Recession Risk?
All one has to do is read any newspaper or listen to the TV and hear all the wonderful economic news. Do I really need to mention all the issues ranging Sub prime, Housing crisis, or, my favorite, all the SIVs [Special Investment Vehicles or toxic paper that needs to be written off] that banks all over the world are holding. When I even ponder the thought that the world's largest banks and financial companies have a special pouch in which they place all their bad loans which they do not want to value, it is reminiscent of Enron and WorldCom. An analyst from the Royal Bank of Scotland estimated the potential write off of bad loans, sub prime or even commercial paper, is from around 250 billion to 500 billion dollars. Every day seems to bring a surprise. Yesterday was E*TRADE...Who will be tomorrow?
The real funny thing [at least to me] was a recent Blue Chip Economic Indicator report based on a group of economists in which the consensus indicated expectations that growth will be sluggish into next year and NO RECESSION! Never has this report been accurate in anticipating a Recession. Ask homeowners in Ft Myers Florida who cannot get prospective buyers to look at their home even after they have lowered the price time after time. Speak to the car salesmen. It is not just Florida; We could be in a RECESSION RIGHT NOW!
There exist tenable indicators present in every Recession. They are logical and historically related to economic weakness. Any one of them is not conclusive but when there is a confluence, the risk of Recession rises dramatically.
Every aspiring economist has learned about the Inverted yield curve. Guess what … We have an inverted yield curve. The 10-year Treasury yields no more than 2.5% above 3-month Treasury yields.
What about widening credit spreads? There has been an increase over the past 6 months in the spread between commercial paper and 3-month Treasury yields, as well as between the Dow Corporate Bond Index yield and 10-year Treasury yields. Do I need to ask if commercial loans to mortgages have been become more stringent? Just ask Mr. Want-to-be-Homeowner, who wants to purchase a house over $417,000. He needs to be an acrobat to jump over all the hoops his bank or mortgage companies present him.
Another obvious sign is the Falling stock prices. We are below the 200 day moving average. This is a line of demarcation. If we are above, one could say the market is healthy and conversely if we are below, the market is sick. Another example is the ISM Purchasing Managers Index. Your guess? It is in the low 50’s. Are purchasing managers going on a buying spree? Nope!
Not to bore you, but when you last filled up your car with gas, did you have shock once you finished filling up? How about our favorite grocery store, Prices are also going up. The additional price of gas has and will affect everything. There is just so much money in our wallets and so much we can press onto our credit cards.
So how do we splurge on ourselves and buy all kinds of cool new things? Do we need to take a step back? The biggest catalyst of the US economy is the consumer. So if we tighten up our spending, then what is the catalyst for the US economy? This is what seems to be happening as Consumer confidence is waning.
We can listen to the economists who have a very poor track record or we can simply look at the facts. We are either in a Recession now or the throes of the oncoming onslaught of one.
