Wednesday, November 10, 2010

Will the Next Recession Look Different from the Last One? (Assuming the Last One Has Ended)

Mish has a post up involving a discussion with a Cerdian economist named Ed Leamer. I am going to comment on one point:

Leamer: Dips come from collective postponement of the postponeable purchases: homes, cars and equipment. But all three of these are at record lows relative to GDP after all the postponement that has already occurred. (After having falling to the floor, the economy has to at least get back to its knees before it can fall again.)

The dip Dr. Leamer is referring to is a new recession.

I wonder if his thinking reflects conventional thinking. I also wonder if when the next recession occurs, it will again fool the experts who are thinking as Dr. Leamer things and thus will not foresee it because it occurs on the less cyclical consumer spending side of the economy.

Meanwhile, we had a turnaround Tuesday today. Gold and silver reversed, and perhaps the record or near-record spreads on the yield curve out to 30 years have peaked. In the meantime, given the collapse in the fraction of the potential labor force that is actually working, we may simply see a combination of a continued retrenchment in consumer spending (especially that which is not due to government transfers/money-printing) and a government in financial straits pulling back on its support of housing. Plus, oil prices have been known to spike unpredictably. What would that event due to auto sales, travel and the like.

In the meantime, BofA ("BAC" symbol) fell 2 1/2% today, sadly once again hitting resistance at its declining 50 day moving average. The nearby chart tells the tale. It is one thing when gold or AAPL, in confirmed structural bull markets with prices that have been bid up fast and high, sell off. It is another thing when a laggard in a lagging industry helps lead the market down following a surge to overbought and over bullish levels. Informed people such as Chris Whalen of Institutional Risk Analytics have been stating that BofA is insolvent and needs to be taken under government protection with its bondholders taking haircuts. The government presumably would make great efforts to avoid this, given the effect on confidence such an action would have at this stage of the so-called recovery.

If Mr. Whalen is more or less correct, then the "Japanification" of the United States continues with seriously impaired major financial instutions existing as zombies ("too big to fail"). The 5-7 year notes are at or near all-time record low yields except for the past week or two. Who knows, but as the banker to the world, all the U. S. has to do is stop importing all elective things and the world will run short of new dollars. Thus I suspect that for all the moaning elsewhere about QE2, overall most of the rest of the world is happy to see America poorer and getting ready to ship its products to them rather than taking the fruits of their labor in return for our depreciating paper. Barack Obama predicted that the world would not let us live in our big homes wasting carbon-based fuels during his campaign. Meanwhile, though, there simply is no other currency ready to take the dollar's place as a reserve currency. (Gold will have to wait. The world is not ready for it yet.)

If he was correct on that in one way or another, please don't be surprised if the U. S. joins Japan and suffers a new recession despite zero interest rates.

Copyright (C) Long Lake LLC 2010

1 comment:

  1. Most everything, has two purposes. The main one is utility. We are way over housed on a utility bases. Too many second and third houses. Too much square foot/bathrooms per person. Our population is not having large families, yet we live in houses many times the one's we grew up in. We are getting older and can not clean our large houses. Heat, electric, maintenance, taxes are all going up, our incomes stagnant or declining, and houses continue to depreciate.

    You can't have less people, taking home less money, with higher costs and expect price gains.