Recession: When Is It Going To Start?

[liquid]

Can anyone please help me understand the indicators for a recession and how to or where to observe movements of these indicators?

I have read the following link:

http://www.reference.com/browse/wiki/Recession

I will do more research, but I wanted to hear the opinion of the forum.

I imagine there are only a few measurements to follow. Once found though, what indicators should be read with a pinch of salt, i.e. how has the owning body skewed the figures! Basically what can be relied upon?

Indeed, can the markets safely predict a recession?

I tried a search in HPC but if someone can point me to a pertinent thread amongst the 3951 results I'd be grateful!

If this isn't pertinent for this discussion area please have it moved.

Apologises if this also shows my ignorance - but I'm hoping you'll forgive that!

Edited September 12, 2005 by liquid

[andrew_uk]

Can anyone please help me understand the indicators for a recession and how to or where to observe movements of these indicators?

I have read the following link:

http://www.reference.com/browse/wiki/Recession

I will do more research, but I wanted to hear the opinion of the forum.

I imagine there are only a few measurements to follow.  Once found though, what indicators should be read with a pinch of salt, i.e. how has the owning body skewed the figures!  Basically what can be relied upon?

Indeed, can the markets safely predict a recession?

I tried a search in HPC but if someone can point me to a pertinent thread amongst the 3951 results I'd be grateful!

If this isn't pertinent for this discussion area please have it moved.

Apologises if this also shows my ignorance - but I'm hoping you'll forgive that!

<{POST_SNAPBACK}>

A recession is 2 quarters of negative GDP. So keep an eye on GDP. Brown planned a 2.5-3.5% for the year and it's now looking more like 1.5-2% so watch this quarterly figure and the first negative quarter in 2006.

[cgnao]

Inversions in the yield curve (i.e. short term interest rates higher than long term ones) are the most reliable leading indicator of recession.

The UK yield curve inverted a few months ago and the recession has probably already started.

The USA yield curve is just about to invert. One or two more rate increases and it will be inverted. Which means, recession in a few months over there as well.

Hope this helps...

[liquid]

What is public debt as referenced in this article?

http://news.bbc.co.uk/1/hi/business/4267370.stm

Does this have any bearing on indicators for a recession?

Edited September 21, 2005 by liquid

[Charlie Don't Surf]

I think the first notion the general public will get of the downturn is post christmas. After what I'm sure will be one of the worst christmas retail seasons on record there will be carnage on the high street. This will coincide with house prices going decisively negative YOY.

[Leeds-Bozz]

This is taken from the monthly report of one of the funds I invest in - Ruffer total return.

I think it is s pretty useful summary of where we are..

When the only things left to get excited about are potential restructuring

stories in Germany and Japan, one senses that the last gasps of bullish

oxygen are being sucked out of these markets. It sounds cynical, particularly

given that we have investments in both Germany and Japan, but we

have to focus on the fact that the key stimulus driving equity market performance

over the last three years is being withdrawn.

By instigating an era of ultra-cheap credit, the US Federal Reserve set in

motion three simultaneous manias: the housing refinancing mania (US

home owners locking into lower fixed rate mortgages and extracting equity

from their homes), the leveraged finance mania (easy financial profits

through the mechanism of leveraged, but relatively safe, speculation), and

then through US dollar weakness, the reflation mania (monetary stimulation

by the authorities of economies whose currencies were fixed to the

US dollar, eg China). In turn, these manias spawned housing and commodity

price bubbles globally.

Now, as interest rates are being normalised, corrective mechanisms are

working their way into distorted systems. Already pressures on corporate

profit margins are starting to emerge, and it isn’t difficult to see why.

Higher energy and raw material prices are starting to filter through from

expiring hedging policies. Labour costs, whether in the form of wages,

pension costs or bonus compensation, are rising. The flattening yield curve

is reducing ‘costless’ carry trade profits which have permeated the corporate

sector in the context of low nominal interest rates, an upward-sloping

US yield curve which a transparent Federal Reserve is ‘guaranteeing’.

Pricing power remains elusive for products exposed to increased global

capacity. Finally, the revaluation of the Chinese Renminbi and a change in

its future management tied to a basket of currencies, rather than just the

dollar, implies potential cost pressure for manufactured goods.

Rather than let lower margins impact corporate return on equity, US corporations

are responding by releveraging their balance sheets through bank

loans (loan growth is now 13%, its highest level since 2000), corporate

bonds or corporate activity (mergers and acquisitions, leveraged buy-outs). It is a

rational response given that long term yields and corporate borrowing spreads

have remained at historic lows in spite of rising short term interest rates.

