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2022-06-23 07:00 by Karl Denninger
in Macro Factors , 1323 references Ignore this thread
Don't Fear The Recession
[Comments enabled]

"Oh nos, there's a recession coming!"

CHEERS, say I.

What, you say?  You must be nuts!  People lose their jobs in a recession and the economy stinks!

Oh, so what's going on right now doesn't stink?  Sky-high gas prices and a 50% inflation built into the PPI which has yet to work itself through the system -- and won't for at least another year even if all the crazy policies stopped now?  Of course it does.

The only reason to fear recessions and higher interest rates is if you, or your firm, is over-levered.  To put not so fine a point on it you cheated to obtain what you claim as "prosperity" and now you're staring down getting caught out while both unprepared and having done stupid things.

Key to this is that you did the stupid things.

What was the smart thing to do in such a time?

Live below your means and sock back capital during the good times.

Why?

Because then you have it, and its yours, when the bad times come -- which means you get to pick on the people who did stupid things and, by doing so, get far ahead and you didn't have to cheat in order to do so.

Twice in my time running MCSNet I feasted on other people's stupidity in regard to taking on leverage they could not service.  Neither time was I personally responsible for the stupidity of said others, but both times I made out like a bandit -- precisely because I had cash and, when the opportunity arose, could slap it on the table in exchange for what I wanted to grow the business at a ridiculous discount to what I would have otherwise paid.

One of those was Class "A" office space in downtown Chicago which I was able to lease for $8/ft, about one fifth of the going rate at that general time.  I had cash and thus was able to slap a big check on the desk in the management office and prove that I was able to fund the space and wanted it now.  I got it.

Why was that so critical?  In business you make your money when you buy things, not when you sell them.

This may sound counter-intuitive but it isn't.  Marketing (and its subset of advertising) are expenses. You not only have to out-market the other guy you must do so while every dollar you spend on same dilutes the results.  That's hard, and while marketing is necessary going at competitors from that angle is an uphill slog.  Necessary, yes, but still uphill.

On the other hand if you can acquire office space at a fifth of what the other guy had to pay now you spend less on said overhead every single month until the lease runs out, and during that time your operation costs less to run than his does.  That's a wild advantage that, assuming you're both equally good at what you do, drops immediately to your bottom line.

So do not fear recession, rather plan for it and patiently wait for the advantage, then take it.  There is nothing wrong with exploiting someone else's stupidity and it is in fact the way the patient and smart make money over time.  Not instantly to be sure, but certainly, and with no or little risk of blowing yourself up economically.

If you're one of those people screaming about an imminent recession you just marked yourself as either one of those who has been stepped on by various corporate interests over the last decade (in which case you have a valid complaint, but its not with an impending recession) or you're over-levered and starting at your own economic destruction, knowing its coming, and demanding that someone save you from yourself.

Sorry, not this time.

And, incidentally, my expectation is that this won't be over quickly either.  The closest analog is the 1970s in our recent economic past and the sucky economic picture went on for about four years.  Thus it is likely to this time as well, and in fact the PPI data, which I have reported on repeatedly, strong suggests that the Biden Administration component of this is just starting to show up at the consumer  level in the last few months and even if we were to stop all the craziness right now, which of course we won't, it would be 12-18 months before it started to improve.

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Rangeishot
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FL
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Five or six years would suit my personal timeline almost perfectly...
Prof_dilligaf
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I don't fear the recession so much as the inevitable and inevitably braindead response to it from our "leaders" at all levels. We haven't even come close to Peak Idiocy yet, and tossing a whole heapin' helpin' of "Something Must Be Done!" gasoline on an already raging fire of ****tardedness will send the stupid rocketing skyward.
Zek157
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I too welcome a recession and look forward to many discovering the consequences of over leverage and gravity. It will be painful, but theres no other way to wring out the excess.

Only question is will it be a recession, or Depression? Prospects for the latter chills me to the bone.
Disgusted
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I'm absolutely cheering it on. PAIN is what the dumb****s voted for, and they all deserve the ass ****ing they're getting and will get even worse in the future. All the ****ing idiots that I know that voted for the Pants ****ter are getting their noses rubbed in in every time they try to call me and snivel. You voted for it dummy, now suck it up. Maybe after you're living in a tent, you'll figure it out. You know that overcrowded blue city you live in, good luck not getting stabbed while you try to shop for food. I always give them a link to this sight also and say, here read this stuff. Maybe you'll learn something. Now shut the **** up and stop bothering me. I'm fully retired now with social security coming in, with ZERO debt. I know things are ****ed for me too, but not like all of the debt up to their eyeballs morons. I hope it does last 4 years or more. Maybe that will be enough time to clean house of all the modern monetary theory and green assclowns infesting .gov. If the incompetent ****heads don't get us nuked, I'm going to enjoy the show.
Twainfan2
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Stupid should hurt, a lot. It's time the stupid people felt some real pain. A nice deep recession/depression should give them some pain.
Rickylc
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Is Everywhere
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Most seem to be delusional, the bad news is good news sending stocks higher because it means powell will reverse thing. they can't really believe that, can they?

