25% Downside Yet to Be Priced In

[hs]

“We Americans need to get back to the ethics of our founding fathers and pioneers, who knew how to go without things and work hard. That’s the spirit that will make this country great again.”

Great comment, powayseller, and I am adding more:

Think about “Ask not what your country can do for you, ask what you can do for your country.”

[Daniel]

Powayseller,

I agree that the numbers look strikingly similar to those before the 2001 recession. I would go one step further: even the inflation numbers look the same; yes, inflation was getting pretty high in the summer of 2000, and the Fed had to go up to 6%.

I think the Fed will stop very soon (maybe it already has). Looking at the history of tightening cycles, inflation actually peaks about a quarter AFTER the last hike (meaning that the Fed can smell a slower economy is coming, and stops even before inflation turns down). About 6 months after the last hike the economy slows to near zero, and the Fed starts cutting. Recession usually starts soon after, and lasts for 3 to 6 quarters.

I think the Fed knows that we are very likely to have a recession next year. But as long as they can manage to keep it relatively mild (think 1990 or 2001), they will probably see this as an acceptable way to correct some of the imbalances in the system. The question is, of course, whether they can keep it mild. I personally don’t fear a depression and think that the Fed has pretty good odds, if not of a “soft landing”, at least of a “not really awful landing”. I guess we’ll have to see how this plays out.

[rankandfile]

I certainly don’t hope there will be any sort of depression. I tend to agree with Daniel about the Fed anticipating a recession next year as a means of correcting things. I think it will be on it’s way to getting worse than that, but the government and/or private industries will step in to keep things from getting too bad. IMHO, we need to find a way to keep consumption going in order to keep the recession from getting too bad or lingering for too long. I bet we’ll suddenly start to see lower energy prices and incentives for purchasing homes, vehicles, and other items for low up-front costs. Isn’t is funny the reasons that are used for increasing/decreasing oil prices?

Increase! Reason: A couple refineries were shut down for maintenance.

Decrease! Reason: Better than expected output from Saudi Arabia…like they all of a sudden exceeded their own expectations! Translation: people are getting pissed at the high prices so we better leave the pumps on for a little longer.

[powayseller]

rankandfile, how can you keep consumption going? The liquidity glut (money printing and real negative interest rates) has finally fed through to inflation, and that takes time to reverse. The liquidity glut caused a consumption boom that made the prices of commodities and other goods and services become inflationary.

Oil demand is increasing faster than oil supply; for several years, oil has been going up in a steady climb, unrelated to the Israel and Iran issues. Oil was going up *long* before that started. Energy prices are set by the futures market, by supply and demand.

The Fed is not God. They cannot stop a recession. If the Fed increases the money supply or lowers interest rates to jump start consumption, inflation could rise to 8% or 10%.

We could have had a regular recession back in 2000-2001, and been done with it. Greenspan’s short sightedness gave us a the largest liquidity bubble that we’ve ever had, and all excesses correct, all bubbles revert to the mean.

We all need to remind ourselves that every asset bubble in history has reverted to the mean. Housing prices will come down. That is a very good thing.

Finally, young adults, teachers, police officers, librarians, and fire fighters can leave their parents’ homes and have a chance at buying their own homes. People will be able to buy a house with 28% of income.

Our economy will become diversified and productive, and no longer reliant just on buying, selling, and furnishing homes to each other, and borrowing money from Asian exporters to fuel a consumption lifestyle. Imagine how much better our country will after the recession!

Why should we wish to continue an economy that is 70% consumer spending, and dependent on Asian export countries to fianance it all? We have a deviant lifestyle. It reminds me of one of those couch potatoes. In aggregate, we are couch potatoes. Picture a big fat guy, on a sofa watching TV, surrounded by cleaning people, cooks, massage therapists, nail techs, and gardeners. Everyone waits him, while he hands out IOUs to pay for it all. He doesn’t have the cash to pay for it.

How much better if our GDP is 30% consumer spending, 30% research and development, 30% capital spending, and only 10% government spending?

If you are mad about the recession, write your elected officials. Perhaps Alan Greenspan should be brought to trial for creating the asset bubble and the foreclosures, bankruptcies, and personal pain that follow. I think it’s only fair to charge him and the entire Federal Reserve, Congress, the Senate, and the President with negligent monetary policy. Just my opinion, and I don’t really care if it happens. Just want to show where the blame lies, and who to get mad at if you don’t like recessions.

[Author]

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