Predicting the next recession

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Right now, as an investor, the key question is: “How much longer does the present growth cycle have to run?”

If we’re approaching the end of this cycle, then investors ought to batten down the hatches, de-lever, horde cash, and get ready to bargain-hunt.

If, on the other hand, we’re still looking at 2, 3, 4 or more years of growth, the above strategy is sub-optimal… you’d be leaving a lot of money on the table.

So, I’m constantly trying to determine which of those two scenarios we’re in.

And, today, Bloomberg has a fairly helpful article, arguing that post-war recessions have followed this pattern:

  1. Economy reaches full employment (we’re there now)
  2. Oil prices spike
  3. Recession

That’s a useful insight, but it begs the question of how / when oil prices will spike.

Regular readers know I’m generally quite skeptical of “this time it’s different” claims.

But this time may actually be different, because fracking and horizontal drilling technology have dramatically increased domestic oil production capacity. Right now, a lot of this capacity is idle, because oil prices have been so low. But, just as classical microeconomics would predict, every time oil prices have begun to price in the past year or so, oil companies have re-started this production, bringing prices right back down.

In effect, we have a buffer against price rises, in the form of virtually unlimited domestic production. And this does not even account for the inevitable spread of new drilling technologies to parts of the world where it has not been employed to date… which will have the effect of further increasing supply.

So, if you believe (and I’m not saying I do, necessarily) that recessions are caused by oil price shocks, then you might be waiting a while for the next recession.

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