I mean if the market is heading higher why would the fed relent? it's all so ****ed up, but I remember the same thing happening last time, it worked until it didn't.

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We know they are lying, they know they are lying, they know we know they are lying, we know they know we know they are lying, but they are still lying. - Aleksandr Solzhenitsyn
Ckaminski
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Looking for Joe Sixpack, the ultimate bag holder
Dingleberry
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We have been LONG overdue for a recession. This place could use an economic enema. It may get folk's heads out of their asses.

What the gov and Fed giveth......they will now be forced to taketh away. Thank God for raging inflation (even despite a strong dollar).....the disease demands a cure. And there is really only one cure.

Now the millennial kids and karens will see what a real recession looks like, not the kind that gets papered over by the Fed and Uncle Sam.

Time to break out those work gloves! For many of you it will be the first time in your lives.
If you are blue collar and actually do real work for a living (i.e. produce a REAL good or service)......you are in a much better position than those sitting in an office pushing paper, or pushing SJW nonsense. Tesla is a prime example. Laying off white collar and keeping those on the production line. For now. Side note: Tesla should go BK, but I digress.

Back when we had real recessions (which are as healthy and necessary as the change of seasons)....white collar types were always the first to go. This time around will be even worse, as there is still a huge shortage of actual blue collar workers. And we have an huge oversupply of "educated" lazy wokesters.

Oh, and those open borders many of you wanted to show how "compassionate" you are......meet your new competitor. Julio and Juan actually show up and work. Better observe and take notes. And if you are a hood rat, they will also compete for a piece of your welfare pie, all while working under the table.

Like many of you older types here, I've seen this movie before. Quite a few times.

Bring the pain. The sooner the better.

Superdude
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Sorry, I am worried about a recession. The reason being is medical benefits. If I am let go by my job and have a medical problem I can be sunk pretty quickly. Not too worried about anything else. (IE I have reserves for food, money, housing, emergencies, etc...) Yes you can exercise, eat right, do all the right things. But all it takes is one ******* to ruin your day or just bad luck or even genes.
Health insurance is damn expensive and is the only thing holding me back from retiring early.
Joancrawford
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House paid off-check.

Retired 2 years ago-check.

Socked away 18 months of my "***** unemployment cash-check.

Purchased 10-12 months worth of non-perishable food-check.

Stocked up on paper towels and tp-check.

Let's see....I turn 59 1/2 on November 23rd, when I will begin to draw on my retirement (cash, not stocks)-check.

Small pension kicks in age 60-check.

Full health/dental kicks in age 60-courtesy of the state of N.C. -check.

20 year old car, purchased new, treat like a baby, runs like a top-check.

Life's lookin' pretty sweet.

Cheers to all you bitchez who tune in to Karl and followed his sage advice.

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Don't f*ck with me fellas! This ain't my first time at the rodeo.

America-it was a good run while it lasted. RIP!
Cmoledor
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As always, explained in a manner that even the dullest of minds can grasp.

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The whole world is one big ****ing scam
Why are you giving a vulgarity warning here? Our genial host is an advocate of both skull****ing and sodomy via rusty chainsaw. Credit to Rollformer
Whitehat
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The media will start to recognize a recession when articles like this one are "forced" onto the cancelled side of TF.


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smiley "How are you feeling? Kind of under the weather? Like you've got the flu?"
Aquapura
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I used to work in design for restaurant/hospitality. Food and beverage is a crazy business and I'm sure you all have heard how many restaurants fail after the first year. Well, that's not a bad thing. A brand new build for a full service restaurant is millions. The kitchen equipment alone is 7 figures for a decent sized establishment. When someone fails they can sell off things that aren't bolted down but a lot of that stuff stays...and the next guy to lease it effectively gets it for pennies on the dollar. Sure, it might not be exactly to your favorite spec and you'll probably want to rebrand the public spaces but overall the 2nd owner should have only a fraction of the capital costs. That means he can likely charge less for the product but also means he can probably survive as a business where the original owner could not. Seen it happen over and over and over again.

Remember one restaurant Owner dumping close to $10M (2017 money) into a ridiculous establishment. He said it was going to be his legacy and somehow got investors to come along. Upon seeing the business plan I knew it was DOA before the design was even done - and advised him to NOT go with fine dining, etc. I'm just an Architect and my advice was not heeded even though I had more experience with restaurant development than he did, oh well....I was back in late 2018 to redesign that space with a new Client. Worked out just fine for me. Stupid people, stupid prizes.

A recession to rebalance the macro economy is not really any different. I'm not afraid.
Tickerguy
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@Superdude -
Quote:
Sorry, I am worried about a recession. The reason being is medical benefits. If I am let go by my job and have a medical problem I can be sunk pretty quickly. Not too worried about anything else. (IE I have reserves for food, money, housing, emergencies, etc...) Yes you can exercise, eat right, do all the right things. But all it takes is one ******* to ruin your day or just bad luck or even genes.
Health insurance is damn expensive and is the only thing holding me back from retiring early.

Meh.

