Rolf Englund IntCom internetional
What Does a Recession Look Like?
A recession is a normal part of the business cycle.
Notice that mortgage equity withdrawals (MEWs) accounted for 2-3% of the growth of overall GDP in 2001-6.
I think Muddle Through is a perfect description of the economy we will see over the next year or so. So, with that in mind, let's look at what a recession looks like.
I have already lived through 5 recessions. And every one was different in nature and cause.
Congress can't repeal them, and central banks can only fight them, but not prevent them entirely.
Today we are watching a slow motion bursting of the housing bubble.
Predictions of 2,000,000 homes in foreclosure made in late 2006 in this letter no longer look ridiculous. No wonder that many (including your humble analyst) forecast a drop of 20% or more in home values.
Further, there are 2.18 million homes that were vacant and for sale in the 4th quarter. We are edging ever closer to a national average of 12 months supply of homes for sale this spring,
While MEWs will not go away, especially with low rates coming back, they are not going to be the consumer spending force they have been.
Recessions are also associated with rising unemployment, and this one will prove to be no exception.
Why won't we go back to the 9-10% unemployment of recessions in the 70's and 80's?
It is my contention that there are very long term cycles in the stock market
And this is important. There has never been a time when valuations dropped to the mean and then went back up again without visiting a much lower valuation.
We are now back to the mean P/E ratio.
If the stock market were to drop 20%, then the P/E ratio gets to 12, assuming earnings don't fall.
There is a serious effort to figure out how to capitalize the monoline insurance companies. I think it is not unlikely that public money will eventually be brought into play, much like the Savings and Loan Crisis on the late 80's. In short, and no matter what your view is, the Fed and the Treasury are going to do what they have to do to keep the game going.
It is always a mistake to confuse a cycle with a trend.
Huspriserna och recessionen