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This Recession, It's Just BeginningUser Forum Topic
Submitted by hipmatt on June 28, 2008 - 8:12am
http://www.washingtonpost.com/wp-dyn/con... So much for that second-half rebound. Truth be told, that was always more of a wish than a serious forecast, happy talk from the Fed and Wall Street desperate to get things back to normal. It ain't gonna happen. Not this summer. Not this fall. Not even next winter. This thing's going down, fast and hard. Corporate bankruptcies, bond defaults, bank failures, hedge fund meltdowns and 6 percent unemployment. We're caught in one of those vicious, downward spirals that, once it gets going, is very hard to pull out of. Only this will be a different kind of recession -- a recession with an overlay of inflation. That combo puts the Federal Reserve in a Catch-22 -- whatever it does to solve one problem only makes the other worse. Emerging from a two-day meeting this week, Fed officials signaled that further recession-fighting rate cuts are unlikely and that their next move will be to raise rates to contain inflationary expectations. Since last June, we've seen a fairly consistent pattern to the economic mood swings. Every three months or so, there's a round of bad news about housing, followed by warnings of more bank write-offs and then a string of disappointing corporate earnings reports. Eventually, things stabilize and there are hints that the worst may be behind us. Stocks regain some of their lost ground, bonds fall and then -- bam -- the whole cycle starts again. It was only in November that the Dow had recovered from the panicked summer sell-off and hit a record, just above 14,000. By March, it had fallen below 12,000. By May, it climbed above 13,000. Now it's heading for a new floor at 11,000. Officially, that's bear market territory. We'll be lucky if that's the floor. In explaining why that second-half rebound never occurred, the Fed and the Treasury and the Wall Street machers will say that nobody could have foreseen $140 a barrel oil. As excuses go, blaming it on an oil shock is a hardy perennial. That's what Jimmy Carter and Fed Chairman Arthur Burns did in the late '70s, and what George H.W. Bush and Alan Greenspan did in the early '90s. Don't believe it. Truth is, there are always price or supply shocks of one sort or another. The real problem is that the underlying fundamentals had gotten badly out of whack, making the economy susceptible to a shock. The only way to make things better is to get those fundamentals back in balance. In this case, that means bringing what we consume in line with what we produce, letting the dollar fall to its natural level, wringing the excess capacity out of industries that overexpanded during the credit bubble and allowing real estate prices to fall in line with incomes. The last hope for a second-half rebound began to fade earlier this month when Lehman Brothers reported that it wasn't as immune to the credit-market downturn as it had led everyone to believe. Lehman scrambled to restore confidence by firing two top executives and raising billions in additional capital, but even that wasn't enough to quiet speculation that it could be the next Bear Stearns. Since then, there has been a steady drumbeat of worrisome news from nearly every sector of the economy. American Express and Discover warn that customers are falling further behind on their debts. UPS and Federal Express report a noticeable slowdown in shipments, while fuel costs are soaring. According to the Case-Shiller index, home prices in the top 20 markets fell 15 percent in April from the year before, and Fannie Mae and Freddie Mac report that mortgage delinquency rates doubled over the same period -- and that's for conventional home loans, not subprime. United Airlines accelerates the race to cut costs and capacity by laying off 950 pilots -- 15 percent of its total -- as a number of airlines retire planes and hint that they may delay delivery or cancel orders of new jets from Boeing and Airbus. Goldman Sachs, which has already had to withdraw its rosy forecast for stocks, now admits it was also too optimistic about junk bond defaults, and analysts warn that Citigroup and Merrill Lynch will also be forced to take additional big write-downs on their mortgage portfolios. |
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So much for that second-half rebound.
Truth be told, that was always more of a wish than a serious forecast, happy talk from the Fed and Wall Street desperate to get things back to normal.
It ain't gonna happen. Not this summer. Not this fall. Not even next winter.
That has been my sentiment through the entire first half of this year. These bear market rallies are becoming comical. I have to admit I enjoy watching CNBC on these big downward movements just to see the expression of the permabull pollyannas..(you mean there really isn't a Santa Clause...Oh NO!). We have just witnessed one of the largest financial bubbles in the history of the markets.....POP! What do you think the correction is going to look like??
Here is good write up from John Mauldin this week that I think accurately reflects what we can expect.
