One Wall Street strategist warns the end of the global economy's current cycle is near.
In fact, the path to a downturn is "irreversible," according to Naka Matsuzawa, chief Japan rates strategist at Nomura.
"The global economy is already on an irreversible path to an economic downturn," he wrote, in a sweeping report, translated to English from Japanese, about his macro investment strategies for 2019.
"However, we do not expect the economy to fall suddenly into a downturn, but to recover temporarily in the second half of 2019 to the first half of 2020 after signs of a slowdown strengthen through the first half of 2019."
Matsuzawa's view is more or less consistent with other experts. Some market strategists and business leaders are not calling for an immediate recession, but think that sometime in 2020 the risks will rise. A recent report from Deutsche Bank placed the likelihood of a recession in the next 12 months as "very low." Still, economists are keeping an eye on the flattening Treasury yield curve, wherein an inversion traditionally indicates a recession on the horizon — with a mixed track record of reliability.
Nomura defines the lifetime of a credit cycle as a decade-long process beginning with the end of a prior financial crisis and a cyclical bottom that ends when credit contracts and the economy enters into a recession.
As shown in the report's intricate chart above, the global economy today is within the range of what Nomura calls the "credit expansion/last stage," just starting to plateau before it rolls over.
The most recent expansion in the US began in June 2009, Nomura writes at the start of the chart, and entered into its "credit expansion/middle stage" in December 2015 — when the Federal Reserve hiked interest rates for the first time since the financial crisis.
That marked the "Fed liftoff," or "second wave" of the middle stage, and launched the US economy into its last stage where investors are seeing a sharp downturn in stocks and the Federal Reserve pulling back from its "quantitative tightening" program.
"We think the real economy will enter a downturn from the second half of 2020, and expect the financial markets to price in this economic downturn in the first half of 2020," Matsuzawa wrote. "The immediate cause could be a global credit crunch caused by a sharp drop in the credit market, including the US corporate bond market."
He added: "But at this point we expect the triggers to be 1) the US’s return to a hawkish approach on Chinese policy and full-scale weak USD measures, 2) further declines in crude oil prices and an increase in bankruptcies among US energy companies, and 3) a demand-side shock that prevents an upturn in the semiconductor cycle."