Recently, the "recession drumbeat" of those warning of the growing risk of a recession has been growing louder and louder.
Yesterday, for example, the stock market rallied strongly on negative comments from Fed Vice Chairman Donald Kohn, which market participants took as signaling a probable rate cut in the upcoming Fed meeting on December 11.
Today's front-page Wall Street Journal article discussing the rally featured a quotation from David Resler (Chief Economist of brokerage firm Nomura Securities International) declaring, "The risks that the weakness in this sector [housing] will pull the overall economy into a recession are rising by the hour." What exactly takes place in the housing sector on an hourly basis to threaten the economy with recession was not specified.
Bearish commentators, noting that the market recently (Monday) passed the official measure of a "correction" (a 10% from a previous high), made pronouncements that the upward moves of the last few days are just "dead cat bounces." Permabear Doug Kass published this article today on The Street.com entitled "This Dead Cat Won't Keep Bouncing."
While the market may indeed retrace upward moves that are predicated on a Fed cut (especially if the Fed deems that a rate cut is not needed), the increasing fear of a recession is overblown.
As we explained in this post, a large percentage of economists and journalists subscribe to the inaccurate "demand side" view of the economy, and this skews their vision and leads to questionable conclusions. Starting with "the consumer" as the fickle engine of the economy (fickle because they view the consumer as forever prone to becoming scared and not spending) the demand-side analyst is always afraid that the consumer will suddenly freeze up and usher in a recession. Current recession predictions generally blame "falling home prices" as the reason the consumer will go into hiding, as if most people buy their Christmas presents using home equity rather than money from their paychecks. The importance the demand side attaches to the "consumer confidence index" is another indicator of why they are always afraid that the moody consumer is always a bad mood away from going into hibernation and bringing on a recession.
However, this worry is misplaced. Healthy economies do not just slip into a recession. Recessions are more often created by misplaced government intrusion than anything else. The current conditions include continuing positive business earnings, lower unemployment percentages than at any time during the entire decade of the 1990s, and generally benign taxation and interest-rate environments. Business growth will always accelerate and decelerate from quarter to quarter, rather than growing at a smooth pace, but the economists we have found reason to trust continue to predict positive economic growth at rates much higher than the general (demand-side biased) consensus.
In fact, there have only been two official recessions, defined as two consecutive quarters of negative GDP growth, in the past twenty years, one beginning in July of 1990 and one beginning in March of 2001.
Similarly, although there have been many market "corrections" in the same twenty-year period (drops of 10% from a previous high), there have been only two actual bear markets (generally defined as a 20% or greater correction), both of which corresponded to the two recessions (there was also a "near-20%" correction in 1998, corresponding to the "Asian Contagion" credit crisis).
These two 20% corrections are depicted in the chart above, which shows the Dow Jones Industrial Average over the past twenty years, with the two bear markets indicated by yellow brackets:
As we explained in this post, a large percentage of economists and journalists subscribe to the inaccurate "demand side" view of the economy, and this skews their vision and leads to questionable conclusions. Starting with "the consumer" as the fickle engine of the economy (fickle because they view the consumer as forever prone to becoming scared and not spending) the demand-side analyst is always afraid that the consumer will suddenly freeze up and usher in a recession. Current recession predictions generally blame "falling home prices" as the reason the consumer will go into hiding, as if most people buy their Christmas presents using home equity rather than money from their paychecks. The importance the demand side attaches to the "consumer confidence index" is another indicator of why they are always afraid that the moody consumer is always a bad mood away from going into hibernation and bringing on a recession.
However, this worry is misplaced. Healthy economies do not just slip into a recession. Recessions are more often created by misplaced government intrusion than anything else. The current conditions include continuing positive business earnings, lower unemployment percentages than at any time during the entire decade of the 1990s, and generally benign taxation and interest-rate environments. Business growth will always accelerate and decelerate from quarter to quarter, rather than growing at a smooth pace, but the economists we have found reason to trust continue to predict positive economic growth at rates much higher than the general (demand-side biased) consensus.
In fact, there have only been two official recessions, defined as two consecutive quarters of negative GDP growth, in the past twenty years, one beginning in July of 1990 and one beginning in March of 2001.
Similarly, although there have been many market "corrections" in the same twenty-year period (drops of 10% from a previous high), there have been only two actual bear markets (generally defined as a 20% or greater correction), both of which corresponded to the two recessions (there was also a "near-20%" correction in 1998, corresponding to the "Asian Contagion" credit crisis).
These two 20% corrections are depicted in the chart above, which shows the Dow Jones Industrial Average over the past twenty years, with the two bear markets indicated by yellow brackets:
July 1990 - October 1990 (Dow went from 2999.75 to 2365.10 which is a drop of 21.2% and which lasted 87 days).
January 2000 - December 2002 (Dow went from 11,722.98 to 7286.27 which is a drop of 37.8% and which lasted 999 days, the longest since the Great Depression).
While it is important to have cash reserves for market corrections (to prevent your being forced to sell securities at low prices in the event you have a cash need) and it is important to be alert for indicators that threaten an actual recession (such as increased government interference with free trade, increased intrusion into and regulation of law-abiding businesses, increased taxation, or unnecessary over-constriction of the money supply), the current recession fears are largely unfounded demand-side anxiety.
for later blog posts dealing with this same subject, see also:
January 2000 - December 2002 (Dow went from 11,722.98 to 7286.27 which is a drop of 37.8% and which lasted 999 days, the longest since the Great Depression).
While it is important to have cash reserves for market corrections (to prevent your being forced to sell securities at low prices in the event you have a cash need) and it is important to be alert for indicators that threaten an actual recession (such as increased government interference with free trade, increased intrusion into and regulation of law-abiding businesses, increased taxation, or unnecessary over-constriction of the money supply), the current recession fears are largely unfounded demand-side anxiety.
for later blog posts dealing with this same subject, see also:
- "Don't fear the current recession drumbeat, revisited" 07/18/2008.
- "The long shadow of the Y2K bug" 08/22/2008.
- "Hurricane hits Wall Street firms" 09/15/2008.
- "Great Depression update: iPhones selling like hotcakes" 10/22/2008.
- "Taking stock of 2008" 12/31/2008.
- "It's a panic, not a Great Depression" 01/21/2009.
- "Managing Investments in the New Era" 02/18/2009.
0 comments:
Post a Comment