I am channeling Ed Leamer, whom I chided in 2007 for denying the possibility of a recession even though his models were flashing red.

Leamer said

The models say “recession;” the mind says “no way.”
I’m going with the mind. This time the problems in housing will stay in housing. If you are a builder or a broker, it will feel like a deep depression. The rest of us will hardly notice.

Obviously, that was spectacularly wrong.

Well, now here we are a few years later and as ironic as it is I can’t help thinking something similar.

I look at a lot of fundamentals but at the end of the day the money markets drive my forecasts. The money markets are telling me in every possible way that recession is coming. Liquidity demand is rising, inflation expectations are falling, nominal interests rates are collapsing.

However, like Leamer in 2007, I am hard pressed to see what is left to recess? At the time Leamer doubted a recession because he didn’t think there were enough manufacturing jobs left to lose.

This time, I look at construction and local government and think the same thing. The cyclical employment sectors are already so far down. Are we going to start losing jobs in Health Care and Education at this point?

Its possible but its just so hard to wrap your mind around. It’s a macro-economic story that’s never been told.