Recession?
I think we are might already be in one. I thought the Fed would cut another 25 or 50bps by now. I think it is a mistake they did not. I hope I am wrong because equities will probably have a significant and sustained decline if it is a recession. My absurdly bold statement last summer about the S&P at 1650, or whatever it was, was predicated on the assumption that the Fed would act more aggressively. Maybe they still will. Anyway, based on the earnings results out of the industrial companies and now weak results from tech, it seems the volatility in the credit markets and uncertainty over the consumer is causing companies to rein in spending.
Since everyone is still caught up in inflation, I think it will subside when China slows down. Their economy has been running GDP over 11% for the last few years and now inflation is accelerating (they had kept it at a stated rate of 8% for a number of years. Even if it is all BS, it is a higher level of BS now). They are either going to have to continue raising rates or loosen the currency band. Once they do that, their economy will slow and commodity prices will likely retreat. I have no idea when they will act more aggressively but the longer they wait the worse off it will be for the US. Also, flat to down housing prices, combined with tighter credit conditions will be a liquidity headwind, at least from a consumer price standpoint. All that said, I still own Barrick as a hedge, which I bought in October 05.
Just my 2 cents, 1 after taxes.
Since everyone is still caught up in inflation, I think it will subside when China slows down. Their economy has been running GDP over 11% for the last few years and now inflation is accelerating (they had kept it at a stated rate of 8% for a number of years. Even if it is all BS, it is a higher level of BS now). They are either going to have to continue raising rates or loosen the currency band. Once they do that, their economy will slow and commodity prices will likely retreat. I have no idea when they will act more aggressively but the longer they wait the worse off it will be for the US. Also, flat to down housing prices, combined with tighter credit conditions will be a liquidity headwind, at least from a consumer price standpoint. All that said, I still own Barrick as a hedge, which I bought in October 05.
Just my 2 cents, 1 after taxes.
posted by Odoacer at
11:25 PM
2 Comments:
Good god, are you late to this party or what? I don't think there is any doubt that we are headed for a recession and the market is finally agreeing with me. I think that retail is just going to be brutal for this upcoming Holiday and, from what I am hearing anecdotally, it seems like retailers are believing the same. I think we see major, major discounts for Black Friday (hearing that you might be able to buy HD DVD players for as little as $100; that might make a nice gift).
Let's assume that you are right on China (I don't know what to think about that yet and it is too late to spend time on it). That isn't exactly something that is going to happen tomorrow. Rather, the pullback in inflation in that scenario is 4th derivative (the U.S. economy sucks, China floats, the Chinese economy sucks, commodities fall). This is not exactly going to happen overnight.
So what is the Fed to do? Well, I think the answer is that the Fed should be standing pat to find out what the impact of its 75 bp moves is on housing, prices, and labor.
I think that the Fed would find that it had almost no impact on housing; in fact, you could argue that cutting might actually hurt anyone whose mortgages is about to reset as long treasury rates went higher and that is the rate that the reset is generally linked to.
I think prices are probably higher, if only because the dollar has absolutely crumbled.
I'm not sure of the impact on labor, though the labor market was pretty tight to begin with. I expect that the labor market will become a lot looser as companies become convinced that a recession is unavoidable and start scaling down. Not sure how much 75 bps worth of cuts softens the blow.
So what WILL the Fed do? I think they cut. Why? We are heading into one of the most important elections in our nation's history. Neither party can afford a recession. Both want to be able to say that they did what they could to help housing. This is a political issue now and I think that there is a tremendous amount of influence being exerted.
Buy gold. We're going to cut. Prices are going to go higher. The currency is going to get weaker. The only thing that scares me about this call is that it is a very popular call.
I think inflation is what pulls us out of this recession. There is no care in the world about commodity prices. The balance of payments is flowing back to the United States and the labor market (if you use the fake stats) is already super tight.
It is a balance sheet problem not an income statement problem. The consumer is over levered. We have glorified the poor to the point that they were the savior for going into more debt and housing now is a given. Now we need to help the debtors to support the rich. It is almost laughable how honorable debt is in the United States. Look at who the heroes are private equity, hedge funds, Countrywide.
We will do whatever it takes to help the degenerate credit junkies that cant pay their bills. Even if it means guarenteeing their loans.
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