In an interview with Bloomberg on Monday, Robert Shiller said, “There was a trade war in the great depression in the 1930s and it was widely thought then that it was the cause of depression.” He said that it was an economic narrative because “people became conservative in their economic behavior.” Shiller thinks that the economic narrative could repeat. Last month, President Trump imposed tariffs on Chinese goods and escalated the trade war. The yield curve got inverted and recession fears rose significantly.
Shiller is a Nobel laureate and sterling professor of economics at Yale University. He predicted the dotcom bubble and the sub-prime crisis. In June 1930, the Tariff Act of 1930 came into force. In the next three years, the unemployment rate rose 25%.
Robert Shiller said that apart from the consumer confidence barometer, we have to understand the narrative behind the data. He thinks that the current narrative could increase consumer spending. The US is a capitalist country. However, he expressed concerns that the fears of a worldwide recession could change the current narrative.
In 2019, the Nasdaq-100 Index (QQQ) has risen by 23.7 percentage points. QQQ outperformed the S&P 500 Index (SPY) by 4.9 percentage points. The Nasdaq-100 (QQQ) is a tech-heavy index—a reason behind the outperformance. The Invesco QQQ Trust ETF (QQQ) tracks the Nasdaq-100. Microsoft (MSFT) and Apple (AAPL) account for more than 20% of QQQ. In 2019, Microsoft and Apple have risen 35.4% and 35.8%. Consumer spending impacts both companies’ revenues.
Why recession chances are lower next year
On Monday, in an interview with Financial News, Shiller said that there’s less than a 50% chance of a recession in 2020. However, he pointed out that the recession can’t be avoided. Legendary investor Ray Dalio suggested a 25% chance of a recession in 2019 and 2020. Mark Mobius advised investors to invest at least 10% of their portfolio in physical gold and the rest in high-yield dividend stocks. He expects a global slowdown ahead.
The US has positive interest rates. The Fed has room to steer the economy at least for 2020. The Trump administration expects significant growth in wages and the workforce after the trade deal. The presidential election is also in 2020. Any slowdown in the economy could reduce President Trump’s reelection chances.
Shiller discussed the Fed
On August 20, in an interview with CNBC, Robert Shiller said that it was too early for the Fed to reduce interest rates. He thinks that instead of a reduction by 25 basis points, the Fed should have increased interest rates at least once. His argument was based on unemployment data that was close to a 49-year low. Shiller also said that by reducing interest rates for the first time since December 2008, the Fed created fear among investors.