We believe the cost of capital is too low. This is supported by the proportion of

new bond issuance in speculative grades being at a 25 year high, suggesting, if

history is a reliable guide, that the quality of credit is at a generational low. Enterprises,

which under normal credit conditions would not generate sufficient returns

to survive, persist. In the first instance, excess capacity causes the return

on capital employed to converge on the cost of capital, lowering returns for all

participants. In the second, any normalisation in the pricing of credit leads to

sharply increasing default rates.

This highlights America’s fragility. US consumers, US speculators, US government,

and, increasingly now, US corporations are saturated in cheap credit. As

returns come under pressure, the quality of that credit will reassert itself, most

likely in 2006. Given that the US external deficit is financed primarily by foreign

private sector (as opposed to foreign central banks) demand for US corporate

paper, any turn in the credit cycle will quickly become a dollar problem.

The sequence of events from rising credit spreads - to falling dollar - to falling

equity markets could be sharp as we saw in April’s GM/Ford debacle. So, while

we can distract ourselves in Japan and Germany, we shouldn’t take our eye off

the real master of these markets: US credit quality.

[lowrentyieldmakessense(honest!)]

This is taken from the monthly report of one of the funds I invest in - Ruffer total return.

I think it is s pretty useful summary of where we are..

When the only things left to get excited about are potential restructuring

stories in Germany and Japan, one senses that the last gasps of bullish

oxygen are being sucked out of these markets. It sounds cynical, particularly

given that we have investments in both Germany and Japan, but we

have to focus on the fact that the key stimulus driving equity market performance

over the last three years is being withdrawn.

By instigating an era of ultra-cheap credit, the US Federal Reserve set in

motion three simultaneous manias: the housing refinancing mania (US

home owners locking into lower fixed rate mortgages and extracting equity

from their homes), the leveraged finance mania (easy financial profits

through the mechanism of leveraged, but relatively safe, speculation), and

then through US dollar weakness, the reflation mania (monetary stimulation

by the authorities of economies whose currencies were fixed to the

US dollar, eg China). In turn, these manias spawned housing and commodity

price bubbles globally.

Now, as interest rates are being normalised, corrective mechanisms are

working their way into distorted systems. Already pressures on corporate

profit margins are starting to emerge, and it isn’t difficult to see why.

Higher energy and raw material prices are starting to filter through from

expiring hedging policies. Labour costs, whether in the form of wages,

pension costs or bonus compensation, are rising. The flattening yield curve

is reducing ‘costless’ carry trade profits which have permeated the corporate

sector in the context of low nominal interest rates, an upward-sloping

US yield curve which a transparent Federal Reserve is ‘guaranteeing’.

Pricing power remains elusive for products exposed to increased global

capacity. Finally, the revaluation of the Chinese Renminbi and a change in

its future management tied to a basket of currencies, rather than just the

dollar, implies potential cost pressure for manufactured goods.

Rather than let lower margins impact corporate return on equity, US corporations

are responding by releveraging their balance sheets through bank

loans (loan growth is now 13%, its highest level since 2000), corporate

bonds or corporate activity (mergers and acquisitions, leveraged buy-outs). It is a

rational response given that long term yields and corporate borrowing spreads

have remained at historic lows in spite of rising short term interest rates.

We believe the cost of capital is too low. This is supported by the proportion of

new bond issuance in speculative grades being at a 25 year high, suggesting, if

history is a reliable guide, that the quality of credit is at a generational low. Enterprises,

which under normal credit conditions would not generate sufficient returns

to survive, persist. In the first instance, excess capacity causes the return

on capital employed to converge on the cost of capital, lowering returns for all

participants. In the second, any normalisation in the pricing of credit leads to

sharply increasing default rates.

This highlights America’s fragility. US consumers, US speculators, US government,

and, increasingly now, US corporations are saturated in cheap credit. As

returns come under pressure, the quality of that credit will reassert itself, most

likely in 2006. Given that the US external deficit is financed primarily by foreign

private sector (as opposed to foreign central banks) demand for US corporate

paper, any turn in the credit cycle will quickly become a dollar problem.

The sequence of events from rising credit spreads - to falling dollar - to falling

equity markets could be sharp as we saw in April’s GM/Ford debacle. So, while

we can distract ourselves in Japan and Germany, we shouldn’t take our eye off

the real master of these markets: US credit quality.

thanks for that

fund managers that appear to know what they are talking about.

do they practice what they preach?

[Leeds-Bozz]

thanks for that

fund managers that appear to know what they are talking about.

do they practice what they preach?

I'm hoping so, this fund rode out the last bear market.

I liked the look of the breakdown of their portfolio; low US and UK exposure, lots of Japan; Swiss bonds and gold/mining.

http://www.ruffer.co.uk/funds/performance_update_rif.htm

[beerhunter]

The USA yield curve is just about to invert. One or two more rate increases and it will be inverted. Which means, recession in a few months over there as well.

Apparently it's almost there... Spectre of yield curve inversion

[MarkG]

It started years ago: it's just been hidden by increased government spending and artificially low interest rates.

