Well that last one is not true.
It is fascinating how the data points seem to alternate between good and bad, although I think the tilt has been toward negative data. My brother commented that Nouriel and Barry have been way off with the timing of their predictions.
So here is a theory or maybe more of a rhetorical question. That the super tanker that is the US economy is taking longer to turn than normal (not sure that it is turning slower than normal but work with me here) does that mean that whenever the next recession does come it will be longer in duration than normal?Discuss.
26 comments:
Yes
Uncle Jack
NO!
It could be longer, shorter, or not even occur.
Your bearish bias is showing. You could be correct but it is not yet clear.
hence the theory/rhetorical nature of the post.
but are you say the economic cycle will not end?
There have been five major recessions in the past century, two in the interwar period and three more in more recent times: Early 70's, late 70's/early 80's and late 80's/early 90's; the early 70's was primarily war and oil shock related, the late 70's was almost entirely oil shock related, and the last was almost entirely credit expansion related, a credit expansion that has not really stopped since (it's just sloshing from asset class to asset class, looking for a home).
All three factors are in play today: War, oil shock, and credit expansion. History suggests that credit expansion led recessions, particularly those accompanied by inflated real estate, tend to be prolonged and deflationary. Other recessions tend to somewhat shorter with oil shock led recessions being stagflationary in nature.
Regardless of cause, major recessions typically reflect abrupt falling off in demand rather than supply. These are usually due to identifiable demand shocks and to swings in consumer and business confidence that amplify the direct effects of those shocks. Major recessions are not easily predicted in part because the degree of that amplification can make a significant difference; e.g., unamplified you may just get a prolonged slowdown where profit is hard to come by (it's difficult to add alpha) but losses may not be that great on average either.
The current world economy is both more robust and more interconnected than in the past so this could either offset a US slowdown or share in its grief, amplify recession or ameliorate a slowdown; who knows. Evidence suggests the US Fed and central banks worldwide continue to reflate but whether this will soften the blow or ultimately only serve to make it heavier when/if it comes remains to be seen.
In the absence of any ability to really predict what is going to happen I remain modestly overweighted in oil and precious metals (stagflationary scenario) and long bonds (deflationary scenario) with the remainder in hedged global equity positions (net long w/ foreign currency exposure) plus an elevated level of cash. About the best I can do until the other shoe drops (if it does). Otherwise I trade tactically using relatively small positions to add some alpha as things unfold. FWIW
By the time a, or the, recession occurs, no...by the time it is reported as fact by you ane the press and the great almighty CNBC, the stock markets will have already corrected and begun their run back up in anticipation of the respective recovery. The market anticipates. It does not react. This is why so many people think they just can't seem to figure it out.
tg
"but are you say the economic cycle will not end?"
No it will always end, but Milton Friedman invented monetary policy and the fed has really only caught on in the last couple of decades.
We will always have economic cycles they will just be much better in the future than they were in the past.
IMO we are still working off the NASDAQ bubble. So a couple of problems along the way are to be expected.
But compare the recent stock market bubble to 1929. Things are MUCH better today than the way they were handled in the 1930s.
Louis Rukeyser was fond of saying that economists have predicted twelve of the last five recessions.
Louis Rukeyser was a pretty smart fellow.
With a presidential election cycle already in play,what both parties can do to prevent a hard recession will be done.
At worst, I see a mild recession unless our foreign adversaries choose to exploit our current international vulnerability.
better than 1929?
yes. I have said at least a 100 times, literally, I am not in the collpase/depression camp.
That things are better than 1929 is out of context with the entire history of the thread.
Say the Nasdaq bubble money , which was backed by internet credit, has flown into housing or worldwide. The demise of the housing market is a much softer landing than the bursting of an internet bubble. At least so far. No banks have failed. The money is still out there. Where did it go? Is it enough to extend this economic cycle? Tom in Indy
More exact, they have been dead wrong. Not that it's an easy game. But, another month and now another year ends with housing prices still not imploding...
Larry,
As you know I have never thought there was much probability in a housing price collapse in the way we think of other prices collapsing. But could the factors they cite result in a decline, that while modest compared to moves in other assets classes is modest, that is different or worse than past RE cycles.
The catalysts they cite, especially Nouriel, could trigger a magnitude much less than what the housing bears expect. Not that I would able to time such a thing.
This underscores by belief that there is value in understanding the outliers argements.
I'm still in the soft-landing/shallow recession camp. This expansion has been measured, not irrationally exhuberant - although it's been strong enough to withstand the Katrina aftermath, an oil price shock, 17 fed fund hikes, and a slowly unwinding housing market.
My guess is Q1-Q2 growth will be slow/flat, but not negative. I could be completely wrong of course.
"But could the factors they cite result in a decline, that while modest compared to moves in other assets classes is modest, that is different or worse than past RE cycles."
Worse than the S&L collapse in 1988-1990? No.
Worse than in the 1974 recession? Not with fixed rates on 30-year loans at 6%.
Worse than when Southern California fell off a cliff in the 1991-1994 recession? Unlikely, with the population expected to grow from 300 million to 400 million by 2040.
One of the two biggest risks to housing (never discussed) is the size of property tax bills around the country. They are simply out of control and will only be reigned in by tax revolts like we had in California in 1977.
It just seems, after talking about debt and the consumer, that the bark has been worse than the bite.
Larry you have previously posted that RE prices have never declined, not sure if you said YOY or some other time measure but either way you latest comment doesn;t jibe with those previous comments.
re> One of the two biggest risks to housing (never discussed) is the size of property tax bills around the country. They are simply out of control and will only be reigned in by tax revolts like we had in California in 1977.
