Positive
4. The Fed is raising rates and will step up QT starting this month.  While not nearly enough to quickly kill inflation, taken together those two will slow down the economy to some extent, particularly the important housing sector. Negative
5. The Biden administration is spending heavily on social and infrastructure programs. Positive.

Taken together, the above may result into a long, slow-burn recession that could last far longer than 10 months, precisely because its causes are fundamentally long term.  The Fed certainly isn't courageous enough to act drastically to produce a deeper but shorter V-shaped contraction. 

So, my basic model is for long, slow and persistent economic weakness that could last years, not months.  For equity markets, this is a real poison - one that no one is yet talking about.

You heard it here first, folks: This one is going to last!  (NOTE: as luck would have it, a major investment bank analyst just proposed this exact scenario).

Final thought: there is a whole generation of Americans out there that has never experienced a real recession, for who prosperity is a given and perpetually rising asset values a law of nature.  I think they are being set up for a hard lesson in reality.

One final final thought: could it be that lots of young Americans are “self-employed” in stock and crypto trading?  Anecdotal evidence points in that direction and could also explain the stubborn Great Resignation.  My sense is that lots of rather inexperienced speculators are still very much active and are trying to call bottoms. If so, the present bear market is going to get much uglier before it ends.