[assetpriceinflation]

When the US consumer stops spending, Mar - Aug 2006. Within the same time period, US House prices will peak. There will be 2 year stagnation in real estate prices (US) to collapse mid 2008 and global recession hit hard in 2010.

Read, a year earlier for UK HPC -- 2007

[oracle]

A recession is 2 quarters of negative GDP. So keep an eye on GDP. Brown planned a 2.5-3.5% for the year and it's now looking more like 1.5-2% so watch this quarterly figure and the first negative quarter in 2006.

i hate to disappoint folks here but there is likely to be growth....not recession.

...you need to keep a much closer eye on UK domestic and it's constituents to get a feel for whether the country,not the country's economy has gone t1ts up.

the UK can be going to the dogs 1979 style but UK plc will be doing quite nicely thankyou,because of its exposure in world markets.

the best barometer of this I feel is likely to be things like fitness first,and some smallcap consumer-sensitives that don't have much in the way of dealings abroad.......Dr Bubb has pointed out housebuilders but I feel there is a bit of global,or at least regional tint to their earnings.

....look at the small picture for the best gauge!...are your pubs/restaurants quieter than usual?,what about the gym?.....what about sky TV,anyone scaling back their package or are prices being cut to keep them?

...even pizza/takeaways??....have some of your associates suddenly gone cooking mad and think they are gordon ramsey....and invite you to sample their cooking?...there is a message in here...and it's "I CAN'T AFFORD £40 FOR PIZZA'S ALL ROUND SO I'LL DO YOU SOMETHING CHEAP WITH RICE AND LOTS OF SEASONING!!!!!"

I'm hoping so, this fund rode out the last bear market.

I liked the look of the breakdown of their portfolio; low US and UK exposure, lots of Japan; Swiss bonds and gold/mining.

http://www.ruffer.co.uk/funds/performance_update_rif.htm

Same here,without the swiss bonds!!!.....overweight on jap/natural resource....and also have some cash(those nice 10% accounts come in handy if you want to stash a liitle bit by with zero risk.

Edited November 29, 2005 by oracle

[The Masked Tulip]

PART 4 - HOW THE CRASH WILL COME

IN THE AUTUMN OF 1929, a shoe-shine boy asked Joe Kennedy to recommend some shares. The story goes that the next day Joe sold all his shares. And then the market crashed. Joe figured if everyone was into something, it was time to get out.

Markets generally do the opposite to what most people think they are going to do. Markets seem to have a personality which says: "We'll keep booming until everyone believes in us, and then, when they think it's never going to end, we'll catch them and crash."

Markets tend to catch three groups of people. First, those who have over-exposed themselves by borrowing too much; second, those who waited too long to believe in the market and third, the greedy - those whose only reason for being in the market was profit. Markets love to catch developers and speculators or agents who open real estate offices just because of the boom. There are lots of these people around at the moment.

TWO WAYS TO PREDICT A CRASH.

Aside from the warning signals of yields, vacancy factors and replacement costs - there are two ways to predict a market crash. The experts will probably scoff at both of them. More on experts in a moment. But let's have a look for ourselves at these two ways to predict the market.

The first is History and the second is Feelings. For history, we can turn to Oliver Wendell Holmes who said "To understand what is happening today or to decide what will happen tomorrow, we must look back". For feelings, we'll look inside and listen to a little voice which is often ignored but often right - our instinct. For good measure, we'll mix in a bit of folklore. With such a recipe, here's what we might come up with.

THE ECONOMY

Things have been good for a while, not just here but overseas. And now Japan and Singapore are in recession and the United States is following. Our Federal Treasurer may say, "It won't happen here. We're safe,". But what does that little voice which dares not speak aloud for fear of embarrassment - tell us?

Try this: It wasn't long ago that the Asian economy was all the rage. The great example. Now it's like a sick friend we don't visit any more. But are we so different? Of course not. We acted the same way as our friend - and we are not immunised.

Of course, this is not economic theory, it's just a feeling - instinct. It could be wrong. The Treasurer ought to know. But history shows that incumbent politicians talk up the economy. History also shows that once an election is over, politicians do things they wouldn't dare do before an election.

THE GRANT AND THE INCOMES

The real estate market has really taken off with the First Home Buyers' grant, just like it took off in the eighties with the same grant. Soon after the grant stopped, the market crashed. The grant might stop again soon. It seems certain to be reduced. Combine history and feelings on that one.

The cost of an average home is "normally" between six and nine times the amount of the average salary. In the late eighties, just before real estate crashed, the average cost of a home was TWELVE times the average annual salary - the SAME as it is today in Sydney. In Melbourne, it's now about ELEVEN times.

