Recession?

[lindismith]

Well, this is traditionally the time of year in retail called the “Dog Days of Summer” because it is so slow. I worked at Nordstrom all through college, and watched it every year. That is why Norstrom started doing their Anniversary and Pre-season sales in the middle of the summer – so they could drum up business.

[SD Realtor]

Powayseller and others…

To me the question is not whether the recession will happen but how deep will it go…. Historical data shows when the yield curves invert… well get ready for the fun.

What REALLY concerns me is stagflation.

I am only a realtor, (and an engineer) so my knowledge of economics and business cycles is rudimentary. I know the typical way to combat inflation is to tighten up the liquidity of cash in the economy, aka raise rates. This reduces demand which in terms bring prices down. I know this is a VERY inaccurate and oversimplified explanation but I am small brained…However when median incomes do not keep up with inflation, and you have runaway energy prices which leak into other standard measures that make up the CPI, (thus driving the true rate of inflation up), combined with a housing market that starts depreciating you can get into a real bad pickle.

What is the expected response of the FED in that scenario?

[powayseller]

Isn’t raising the funds rate, the “expected response”?

Here’s the take on recession from freemarketnews.com

“Generally speaking, a recession is a prolonged period of time where the economy is contracting. During a recession, you will most likely see consumers spending less money and saving more, a subsequent decline in the stock market, a rise in unemployment, and a decline in real estate prices.
The idea is that the economy has to have periods of contraction after years of expansions.

From 1991 to today our economy has been constantly growing. Some Economists might argue that we did go through a recession in 2001. I disagree. Although we did have some characteristics that were indicative of a recession, we also had some glaring omissions. How can we have a recession that only lasts one quarter, especially after we just came off a major stock market bubble? Why would real estate prices continue to rise in a time of less spending and more saving?

In either case, the recession that is to come will be a multi year recession that will serve to slow down this economy that has been wildly expanding over the last decade and a half.

I see the commodity markets as the premier place to invest during this upcoming recession. Like the recession of the 1970s, I also expect to see rising inflation and soaring commodity prices. Whether you invest in the metals markets, agriculture, or basic raw materials, I believe that positioning your wealth towards commodities will best position you to ride out this housing burst and subsequent recession.”

What I am interested in: is the 1970’s like today? I know that the low global interest rates fueled a liquidity glut that took several years to bring up inflation and it is now happening, and that’s why many central banks are busy raising interest rates. How bad will inflation get? How far will they have to raise?

[powayseller]

Here’s more data predicting a recession. Since 1971, the year over year change in retail employment was negative 5 times, each time in a recession. This is the 6th time it is negative.

See calculated risk chart

[powayseller]

Here’s more data predicting a recession. Since 1971, the year over year change in retail employment was negative 5 times, each time in a recession. This is the 6th time it is negative.

See calculated risk chart. He writes “Of course, the spin doctors are sure to dismiss the negative growth in retail employment. Sure, every time it’s happened since 1945 it’s presaged a recession. But it’s bound to be different this time. Of course.”

I was at Fashion Valley, and could barely find a parking space. I circled a long time, and then had to wait for someone to pull out. Oh, retailers at Fashion Valley are defying the downturn, I thought. But, wait… One of my first stops was the Food Court, to get a bite to eat. The kids were off shopping, so I was alone and looked around. During my 20 minute lunch, I observed at least 1000 people. 90% of them had NO shopping bags, but were just walking around, sometimes with a drink in hand. Of the people with bags, 99% had Nordstrom Half Yearly sale bags.

At Neiman Marcus, it was sheer desperation. My daughter gets her makeup there, and I’ve been there often. Today, there were THREE salespeople barraging people who commonly walk through the store, begging them to stop for 2 seconds to try the eyeliner, or get a perfume sample. It was really annoying. Each customer was barraged by all THREE of these people, who were lined up in the corridor that is used by people walking through the store. It was obvious they were desperate. FYI – Lilly Pulitzer is having 75% off most of their summer merchandise; ladies, go get some great bargains! Overall, the Apple store, Nordstrom, and probably Victoria’s Secret and Borders and the Food Court were busy; the rest was empty.

I keep noticing Help Wanted signs in the WINDOWS of the stores. It used to be in the Classifieds, but desperation has forced it to the windows. Since last night, I saw Help Wanted signs at Starbucks in Del Mar, and the Cleaners and Round Robin Pizza and Henry’s in Poway.

Does anyone else have any retail downturn stories, and Help Wanted desperation (which proves people are moving out of San Diego and employers cannot find help).

[novice1027]

They were all there to get away from the blasted heat. Probably can’t afford their AC.

[powayseller]

Good one. Noticed lots of people at the movie theater and the restaurants (Cheesecake Factory was packed outside…)

Maybe they came for the chef presentation in the courtyard. Chef Bernard was there, with a big setup. In all my years of shopping at Fashion Valley mall, I have NEVER seen a demo in the courtyard.

I have never seen 70% off at Lily Pulitzer either. This was on their entire summer line, a wonderful assortment. Things have definitely turned. I hate shopping, so I didn’t go into any other stores, besides the book store where I got a book by Dr. Leeb on $200 oil and the coming economic collapse… Does anyone else have any stories of car dealers, Home Depot, etc?

[qcomer]

Wanted to comment more on “where to put cash”.

Folks, since most of us agree that the housing bubble is essentially a credit bubble then there are 2 ways for the US Govt to get out of that increased liquidity bubble.