"The Slow Motion Recession
Last October 5, I wrote a letter called The Slow Motion Recession. The basic premise then and in this space since then has been that we are either in recession or a lengthy period of very slow growth and that this slow growth will continue for some time. The cause of the lackluster growth is the bursting of the two bubbles of the housing market and the credit crisis. These are not problems that can respond quickly to the Fed cutting interest rates, but will need several years to correct. These deflating bubbles will put pressure on consumer spending and thus on corporate profits.
At the end of the day, it is earnings which drive the price of stocks. And if earnings are under pressure, we are going to see the stock market to continue to be under pressure. In a Slow Motion Recession, with growth depressed in the latter half of this year, it is going to be hard for the stock market to gain any real traction. As I have been writing for some time, in a recession the US stock market typically falls 30% or more. We are now down almost 20%. It would not be surprising to see the markets fall another 10%, at least from the perspective of history.
And inflation is not helping. Inflation is often more damaging to stock prices than a slow economy. Inflation, especially in a slow growth economy, eats into profits and can be hard to pass on to customers who are under spending pressure. And while inflation may slowly go away over the next year, it could be a factor for the remainder of the year.
While we should see some rallies in July and August, I think the trend is going to be lower, as the earnings projections are going to come down, and guidance is likely to be soft for many companies.
A Slow Motion Recession, a Muddle Through Economy, and inflationary pressures are not a prescription for a robust bull market. Further giving cause for concern, the recent rise in consumer spending is largely attributable to the stimulus checks being spent. This will be largely over by the middle of the next quarter. As gas and food prices eat into more and more of the average US consumer's ability to spend money on other discretionary items, there will be pressure on almost any company that has exposure to the US consumer."
Argument seems to be supported. For the more economic minded people Louise Yamada is a pretty good read
http://welling.weedenco.com/
Enjoy
The psychology in the markets tend to be a contributing factor as well. When we're doing well the psychology makes things even better; when we're doing poorly the opposite occurs.
Raybyrnes,
Here is a video of Louise Yamada on CNBC. She has a target on the S&P at 1175. This is some pretty interesting stuff for the technicians.
http://www.cnbc.com/id/15840232?video=78...
Two anecdotal data points:
I work for a local tech company. Business fell off a cliff starting in May-Big corporations, especially seem to have shut down. Combine that with consumer pressure and you are in for a rough one.
My dad works as a project management consultant. His firm had 40 people, 5 full time and 35 contractors. 35 contractors are all gone, and the 5 are now contractors.
Anecdotal evidence to be sure, but I think we are just now staring into the teeth of a bad one. Wall Street is starting to realize, but it will really hit the fan three months from now. Corporations have buckled down-this will sustain earnings short term, but we'll have some ugly earnings in Q3/Q4.
Stan
Two anecdotal data points:
I work for a local tech company. Business fell off a cliff starting in May-Big corporations, especially seem to have shut down. Combine that with consumer pressure and you are in for a rough one.
My dad works as a project management consultant. His firm had 40 people, 5 full time and 35 contractors. 35 contractors are all gone, and the 5 are now contractors.
Anecdotal evidence to be sure, but I think we are just now staring into the teeth of a bad one. Wall Street is starting to realize, but it will really hit the fan three months from now. Corporations have buckled down-this will sustain earnings short term, but we'll have some ugly earnings in Q3/Q4.
Stan
Correction last week was ~ 460 points for the DOW....
Here is happier spin on data from Barron's Gene Epstein June 9 (it's less rosy than typical from Mr Optimistic):
"Take the recent 3.9% reading on year-over-year consumer price index inflation, add May's 5.5% jobless rate, and you get a misery index of 9.4%. While far below the peak -- which topped 21% in mid-1980 -- the MI can be regarded as a harbinger of the economic outlook over the next year or two.
That outlook is for stagflation: inflation combined with slow or stagnant growth and rising unemployment.
There is still some question whether those in charge of these matters will ever see fit to declare that the economy is in recession. But given the stubborn rise in food and energy prices, inflation is likely to persist, squeezing incomes. And with credit still scarce, growth in gross domestic product should crawl along at an annual rate of 1%-2% at best. With growth not fast enough for the increase in jobs to keep up with the growth of the labor force, the jobless rate will keep rising. So will the index of misery.