No, what's holding you back is that you think you should be able to live in a high-cost area and yet maintain all that stuff without consequence. Bull****.

I've done it since Obamacare came into place. If I get rat****ed I have catastrophic coverage; its worthless for anything else but I don't use it, and don't pay anything for it. If I get run over by a bus, its there. Change your expectations and, if necessary, move to where reasonable expectations make the numbers work.

@Aquapura - Yep. The space I got for MCSNet was not precisely what I wanted, but it was close enough to be workable, and workable it was. The only real "add" I needed to do was a chiller for what was a stockroom turned into a computer room, and some retermination of the cube data wiring (whoever did it originally was a monkey.) The chiller was a sunk cost no matter where I went -- the cube system in the main space was already there and had I needed to outfit from new those are NOT cheap, so not only did I get the space the buildout was 90+% complete and ready to go; had I needed to build that out it would have been a six-figure check that I did NOT need to write.

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Civil Society requires 99%+ consent.
Stop consenting and it is forced to stop. Always.
No violence required.

Frat
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If Mrs. Frat and I can continue to keep gainful employment, I absolutely welcome the recession. For her part, folks are going to keep dying (in ever-increasing numbers, and you know why) and using the ER, so I doubt her job is in jeopardy. Mine may or may not be recession-proof; it depends on how good of a job I do. Then again, if we HAD to, sorry dear - your nice 2021 car can go and we can cut things down to just the mortgage, which she can easily pay on her salary.

I think we're gonna be just fine. How is your debt-to-income ratio looking these days, folks? If it ain't so good, you might want to work on that.

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We're ****ed. There will be no happy ending here; there is no going back to 'normal.'. There are only bad outcomes and worse outcomes. And we don't get to choose those, either.
Toddmeister
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Invisiblesun
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To paraphrase Mencken, Millennials and Gen-Z voted for stupid and now they are getting stupid good and hard. And as the mass layoffs begin, a great truth will be revealed. The CEO does not care about your feelings and in fact inasmuch your feelings interfere with productivity, you are more likely to be out of a job.


Winesorbet
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Futures up
Bonds up

Looks like investors are taking your advice. smiley
Joancrawford
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Superdude-Sorry, I am worried about a recession. The reason being is medical benefits.

Everyone who spends any time reading Karl's articles knows that healthcare in this ****ry (sic) is a huge scam and has been for many years. "Obamacare-ya hafta pass it to find out whas in it"-N.P.

Obamacare, too, needs to hit a f*cking brick wall at 180 mph. How do (did) I get around it? Quite simply, living far, far below my means. My income is tiny, but so also are my expenditures. Sure, the unexpected horsesh*t comes along occasionally,but that's what savings are for. So I qualify for "subsidies" which make my "contribution" each month quite small.

And believe it or not, on a rather small income, I live quite well. I reside in a very well heeled suburb of a small(ish) southern city, and pass the monthly condo fee I have to pay on to my husband as "rent". It's a great arrangement for us both, as he's 65 and also retired.

So long story short, it's all doable, you just have to look at the **** sandwich you're being served and say, "Um, no thanks...I've had lunch."

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Don't f*ck with me fellas! This ain't my first time at the rodeo.

America-it was a good run while it lasted. RIP!
Mvj
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I am wondering how all this pans out in Emerging markets especially India. Of course there may be large scale layoff in big IT companies that may drag real estate mainly. Real estate is crazy here. Seeing few layoffs in Startups already. VCs are tightening and sitting on companies to cut down employee cost and concentrate on Cashflow and profit.
Abelardlindsey
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I agree with this 100%. The recession is needed to correct out all of the levered BS that has been built up over the years. The only issue is if they try to get us out of these one with another credit bubble just like they did with the previous two recessions (Tech crash and General Financial crash).

Recessions are also good times to start new businesses as well. People are looking for new products and services that work and save them money.

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It's all in the mitochondria.
Spaceace
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As far as medical coverage goes if I lose my job I can do a bronze catastrophic plan. As long as I make over 30k to avoid Medicaid, I can roll with that for a few years. Looking at the medical system, I am betting that costs go down and hopefully we can go back to arms length "Write a check" medical transactions. Other than the medical coverage, I have the other bases covered in that I live on a farm and have low or no costs along with no debt.
Stoic
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LC SC
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TG
Quote:
In business you make your money when you buy things, not when you sell them.


As someone who spent the last 25 or so years of my former working life in procurement in various positions for large manufacturing businesses it always amazed me how few people truly understand this concept. From the line worker to the C-level tool the inability to grasp this simple concept was a daily grind on me. I don't miss it at all. Another reason for the retiring 3 years ahead of plan.

Stoic

Jc3
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South Texas 93 miles from Houston
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The insurance data we've discussed in this forum is real.
Got a PRE-billing notice from life insurance/sponsor(Mercer/IEEE). We usually see discounted rates on a regular basis(since 1989 IIRC). The letter indicated that "due to the large number of claims experienced, your rate goes up 10% on the next premium". I expect additional increases and/or insurance co. bankruptcies once the "excess deaths" and "suddenly, unexpected, and tragic" get factored in.
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