1) Keep increasing interest rates and tighten money supply irrespective of the economy until the resulting increase in savings brings back the equilibrium. This will help the “savers” like most of us but may kill the housing, general economy, stock market. This option will be extremely unpopular among politicians and big corporates lobbying for them.

2) Naturally, since there is a lot more greenback out there, its price should come down. Govt doesn’t increase rates further and instead chooses to cut rates back and let the dollar decline. This will also boost US exports, help reduce the huge trade deficit, reduce our foreign debt automatically. However, this will be very bad for savers like most of us with most of their savings invested in CDs, MMs or other dollar denominated securities, wiping out our saving for just being frugal. It will boost people owning hard assets like homes and may well save housing from a hard landing.

If you tend to believe the point # 2 is more likely of the two to happen then what are the strategies or backup plans for such scenario, if it happens? 100% in MMs or CDs doesn’t seem to be a good move. Gold and PMs seem to be over valued due to lot of speculation right now. I agree with Poway that with the downturn in housing bubble and the ensuing recession, commodities bubble will also perish so I don’t like investing in commodity ETFs either right now. So where to put money then? Foregin Currency ETFs or Foreign Currency CDs by EverBank or buy Treasuries of countries like Canda? Or put money in Global Bonds Funds? I am confused.

[FormerOwner]

I’ve still got a lot to learn about macro-economics BUT wouldn’t #2 end up increasing long-term mortgage rates anyway since bond holders would require higher interest rates for holding dollar-denominated notes? Long term bond rates drive long term mortage rates as far as I know. That would still kill the housing market by driving up monthly mortgage payments. Any thoughts?

[FormerOwner]

I’ve still got a lot to learn about macro-economics BUT wouldn’t #2 end up increasing long-term mortgage rates anyway since bond holders would require higher interest rates for holding dollar-denominated notes? Long term bond rates drive long term mortage rates as far as I know. That would still kill the housing market by driving up monthly mortgage payments. Any thoughts?

[North15]

Powayseller,

I understand your desire to seek out successful investment vehicles to place your cash investments.

I think you may be limiting your options from your comments about the stock market. Some of the best short term plays are large up moves in a bear stock market.

It will cost an individual great opportunity if they seek an all or nothing investment plan. This is an American culture trait whether it be in investing or just “I have to have that house, I don’t care what the market is doing”!

So, a suggestion. Don’t remove the stock market or other options as they can be great short term profit generators. Don’t put all of your money there, but try out a few things.

[FormerOwner]

70’s deja vu; are we in for stagflation?

1979 Time Magazine Cover

[novice1027]

I think I’m burying my money in the backyard.

[powayseller]

North15, do you have any suggestions?

The other day, someone asked about shorting DR Horton. This is what Bill Fleckenstein said, and my question:
What do you think about shorting homebuilders, like DR Horton?
• It’s a bit late… there are better targets.

Bill is short TXN, but didn’t say when he shorted it.

About foreign currencies:

Hey Bill,

Are you using the recent volitilty in FX [foreign currency] to add to your positions??

Are you still mainly focused on yen??

thanks!!
• I have CDN$, EUR, and YEN but haven’t added much YET… I plan to though.

My brother, who is brilliant, told me to diversify. Since we don’t know which sector will do well… Buy some foreign currency, precious metals, etc. That’s what I will do, but I will keep my majority in cash. I could be all wrong. Some things are easy to see, like the housing bubble that is before us, but the future I cannot see.

The book I am reading on $200 oil suggest loading up on gold and oil stocks and alternative energy companies. I bought some shares of Conoco Phillips last month. I believe oil will keep going higher, and oil seems more necessary than gold, so I should increase my oil position.

I am really clueless where to make money, but I believe that the general stock market is going down, so I got rid of my index funds and stocks. I kept Berkshire Hathaway and bought Conoco Phillips. So I put 95% of my money in cash, in a CD, while I figure this out. Now I am almost paralyzed, because I keep reading about what to do, and am doing nothing, because no clear strategy emerges. I am scared to short stocks.

I subscribe to the Yamamoto Forecast, and he tells his subscribers to be 100% cash, 0% bonds, 0% gold. Zeal Intelligence is waiting for a gold pullback. I am paying for their advice, and am heeding it.

[North15]

Powayseller,

Thanks for your reply.

I like Bill Fleckenstein’s work. He was a writer at one time on RealMoney.com

All of the investing options you mention will make money in certain time frames. What I am trying to convey overall is that it is a mistake to dismiss investment vehicles that appear to be out of favor as “univestable”. In addition, the “invest all of your assets/risk in this category now” in gold, etc. is not unlike all of the discussion here about what a large number of residential property buyers have done in San Diego since 2004.

In order to narrow down your choices, you need to decide what time frame you are comfortable with for your investments. If you only want investments that historically work over a 5 – 10 year investment period, then it greatly reduces investment options. If you want to take advantage of the tendency for vicious up moves in a bear stock market, be ready to be in and out (long not short) in just a few days.

I suggest both approaches with portions of your investable cash, otherwise known as divesifying. But you need to identify what your time frames are for the investment first.

Be ready to sell the short-term time frame investments when it is not working out or when it has worked to your targeted sell point. Yesterday I invested in an international stock index fund with a target sell point of 3% above my buy in point. Depending on how things work out in the Middle East and Mr. Ben Bernanke (FED) this week, I may grab a quick 3% and be out. Yes, I am buying when everyone else is saying “sell”.

The long-term investments will be like watching paint dry, but they will be safe.

[Author]

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