But while all that is miserable enough, the biggest jump in the unemployment rate in a quarter-century is still far less alarming than it might seem.
The employment report for May, released Friday morning, indicated that joblessness had risen to 5.5% from 5% in April. But more than half the increase was concentrated among 16-to-24-year-olds. Unemployment among workers 25 and older, sometimes referred to as the "prime-age" labor force, rose by two-tenths of a percentage point, to 4.1% from 3.9%. And while that is hardly good news, it's by no means a record -- and about what you'd expect under the slow-growth conditions of the past year."
http://online.barrons.com/article/SB1212...
double post deleted
I tend to be gloom-and-doom oriented, but my predictions are often accurate.
So here's my prediction on this recession.
Not only will this be a deep and long recession, but the USA will NEVER fully recover from it. This recession coincides (and is driven from) both a a credit cycle bottoming, AND an historic reordering of global economics, plus the end of the Age of Oil. The USA will be the loser in the New World Order, where the 3rd world rises and we fall, and the USA is least prepared for the end of the Age of Oil.
The recession will be global, for example, China's GDP will be cut at least in half for a year or two; however, it is possible China's GDP won't go negative. So one could say I expect significantly lowered growth for China but not necessarily a painful recession. However, I see Asia quickly and fully recovering from this recession.
I think this reordering of global economic and political power could take ten years, but then the typical American will be left stunned at how dramatically our standard of living (and world political power) will have been reduced.
Case-in-point for a Typical American. You own a big SUV. You live in a big McMansion (mortgage underwater) that is a 100 mile commute from your job but in typical American fashion, mass transportation has never been built that can take you where you want to go.
Gas goes to $10/gallon, or it isn't even available at all.
Even if you don't lose your job (recession) you've got no cost-effective way to get to work. You're screwed.
Oh, and let's not forget that the dollar has by then ..say fallen to less than 1/10 of its value today.
So now you go to Walmart, but unfortunately all those made-in-China products are now expensive relative priced in a very weakened dollar.
I'm really afraid for the future of our country.
So much for that second-half rebound.
Truth be told, that was always more of a wish than a serious forecast, happy talk from the Fed and Wall Street desperate to get things back to normal.
It ain't gonna happen. Not this summer. Not this fall. Not even next winter.
That has been my sentiment through the entire first half of this year. These bear market rallies are becoming comical. I have to admit I enjoy watching CNBC on these big downward movements just to see the expression of the permabull pollyannas..(you mean there really isn't a Santa Clause...Oh NO!). We have just witnessed one of the largest financial bubbles in the history of the markets.....POP! What do you think the correction is going to look like??
That is one reason the Vix is so low. People have been burned shorting this market and are thinking its just another sell off that will be followed by a rally that will last.
Rather then "slow motion recession" it would be more accurate to term it a "slow motion train wreck"
John
USA will NEVER fully recover from it
Isn't that extreme? With all the problems, the situation seems better than what happened in Brazil, Argentina, Russia and even 1930s here. US still has great advantage in many resources. Very soon, China, India and many other countries can't feed their people without massive food imports and the resulting raise in food prices can easily turn balance of trade to U.S. advantage. One can do all kinds of economizing with oil, but it is hard to solve food deficit. We are dumbstruck by oil as the currency of power now, but historically, food is even more potent.
Isn't that extreme?
No, I don't think it is. I think of the current situation as very similar to what happened to the American automotive industry in the 1970's. When fuel costs began soaring what happened? US companies were still building large, overpowered, gas guzzling muscle cars, while the Japanese and the Germans responded with smaller, fuel efficient, reliable cars that took the market by storm. It took almost a full decade for the big 3 to respond, and we ended up with cars like the Reliant K as a legacy of the times.
Has the US auto industry recovered from those times? I don't think so. How often did you see a foreign car in the early 70's? Almost never. By 1980 they were everywhwere, and now Toyota is the world's largest auto maker. Heres another thing- when I was a kid "made in Japan" meant junk. Anybody else remember those days? Now it's a badge of quality.
If we as a country fail to respond adequately to the challeges facing us, there is no doubt in my mind that we will recede as the world's largest economy, and be replaced by those countries who are more adaptable and forward-thinking than we are.
stockstradr,
Unfortunately, I agree with everything you've said.