FOLKLORE

In the mid eighties, during the real estate slump, an elderly man was driving into the city. He said to his passenger, "Heavy traffic at this time of day. The shops are crowded. There's a boom coming. Go and buy more real estate." Like a farmer looking at a blue sky and predicting rain, he had that quiet confidence that comes from being right. A year later real estate boomed. The shops are quiet lately. And the elderly man's not buying.

Another elderly man, a fellow called Rockefeller, had a saying: "I always sold too soon." He never waited until the market started going down before he took action to protect himself. He acted early.

EVENTS BEFORE THE CRASH

There is a real estate crash coming and although it's hard to say when, here's how it will come: It will probably begin after a 'date event' - an election, a holiday period or an unplanned world event. These 'date events' are like half-time in football. When the game starts again, it's different. And you've got to make sure you are well ahead, so far in front that no matter what happens you will still WIN the game. And that means getting rid of any dangerous debt NOW - while you have time. It doesn't mean you sell your home on which you have an easy to pay home loan, but it does mean answering the question, "What's the WORST that can happen to me?"

Make sure you avoid the worst. It means playing safe, which, by the way, is how you should always play any financial game.

BUY OR SELL FROM CHOICE NOT FORCE.

The financial maxim that you "don't lose until you sell" is only true if you have the CHOICE of when you sell. If you are forced to sell when the market crashes, you can lose plenty. Before the market crashes there are always signs - clues that mount until the unrealistic optimists can't deny them any more. The market is not crashing now, it's just giving us a few clues. It MAY go higher - perhaps to catch more people before it crashes. Whatever it does, you should make sure you are able to sell or buy without being forced to do either.

NEWS STORIES

A big turning point will be the news stories. It will probably begin with the rich. Stories of rich people losing money always make "good" news. You'll see a story about someone selling a home for $2 million when they paid $2.5 million; or you'll see a story about an expensive home being passed in at auction for less than the owner paid for it a year earlier.

And then, you'll see the sad stories - and they will probably be on television - about families who lost their jobs and had to sell for less than they paid. The newspaper headlines will follow later. You'll see the poster first. It will say, HOME PRICES CRASH! That will increase circulation because we all want to know what's happening with our asset which is supposed to always go up.

THE WORST MARKET FOR AGENTS

For agents, the worst type of real estate market is not a bad market, it's when the market STARTS to go bad. That's the time BEFORE the news stories. It's the time when the market has stopped booming and started to turn down. It's the time when the sellers are looking at the SOLD prices not the UNSOLD prices. It's the time when homes become a bit harder to sell - and then a lot harder because frenzied buyers have become careful buyers - a little more choosy, a little more inclined to walk-away. It's the time when agents have to start chasing up buyers again, instead of just waiting for them to walk in the door. It's the time when they begin to realise that maybe they have been spoiled, that maybe they have had it too easy and that maybe they're about to learn a lesson. If they have never seen a crash, they might be like some American agents who once had bumper stickers saying, "Please give me one more real estate boom and I promise not to muck it up."

CONTROL OUR OWN TIMES

Historically and economically, bad times follow good times. But, if we are careful in ALL that we do, if we urge others to be careful, we can CONTROL our own times. When the economic times are bad, our personal times don't have to be bad. We should be prepared for the worst and if the best stays for a bit longer, no harm done. But when the worst does come, there will also be no harm done.

And that brings us to the first principle of ethics - FIRST DO NO HARM. Not to ourselves or to others. And the only way to avoid harm and to maintain prosperity is to play it the way they used to play it. That's what history tells us. The happiest time of the past hundred years was in the 1950's. The American news anchorman, Tom Brokaw, described the people of that era as, "The Greatest Generation."

The way they played the game in those days was SAFE AND SOUND. And that's the advice for you. Play it safe and sound.

BACK TO THE EXPERTS

What will the experts think of all this? Probably not much.

David Potts is the business editor of the Sydney Sun Herald. In a competition to see who can earn the most money, he and nine others have a mock $100,000 to invest in shares of their choice. Emily Knox, a Year 12 student at North Sydney Girls' High School, is in first place. The person running second is not a person at all, but a dartboard. And third place goes to the paper's astrologer. The business editor is running last. [if only real estate experts were as honest about their results.]

And finally, another expert story. On Wednesday October 3, a lady saw a snake near her laundry door. She called a snake expert. "Stand back everybody," he said, "I know what I am doing here". An hour later, the snake expert was in hospital.

Please be warned: I'm no expert. I just have a feeling the real estate boom will end.

All I'm saying is, BE CAREFUL YOU DON'T GET BITTEN.

http://www.jenman.com.au/NewsAlerts1.php?id=4

[ian13]

A good site for the bear is www.fiendbear.com

I particularily like alan newmans site and www.comstock.com

Alan Newman is predicting 6400 for the Dow by October 2006.

Interesting.

For charting I'd recommend www.asaiachart.com

Ian.