There has been plenty of discussion regarding a possible recession in the near future, especially after the bond yield curve inversion earlier this year, which is generally an accurate indicator that a recession will follow within 1-2 years. It has now been 7 months since the inversion and the stock market continues to be near its all-time highs, and there is little to no talk in the mainstream media regarding a possible recession, which perhaps makes it hard for most people to believe that a major economic recession is an imminent threat. 

The Recession Is Not Just A Theory, Concrete Evidence Shows It Is Now A Reality

Unfortunately, the predictions of a recession are beginning to become a reality, with numerous concrete signs that the economy is slowing down and entering a recession manifesting themselves. This article will discuss these signs, and then discuss two possible scenarios for the crypto market in the event of a recession. 

A survey by the National Association for Business Economics has found that hiring has fallen to a 7 year low, sales are growing more slowly, fewer employees are receiving pay raises, companies are reducing their investments in equipment, and profits are declining. Simultaneously, consumer confidence has declined for the third month in a row, as people are becoming less optimistic about job prospects and business conditions. 

Even worse, defaults on subprime auto loans that are at least 60 days delinquent are at their highest levels since the 2008 Great Recession, with around 10 million Americans over 90 days delinquent. This basically means that a significant fraction of the population cannot afford their cars anymore, even though cars are often a necessity to get to work. 

Also, this is eerily similar to the 2008 Great Recession, which was largely precipitated by defaulting subprime mortgages. In this case it is subprime auto loans, but the basic idea is that banks and corporations actually hold large amounts of various subprime loans, and if they begin to start defaulting en masse it can spark a chain reaction where banks and corporations begin to fail, causing loss of investments and jobs, leading to more loan defaults, and so on and so forth. 

Vacancies at malls have hit their highest levels since the Great Recession of 2008, with some chains closing hundreds of stores, as the cost of running a store drops below the cost of operating it. The mass closing of retail stores also creates a chain reaction similar to defaulting subprime loans, where stores closing causes job and investment loss, leading to more stores closing due to less consumer demand, and then more jobs and investment losses. 

In total 12,000 stores are projected to close in 2019, and this is by far the record for stores closing in the United States in a single year.

The Cass Freight Index for Shipments tracks the transport volume of consumer and industrial goods, which is a solid indicator of the strength of the economy, and it has now been falling for 10 months in a row. This is simultaneous with railroad volumes declining to their lowest level in three years and orders for class 8 heavy trucks declining by 71%. Basically, the volume of transported goods is a good way to measure the pulse of the economy, and that pulse is getting weaker.

Real estate is feeling the pain as well, with existing home sales declining despite the lowest mortgage rates in history, and the prices of new homes falling to the lowest level in three years. In other words, even though homes and mortgages are historically cheap, less and less people are able to afford a home. 

Most damning out of all of this evidence is a survey which found that 44% of consumers cannot afford their expenses, following a decade of increasing credit card, auto loan, and student debt burdens. These conditions may lead to a cascade of defaults and then eventually bankruptcies for the banks and corporations who hold these loans. 

All in all, the signs are clear that a recession is coming. If fact, it has also already started. The only indicator not suggesting a recession is the stock market which is near all-time highs. However, the stock market is not a reliable indicator of the economy’s health at this time due to the government injecting tens of billions of dollars every month to prop it up. Eventually the stock market will probably begin to adjust to the economic reality as investment demand weakens, but it seems it will be the last shoe to drop. 

Crypto Market Recession Scenario #1: Stocks Crashing, Bonds Yielding Nothing, And Fiat Inflation Leads To Bitcoin (BTC) Rally

How would the crypto market react if a true recession occurs? It seems there are two likely scenarios. The first scenario is that when stocks finally begin to crash, due to government liquidity injections becoming insufficient to compensate for falling investment demand, investors will decide to put their money in cryptocurrency as a safe haven. 

Since the stock market is orders of magnitudes larger than the crypto market, even a small fraction of investors moving their money from stocks to crypto would spark a major Bitcoin (BTC) rally. At that point Bitcoin (BTC) would be rising while stocks rapidly lose money, causing more investors to flock to Bitcoin (BTC) and other cryptocurrencies, since they will see that they can make money on crypto rather than lose big on the stock market. 

Simultaneously, bond yields are already approaching zero and becoming negative across the world, as investors flock to bonds as a safe haven for their cash. If the stock market crashes this situation would become even more drastic, with practically no bonds in the world yielding profits, and bond investors may choose to put their money in crypto. 

Another part of this scenario is possible fiat inflation, if government liquidity injections into the failing economy become so large that the dollar begins to weaken. If this were to happen a broader spectrum of people may move their funds from fiat into crypto in order to protect their wealth against inflation. 

Crypto Market Recession Scenario #2: Job And Investment Losses Cause People To Sell Their Crypto In Order To Survive

As discussed at the beginning of this article, stores across the country are closing at record rates, while hiring is slowing and wages are stagnating or declining. Apparently 44% of Americans are so crippled by debt they cannot pay their expenses, which may lead to mass defaults and subsequent bankruptcies and further job loss. 

For numerous Americans, it is already a constant struggle to pay rent and buy food, and when the recession comes many more Americans will be living paycheck to paycheck with no guarantee that their job will last long term or even short term. 

When it comes down to it, people need to eat and buy necessities, and when a person gets to the point that they need to choose between HODLING Bitcoin (BTC) or feeding their family, they will sell their Bitcoin (BTC) as fast as possible. 

Theoretically, when the economy enters a full-blown recession as the stock market finally crashes, Americans in the middle and even upper classes may need to liquidate their cryptocurrency holdings due to sudden job and investment losses. 

Essentially, a recession may cause retail crypto speculation to completely dry up, even if scenario #1 is unfolding and crypto prices are rising fast. No matter how fast the crypto market is rising people may be forced to sell just to cover basic expenses. 

In other words, investing in cryptocurrency is a luxury, and Americans will choose necessities over this luxury if the economy really crashes. 

In reality, a mixture of scenarios #1 and #2 will likely unfold. Retail cryptocurrency investment will weaken as people lose their jobs and other investments, while simultaneously an influx of institutional investment into crypto occurs. The direction of the crypto market will be determined by which force is greater, and of course the balance of these forces can change from day to day and month to month, which could lead to a chaotic mixture of significant rallies and crashes on the crypto market. 

If there is a silver lining to all of this, at least the crypto market has a chance at rising in the event of a severe recession, whereas most of the rest of the economy will have nowhere to go but down.