"I work for a local tech company. Business fell off a cliff starting in May-Big corporations, especially seem to have shut down. Combine that with consumer pressure and you are in for a rough one."
And how many months have I been warning people here about this and no one takes it seriously???? One more time.
You better look at your employment situation and do a real gut check on how stable it is likely to be. You better do it soon...the job market in SoCal is BAD, BAD, BAD and getting worse.
This warning is particularly important to the all of the Engineers who post here who think they are immune to this...you are not. Cost of Capital has a way of wrecking R&D Engineer Careers....trust me on this.
stockstradr, I also agree with what you posted, with one small caveat. I question if we are at the end of the "Age of oil", as you put it. Since the ice has melted at the north pole, it has opened up a huge area for new drilling and exploration. I've got a feeling oil will be around for a long time to come. However, from an economic standpoint, we may have to wean ourselves off oil and into alternative energy sources for survival. Problem is we're not doing that fast enough and are playing catch up with asia and europe. I believe it will be a new world order for our children.
This warning is particularly important to the all of the Engineers who post here who think they are immune to this...you are not. Cost of Capital has a way of wrecking R&D Engineer Careers....trust me on this.
Well, I did make the decision three years ago to move to the public sector and rent a place within walking distance of free transportation to my place of employment.
Therefore, sorry, I'm about as immune as is possible at this point.
"USA will NEVER fully recover from it"
I'd like to believe that we will innovate ourselves out of this one whereby our new technologies will provide growth that usurps the losses. Perhaps the next big thing will be in renewable resources and goods/green products. Biotech or medical innovation.
I'd like to believe that we will innovate ourselves out of this one whereby our new technologies will provide growth that usurps the losses. Perhaps the next big thing will be in renewable resources and goods/green products. Biotech or medical innovation.
I certainly hope so golfgal.
Speaking of recession, I see a lot of angry consumers whenever I go out lately. On the gas pump where I bought gas yesterday someone wrote "Kill Bush" with a sharpie. At Vons there were a couple of guys in line in front of me who were checking and re-checking the receipt for their groceries and complaining about the cost of things... The price of eggs at the Vons near me has about doubled. Last time I got gas at Costco I saw people fighting in line. I saw on the news this doctor was arrested for a rage incident at the gas pump.
Watch yourselves people! Things are heating up. In hard times people are angry and will go postal.
Isn't that extreme? With all the problems, the situation seems better than what happened in Brazil, Argentina, Russia and even 1930s here.
As an aside, today will mark the close of the worst June in the stock market since 1930.
Case-in-point for a Typical American. You own a big SUV. You live in a big McMansion (mortgage underwater) that is a 100 mile commute from your job but in typical American fashion, mass transportation has never been built that can take you where you want to go.
Ever heard about "carpooling"? Or even "buying a Toyota Yaris, then carpooling"? Dangers of expensive gas for American exurbs are greatly exaggerated.
Oh, and let's not forget that the dollar has by then ..say fallen to less than 1/10 of its value today.
So now you go to Walmart, but unfortunately all those made-in-China products are now expensive relative priced in a very weakened dollar.
Presumably, then, Chinese people will have to eat those made-in-China products themselves, because they won't sell them here. So your picture will necessarily involve unemployment in industrial China that's on the order of U.S. Great Depression.
Sorry, that's too much doom-and-gloom for me.
BTW, United States are third in the world by exports, and our exports are tech heavy. If the dollar falls to 1/10 of its value, it'll be really good for American high tech industry, and exports in general. It will also be really good for mining and agriculture - we will be able to drown the world in corn and wheat, and all the minerals that are abundant in the Rockies but just not profitable to extract at current wages and exchange rates. United States have MORE arable land than China, and one fifth of population. United States have huge oil shale reserves - maybe 1/2 of all world's known oil shales, enough to satisfy the entire world's demand for oil for 30+ years if they were fully developed. They were just not profitable with $50 oil, but things are changing.
As negative as I can be, I have to agree with esmith on this. The USA has a huge educational system and many natural resources available yet to tap. The one thing we've abdicated heavily over the last two decades is manufacturing, but we still have plenty of it here and can create more without too much difficulty. Yes, we'll have to rethink our consumerism lifestyle and probably scale-down a lot from what we're used to spending, but from a global perspective, we're in pretty good shape. We can easily feed ourselves and create more energy from non-petroleum sources.
