re: Care to enumerate the reasons why you think we are in for a 1973 type of recession?
First, I could easily be wrong, and, if I see evidence that we are going to be able to avoid a recession, then I will change my opinion and my investing stance.
1. credit, for individuals and businesses, has been too easy to obtain, for years. As a result, consumer debt levels are very high, and a lot of money has been borrowed by businesses with untenable business plans. The savings rate is negative, which is an unsustainable situation. People can't finance their vacations with home equity loans any longer. Basically, spending levels, for years, by individuals and businesses, have been funded by increasing debt, and we are in for a big hangover from that party.
2. With unemployment levels now rising, and credit maxed out, consumers are going to have a very hard time sustaining current consumption levels. Lots of bankrupcys, and a severe tightening of credit standards, is in progress.
3. the sharp downturn is business capital spending, is now going to be followed by a sharp downturn in consumer confidence (in progress, but still has a long way to go), and a sharp downturn in consumer spending (just beginning, won't hit bottom for 2-4 more quarters). Consumer spending won't hit bottom until the national savings rate is back up to +3-4% (from its current negative level).
4. I've come around to believe the argument that a rapidly easing Fed may not be able to maintain consumer spending. Think about someone who is, say, a cashier at Montgomery Ward, who lives from paycheck to paycheck, carries a large balance on their credit cards, and then gets laid off when their employer goes under. They will be spending less, no matter how low the Fed Funds Rate goes. Even when they get another job, they aren't going to buy that Mobile Home they were looking at, because they feel less financially secure, and credit standards have tightened. A year ago, they might have used a credit card to buy a PC or cellphone. Now, they no longer are getting credit card offers in the mail every day.
5. A decade-long expansion (in 1920s, 1960s, and 1990s), was followed by a decade that was lousy for the economy, and lousy for the stock market (1930s, 1970s, and ???2000s). I'm not at all sure the hangover from the overspending and overleveraging of the 1990s is going to take 10 years to get over. But it might. The economy needs a recession at periodic intervals, to wring out the waste and fat and lax standards and general silliness. We haven't had a real recession in this country, a recession that hurts enough to get all the excesses out, since 1974. We are due for one.
6. If the two largest economies in the world go into recession, all the export-driven Third World economies are facing a downturn, too. Economic downturns, in those countries, always creates social, political, and military uncertainty. Lots of opportunities for the kind of "exogenous shocks" the market hates.
7. So, my attitude toward the recovery is "show me". That is, I'm willing to give up the first big rally in stocks off the bottom, to gain the certainty that it isn't just a bear rally. I know I will pay for that certainty. In the 1996 and 1998 downturn in semi-equips, I tried to buy at the bottom, buy at the point of maximum despair. Now, I want to buy later. The main reason for my changed stance, is that in those two previous downturns, the economy was not facing the possibility (and, yes, it is still just a possibility) of a recession. |
