The odds of a U.S. recession are rising…

A recession is when an economy shrinks two quarters in a row. It means businesses are slowing down and selling fewer goods and services.

The stock market typically goes down before, and during, a recession. And a severe recession can cause the stock market to crash, like it did in 2007-08.

Every month, Bloomberg asks a group of economists to estimate the likelihood that the U.S. economy will go into a recession within a year. For the past thirteen months, they’ve put the odds at 10%. This month, they raised the odds to 15%.

This isn’t a huge deal by itself. But it’s one of several recent signs that the U.S. economy is slowing. Earlier this month, the Bureau of Labor Statistics reported that there was zero wage growth in September, and that the U.S. economy created 59,000 fewer jobs than expected.

•  David Rubenstein says a U.S. recession is “inevitable”…

Rubenstein is the founder of The Carlyle Group, a huge private-equity firm that manages $193 billion. Last Friday on Bloomberg TV, Rubenstein said the U.S. economy is due for a recession.

We have not really had a recession in six years. We came out of the last recession in June of 2009. We tend to have recessions every seven years, more or less, in the United States, since World War II. So, at some point in the next year or two or three, you can expect a recession.

•  The Federal Reserve cut its key interest rate to effectively zero to fight the last recession…

Cutting rates is the Fed’s go-to weapon to fight economic problems. Cutting rates makes borrowing money cheaper, which can stimulate the economy in the short-term.

But as regular Casey readers know, the Fed has held rates at zero since the financial crisis. So the Fed won’t be able to fight the next recession by cutting rates.

Like us, Rubenstein thinks this puts the Fed in a tough spot.

I'd say that the Federal Reserve doesn't have the tools available to it that it normally has. Normally if you worry about a recession you lower interest rates. Now you cannot lower them any longer.

•  We think the Fed will launch another round of quantitative easing (QE)…

QE is when a central bank creates cash and injects it into the financial system. It’s basically another term for money printing.

The Fed launched its first quantitative easing program, or QE1, in November 2008. It followed up with two more rounds of QE, known as QE2 and QE3. By the time the Fed finally stopped its last round of QE in October 2014, it had pumped $3.5 trillion into the U.S. financial system.

QE flooded the financial system with cheap money. This sent stock prices soaring. The S&P 500, for example, is up 125% since QE1 started.

•  John Burbank also expects more QE…

Burbank runs Passport Capital, a hedge fund that manages $4.1 billion. Burbank is a brilliant investor. Through August, his Passport Global fund gained 15%, while the S&P 500 was down 3%.

Last month, Burbank said the Fed will end up pumping more money into the financial system when the world economy starts to slow.

•  But QE doesn’t help the “real” economy…

It’s only good for blowing asset bubbles…

As we just mentioned, the S&P 500 is up 125% since the Fed started QE1 in 2008. That’s helped the 55% of Americans who invest in the stock market. But a lot of people are actually worse off than they were seven years ago. The real (inflation-adjusted) median annual income in the United States has dropped from $57,795 in 2008 to $55,218 today.

America is also deeper in debt than it was before the last financial crisis. The Bank of International Settlements estimates that U.S. household, corporate, and government debt jumped from 218% in 2007 to 239% last year.

•  On top of that, government hiring is spiking…

The government has hired 115,000 new workers in just the past four months. That’s the fastest rate of government hiring in the past six years.

Meanwhile, private sector hiring has stalled. The private sector only added 100,000 jobs in August and 118,000 jobs in September. That’s a huge drop-off from the beginning of the year. The private sector averaged 205,000 new jobs every month between January and July.

Private workers add value to the economy. But government workers don’t, as Doug Casey explains:

There are now 22 million government employees in the U.S. Think about that for just a moment. Roughly one in every six jobs in the U.S. is a government job. But what the government workers produce, build or sell is nothing at all. Nada by the carload. They shuffle paper and spend our tax dollars. They are a sinker tied around the neck of the American economy.

Many government jobs actually make it harder to do real business. Doug says the economy would be much better off if these jobs simply vanished.

…[M]ost government employees just push paper, and stop things from happening. It would be cheaper and better to pay them not to work, so they won’t do actual damage—or give them unemployment compensation.

•  In today’s mailbag, our take on gun control created some controversy…

Last Friday, we told you that gunmaker stocks are soaring in anticipation of stricter gun control laws. Many readers wrote in to share their views on gun control. Here’s a sampling of your comments…

Claire B. says:

It does not make sense to me that people can buy and own rifles and other powerful guns. If they need to defend themselves against an intruder, a revolver should be enough. There is no need own a gun used by the Army.

Also, I don’t think anyone should be able to buy a gun without going through a tough screening process, including a letter from a psychiatrist. Many of the guys who shot little kids at schools were deranged. There must be a way to profile possible murderers and before they decide to go on a shooting spree.

Meyer S. says:

The government’s plan to take away guns from law abiding citizens would make it easier for criminals to commit crimes, knowing the average person is not armed. No one would be safe in their homes or on the streets. The President, members of Congress, should first set the example and walk around unprotected. If enough of them are killed, maybe they will come to their senses.

Chuck says:

Evidence shows that states with the tightest gun restrictions have higher gun crime rates than states with less restrictive policies. The definitive book on the subject is “More Guns, Less Crime”, by John C. Lott, PhD.

It's science- and math-based evidence in favor of the 2nd Amendment. It’s like kryptonite for the emotional, liberal lefty politicians who love the media attention that gun violence attracts.

What are your thoughts on gun control? Tell us at [email protected].

Chart of the Day

Government hiring is speeding up. Private hiring is slowing down.

Today’s chart makes this easy to see. It shows the three-month change in government hiring vs. private sector hiring.

As you can see, the government is adding jobs faster than it has all year…while private sector hiring has slowed to a crawl.


Justin Spittler
Delray Beach, Florida
October 12, 2015

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