Is it possible for the for a recession to occur just by talking about it incessantly? It certainly can't help. The sad part is that the media seems to want a recession to occur, for whatever their motivation (the list is endless). If the US is in a recession (it remains to be seen), all interested parties seem to be doing the right thing: the Fed is lower interest rates (For all you Fed bashers out there, you know who you are, the Fed has already brought the Funds rate down 100bps in the last four months. More on this later.); the government is talking fiscal stimulus; interest rates that matter are moving lower (The alleged geniuses out there seem to think that the Fed should lead the market up or down. In a capitalist system, it should be the other way around. This is what is happening.); and stock prices should go down, despite numerous calls for the Fed to lower interest rates to prop up prices, to reflect lower earnings growth or bad decision making.
Whether or not we are in a recession, the pieces are in place (listed above plus, hopefully, tax reform) to get the economy growing again. Regardless of how many more eases come out of the Fed, the groundwork is in place for recovery. This can be seen in the increase in the number of refinancings over the past few weeks. Given where the 10-yr is now, it is estimated that 40-60% of mortgages are refinancable, assuming of course there is enough equity in the house. The 100bp of Fed Funds rate reductions take time to work through the economy, but it is now being seen in lower HELOC rates and a lower prime rate. In addition, once again, the Fed is getting little public credit for restoring the money markets to normal function. It's funny, people that couldn't spell LIBOR a year ago were coming out of the woodwork decrying the Fed for not doing anything about the seize up in money market liquidity. Now that things have normalized, these same people are nowhere to be found.
Yesterday, I had the privilege of attending a lunch where the speaker was Tony Crescenzi, chief bond market strategist for Miller Tabak. Tony was there ostenibly to speak about his new book, an update of the seminal The Money Market by Marcia Stigum. However, he spent most of his time speaking about recession and gave some very clear and concise arguments on why if there is one, it will be probably be short. He had ten points, some of which I'll recap here. First, inventories are low, part of a continuing trend of better inventory control and management. Second, sovereign wealth funds investing here are a good thing. It is a sign of confidence and they aren't looking for control, yet. Third is a longer term item, demographics. New housing starts last month fell to a 1 million annual rate, which Tony explained should be adjusted downward 300,000 to account for teardowns. With at least 1.1million new households forming annually combined with an increase number on baby boomers buying second homes, it is only a matter of time before the excess housing supply is absorbed. Finally, productivity gains and technology implementation during this super-cycle have yet to run their course.
It is important in this uncertain environment to filter out noise and attempt to focus on what is real and important.
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The problem is a structural or fudnamental recession. Bondguy, you more than most know that markets can move for technical reasons as well as fundamental reasons. You make many fundamental points with which I and, apparently, Mr. Crescenzi agree. However, if consumers believe that there is a recession, they could cause a recession or at least a signifciant slowdown.
You are correct, the media is hell-bent on soudning the recession alarm. Unfortunately, people believe talking heads. You should hear the things brokers tell me their clients tell them they heard form or read in various media sources.
The Fed is panicked that there will be liquidity issues in the financial system. The problem is also the financial instituitions.
The big finacial institutions havebeen crying for help, publicly and privately to the Fed, for help. Recent financing deals fith soverign wealth funds indicate just how badly "Big Finance" misplayed the housing boom.
Many of your readers may disagree, but the quant model of trading / investing is inherently flawed and poorly thought out.
My late father was one of the ealry computr programmers. When video strategy games first became popular in the 1980s, during my highschool and college years, he laughed at how I struggled to win games. He told me to figure out what the computers typical response to my actions were and what it did in various situations and do the opposite.
You see, computers and software are logical creations. They are designed to make logical decsions based on mathematical equations. If you engage in what the program believed to be low percentage (illogical) decsions, you can beat it.
This is exactly what happened rith CDOs, SIVs etc. The programs never figured on massive deliquencies etc.
Structurers, somehow, didn't figure that similar lonas would react similarly to changing ecnomic conditions. Their models said that percentages indicated otherwise.
So many bad bets were made by banks which are large enough to cause major disruptions in the banking system, the Fed is now forced to take action it truly does not want to take.
The Fed, fundamentally, does not want to ease. Howvever, it cannot let the banking system stall. Now it risks creating a moral hazard. Look for higher in flation and a steeper yield curve (first as a bull and then as a bear steepener) as the year progresses.
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