Private equity activity supports fears of a looming US recession

11 July 2019 (Last Updated July 11th, 2019 15:51)

The rapid growth of PE funds targeting the distressed housing market suggests large financial institutions believe a US economic downturn is on its way this year or next and that they are preparing for it.

In preparation for a downturn in the US housing market, private equity firms are stockpiling cash as probabilities of a recession increase.

In 2019, private equity firms have been raising significant funds to capitalise on opportunities they see coming in the housing market. A number of investment funds have been created to target distressed real estate markets and around US$8 billion has been secured so far, significantly more than in previous years.

The next recession is around the corner

These funds have the strategy of targeting property owners overloaded with debt, or in cash flow difficulties, and taking over that debt or snapping up large amounts of non-performing loans before they default. Further to this, they can also snap up cheap real estate should prices start to free fall.

The rapid growth of this type of investment product suggests large financial institutions believe a US economic downturn is on its way this year or next and that they are preparing for it.


Source: New York Fed © MarketLine

The New York Fed recession probability model suggests the odds of a recession are currently high.

The traditionally very accurate model from the New York Fed has found the chances of a recession has risen to levels not seen since 2007, the date of the last recession. Activity in private equity funds, in relation to the housing market, supports the predicted increased risk of a recession.

The model suggests that there is currently a 30% chance of a recession hitting in the next 12 months, and typically this model is rather conservative in its predictions. For instance, in 2007 the model only suggested a 39% chance of recession.

The model monitors US treasury yields from 10-year and three-month spreads. Typically before every modern recession, the yield from a three-month grows higher than the ten-month treasury yields, a process which began in May 2019. This suggests that the next recession is not too distant.

Current US economic expansion is the longest on record

The current period of economic expansion is the longest that has ever been recorded and the S&P stock index has risen 300% from its low in 2009 to today.

If nothing else, this period of continuing growth tells a story, because international economic markets are cyclical in nature and prolonged growth always comes to a harsh end.

Of great concern for the next recession is that unlike the recession of 2007, there are currently bubbles in a number of economic markets from auto loans through to healthcare and in a variety of different geographic regions from the US to China.