Although 3rd world countries are rising rapidly, they face huge challenges due to their lack of infrastructure and massive populations. And dont forget that having the USA as an open market where they could sell their production has been a key factor in their rapid rise.
I would like to hear from some of the wise men on the board, who can remember the recession of the 70's. I was still in HS during the early 90's recession, and I've heard some older friends still say that the 70's recession was far worse than what is going on currently. It seems like a healthy recession going on personally, and all the "cash is king" people will be the winners when they buy at or near the bottom of real estate, stocks, etc... What do our wise elders have to say?
You may be right, but if we don't rethink our consumerist lifestyle until the whole thing breaks down, how long will it take to make all these fabulous changes that will save us? We're pretty selfish as a whole, and aren't usually willing to tolerate much change without the required chaos.
If we don't have jobs, and food prices skyrocket due to crude/"flooding the world with corn and wheat", we will be able to feed ourselves, but we wont be a we. The agribusinesses wont just give us the food. The American people are screwed.
America is going down the shitter.
It's painful, and we're all in some level of denial.
I have to agree with esmith. Things are not good right now, and still trending down, but not to worldwide implosion.
The USA still has a few advantages in the world.
1) massive natural resources. ie farmland. We pay people NOT to grow stuff so we dont kill markets. If prices and demand gets too high, those incentives wont be used and well just produce more. We have Oil, gold, copper, natural gas, coal, steel, all in very large quantities, we have again just limited our access to them. Well, we can unlimit it if we need to.
2) A culture that assimilates. The USA is able to assimilate people better than any other on Earth. We are able to take the best of cultures and use it. Look at Japan, the latest eastern "wonder child". They are fading fast becase they have negative population and no assimilation. That does not bode well for their futures. China's 1 child policy guarentees they will go through a similar event in the not to distant future.
3) A political system that is flexable. People here generally know that the political system is open, fair, and amendable if needed. We trust that when the vote totals are in, they are real. Look at Zimbabwe for why this is important.
4) A financial system that allows for failure. Companies go bankrupt, trends disappear, people get sick or just unlucky. S^%& happens, and our system handles it. The last financial panic was located in the exact countries that are now going gang busters. They have not been tried or tested, and can fail again.
5) A financial system that everyone else leaches off of. Since we tend to compare ourselves to everyone else instead of look at % of the whole it seems everything is falling apart at the seems. Cept, China is going through inflation far worse than ours, to keep supporting their export laden industries. That can only go on for so long. Eventually they will have to allow for their currency to rise, and when it does the breakneck speeds they are growing will slow dramatically. Coupled with higher energy costs, it may well be that some significant industrial production will come back the USA as it is just cheaper to do it that way. I have alreaday seen news reports about furnature construction moving back to North Carolina.
6) Our exports are food, technology, entertainment, and aerospace. If we ever get in trouble, they cant eat or replace their aircraft/high tech. We cant shop at target anymore or drive BMW's. Who do you think cries uncle first in that one? (Oil is a problem, a big one. But the high prices we now face will help correct that)
7) We reward creativity better than anyone. The USA is still one of the best places to start a buisness in the world. We are responsible for a huge amount of the worlds R&D. We have capital markets and the know-how to make new discoveries profitable.
8) A reputation that cant be beat. If you can do buisness here, you can do buisness anywhere. I am not talking about Walmart unable to convince Koreans or Germans to shop there. I mean that when we build something people respect it. The Chinese have earned a reputation for being Cheap, but low quality. A family members company was gonna buy a chinese company to make a component in their product, and the "independent" chinese labs said it passed every test with flying colors. It failed every test in the American labs, and needless to say, they didnt buy. That is remembered in the buisness world.
9) The best universities in the world. We still have them and they still are. We need to worry about availablity due to high costs. We need to worry about keeping true talent here. But they are still the gold standard in higher education and that isnt changing anytime soon.
10) The worlds most powerful military. Many of those here may not like this one, but it is true. We have all these things, and we can protect them. That is a major advantage because everyone knows, if trading and deplomacy dont work, we can always take what we want, even if it isnt a good thing to do.
I am not saying there are no problems. I am not saying that the future is without worry. I am saying that we are not gonna be Italy anytime soon.