I heard a story on NPR yesterday that highlighted a D.C. suburb and the realization that falling home prices are going to result in a $67 million dollar shortfall in property tax revenues next year. Keep in mind the average price of homes in this county are north of $500,000. The county officials made it sound like the end of the world.
I'm sitting in my car wondering how this county is currently spending these funds. Is the average classroom size 10? Does the police department own a fleet of BMWs? How can such modest decline in property values result in such a huge revenue deficit?
isn't there a delay in this sort of thing--resetting of proerty tax too?
interesting anecdote
"Larry you have previously posted that RE prices have never declined,"
No. Since 1930, YOY (ending 12/31) the median price has never had a decline, nationally. But, although true, it is a useless number since housing is regional and more important is local.
I have said two things: the housing sector of real estate peaked this past summer. The peak of a cycle doesn't translate into bubble. And, the other sectors remain strong.
"isn't there a delay in this sort of thing--resetting of proerty tax too?"
Not sure what you are asking. However, each state and each county is different. In California, for example, the rate in SF is fixed at 1.1%. And, the reassesing occurs upon a transaction (not re-fi). The annual increases are also set by state law and are small.
In Maricopa County, seemingly forever, they did not reassess upon sale. They wanted no part of a tax revolt here. Alas, 2007 will bring us huge increases in assessed values. I predict trouble.
That real estate prices are regional and/or local is true but irrelevant. The question is does the aggregate national effect of those real estate markets that _are_ slipping or crashing, considered along with other factors such as stagnant real wages, energy & war costs, etc., represent sufficient critical mass to tip us into recession?
As this report (http://tinyurl.com/yngt2y) from the Dallas Fed makes clear, the big unknown WRT homes is the degree to which the aggregate housing slowdown may affect equity extraction and consumption. Housing itself accounts for approximately 6% of GDP w/ effects that extend that influence somewhat; e.g., reduced demand for building supplies, labor, etc. Consumption however is a far greater percentage of GDP so the 'spillover' effect of a housing slowdown on homeowner willingness or ability to extract equity (and bank willingness to extend that credit; cf, http://tinyurl.com/y8yjbw) will probably be a key factor in whether we enter recession or not and/or the depth of recession should one occur.
Another unknown is the mortgage default rate and it's potential effect on mortgage backed securities and regional lenders. Defaults on 2005 loans, 'exotic' loans in particular, are increasing the fastest as one might expect but the cumulative effect is not yet clear there either.
At this point it's just a guessing game; io ipso, increased caution becomes the better part of valor IMHO.
Well the US dollar is in a recession - 30% drop in 4 years. The Fed cannot save the dollar without raising interest rates and thereby slowing down the economy and hurting real estate even more. I would only count rising equities with a stable or rising dollar as real growth.
The R-word is a dirty word Roger. We'll not see politicos utter it until we're halfway through it!
While the 1990/1 recession was founded on abhorrent lending practices coupled with increasing vacancy rates in commercial real estate, I have to wonder why any think that it is different with the retail customer in the residential area? Falling prices and overextended credit to a large proportion of transactions smacks of trouble. And, there is no denying that the decline in residential real estate prices is the highest--ever, isn't it?
Anyway...I think that there are enough variables moving in all sorts of ways (like an particle accelerator) that our view of reality is occulted. In his book Wining on Wall Street, M. Zweig listed these hallmarks of a recession. Perhaps you and your readers might find this of interest.
1. Extreme deflation characterized by a PPI index drop of 10% on a 6 month average of annualized m-t-m changes.Take current year m-t-m inc/dec and average it with the last 5 months (sum the mtm change each month for the last six months and divide by 6).If that 6 month average is at least –10% then you have cleared this test;
2. Ultra high price/earnings ratios.He labels 10-14 aS normal P/E range. Upper teens and twenties is what he calls high; and
3. Inverted yield curve.Zweig used the Moody’s Aaa Corporate Bonds yield as the long term rate and 6 month commercial paper rates as the short term rate.
"And, there is no denying that the decline in residential real estate prices is the highest--ever, isn't it?"
I don't think so. Depends on how it's measured, but California prices dropped a lot for about 13 quarters from 1991-1993.
"While the 1990/1 recession was founded on abhorrent lending practices coupled with increasing vacancy rates in commercial real estate, I have to wonder why any think that it is different with the retail customer in the residential area?"
I think it's very different even if the end result is bad.
The S&L crisis was preceded by bad legislation and then fraud, which led to the Junk Bond collapse and the simultaneous insolvency of most S&Ls, which preceded the start of the recession (july 1990) which preceded by one month Iraq's invasion of Kuwait, putting oil over $40.
And, with all of that, defense contracting plants closing (or merging)in So Cal throwing hundreds of thousands out of work at the same time all looking to sell their homes (because they had to) at the same time.
Leisa,
I wish you comment about the R word was not true but it is.
Larry...not to sound combative...
Legislative issues--I would say lack of oversight on certain underwriting is a guise of legislative issues--paucity of legislation.
Regarding price drops--the aggregated information that I've seen is supportive of my comment.
Fraud--have not valuations been edged up in an effort to qualify? Different king of weaselfication, but weaselfication nonetheless.
Regarding employment...we have the home building and the auto industry both of whom's employment picture looks like that of Dorian Gray's--not pretty, though the public visage is that of robustness.
I say all this with no arrogance of certainty but rather the arrogance of suggesting patience in seeing how these themes play out. I don't think any of us are prescient enough to be certain of any outcome as we have different dynamics.
Larry...not to sound combative...
You don't at all. In fact, well said. Certainly have railed against the lenders/underwriters in this particular cycle. Standards went out the window as few loans are portfolioed and most sold (on Wall St). Good job.
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