World recession here, now! :(

[Sunfish]

I know most here think I'm a chicken little and do not believe a word I say. If so read no further. However, if you don't wish to get caught out, keep reading. I may be right. At least the economic journalists I read may be right.

The headlines last Friday (US time) said that there was only 32,000 jobs created in the US for June. They also adjusted down the figs given for April and May by more than twice this figure so during a much touted recovery, employment is falling. So what will their Fed do about interest rates next week? The current rate of 1.25% is really an emergency "force feeding" rate which, like steroids for an athlete, are dangerous in the long term. If those rates are still needed after such a long time, it says volumes for the US economy which they would rather not hear. But how can they raise them? Last Thurs a rate hike was accepted as inevitable, now it is in doubt.

As property investors we have an interest in rates staying low but we have no interest in a recession. Any economy which can't operate with more neutral rates than the US has now, is at risk of a recession.

As I said in the heading, I think the recession has arrived and it is riding on the oil price. PoO is high and rising and oil shocks have always induced recessions in the past and I see no reason to doubt it this time. The trouble is that PoO is not simply spiking now, it is more likely to be permanent so the recession may not end in another boom as PoO comes down and the business clock passes midnight.

What else might happen then? Resource wars, depression, hyper-inflation..... Who knows? I don't.

Next week could be nasty on the stock markets.

I have thought about whether I should write this for a day now and decided to do so. I don't mind if this post is rubbished just don't shoot the messenger, but if it is ignored I promise that I will not bore you again on the subject.

Thommo

 

[qaz]

I actually agree with you Thommo. Cheap, reliable energy is the backbone of an industrialized nations economy. If there is a surge in the price of energy (oil, gas, etc) then in my opinion the economy will suffer greatly because of it. Theres a good chance we are in for another recession.

 

[DaveJ]

Are the Clouds building!???

I agree the clouds may be building...


If you don't agree with all the bullish comments around at the moment (even though things are falling) then have a look around this site...

http://www.investmentrarities.com

Some interesting comments...


(Just nice to see 'both sides of the story' )

 

[Aceyducey]

World recession - European, Asian and even Australian data indicates otherwise. The world is coming out of a global recession (which Australia through luck & good management didn't experience). Even Japan is recovering slowly!

US recession - not right at the moment. Employment isn't the only factor to look at......business investment is tracking well - however, as employment figures indicate, the threat remains. The US has balanced on a knife-edge for awhile now...there's no real way to predict which way it will go in the mid-term.

An interesting factor that influences employment figures in the US is that their stats processes miss a lot of the new jobs created in an information economy by small employers & self-contractors...they simply don't get registered. The US needs a serious review of it's data collection processes to get any kind of accuracy in their figures.

Oil price shock - we ain't seen nothing yet

Cheers,

Aceyducey

 

[Jamie]

Hi Thommo,

I agree with Acey. Your sensational headline says World recession here, now..., but the entire article is about the US - US jobs, US interest rates etc etc.

Any stats to show we face a similar situation here?

Jamie.

 

[ger]

Thursday I rang my super fund to find out
some details. I also asked how my fund was doing
Balanced fund with shares property and cash
up to 30 june 2004 14.75%
july till thursday last week -4%!!!!!!!!
I personally did not think economy was bad but talking to
the adviser there I have my reservations

 

[Sunfish]

Thursday I rang my super fund to find out
some details. I also asked how my fund was doing
Balanced fund with shares property and cash
up to 30 june 2004 14.75%
july till thursday last week -4%!!!!!!!!
I personally did not think economy was bad but talking to
the adviser there I have my reservations

Your balanced fund is probably heavy on bank shares, NAB in particular, and possibly outside their guidelines. Even balanced don't hold much cash today, that's not where the action is. Strip out NAB and to a lesser degree the other three, and the stock market is at record highs.

Thommo

 

[Sunfish]

Hi Thommo,

I agree with Acey. Your sensational headline says World recession here, now..., but the entire article is about the US - US jobs, US interest rates etc etc.

Any stats to show we face a similar situation here?

Jamie.

OK, so can I change the heading a little to include the words "inevitable" and "slippery slope"?

What makes you think we can walk through the Valley Of Death unscathed if the US fails? I don't.

For Aus reference see
http://www.theage.com.au/articles/2004/08/07/1091732139240.html
and
http://www.somersoft.com/forums/showthread.php?p=112691#post112691

Thommo

 

[Bill.L]

Hi all,

Gloom and doom, gloom and doom, gloom and doom.

I've been reading about the coming apocalypse in financial markets for over 25 years. It's always "upon us", and following what the G&D merchants have been peddling has always proven to be a great way to lose money.
Believe me, I've lost lots of money in the past following the G&D advice. I bought silver in 1980 when the price came down to ~$A15 per once. Great investment that one!!

Try to think logically about what is the way out of coming problems, if you want to think about them at all. Let's say we do get much higher energy prices which leads to a recession, what is the most likely reaction from Govt and RB. They could raise interest rates to head off the higher inflation at the risk of causing a much deeper recession/depression. OR they could allow the inflation to run ahead of interest rates, thereby saving the economy at the expense of those who have large savings.(this they did in the 70's). There could be some other combination!

bye

 

[ger]

Your balanced fund is probably heavy on bank shares, NAB in particular, and possibly outside their guidelines. Even balanced don't hold much cash today, that's not where the action is. Strip out NAB and to a lesser degree the other three, and the stock market is at record highs.

Thommo

Hi Thommo
I am in the same belief that the share market is
very healthy at the moment
I do not have much control on what they invest though and
they would not realy tell me
thanks for info

 

[Sunfish]

Hi Thommo
I am in the same belief that the share market is
very healthy at the moment
I do not have much control on what they invest though and
they would not realy tell me
thanks for info

Their guideline percentages should be in their statements or offer documents. It is a puplic document. Actual breakdown ATM should be available too, but they may not tell you their exposure to NAB. They should though, it's your money.

If they can't make a profit in a healthy market, you should consider a switch. If I were to recommend less share exposure that would sound like advice, so I wont

Thommo

 

[keithj]

Your sensational headline says World recession here, now..., but the entire article is about the US - US jobs, US interest rates etc etc.

Any stats to show we face a similar situation here?

Jamie,

Here's a bit of todays' commentry from HSBC

House price inflation labs
It’s been well noted that the major “Anglosphere” economies of the United States, the United Kingdom, Canada, Australia and New Zealand now share characteristics which give them a distinct role in the global economy. All have high and rising levels of household debt, and all have a high level of home ownership and have recently experienced rapidly rising house prices. With the exception of Canada all of them have formidable trade deficits with the rest of the world. In all of them domestic demand growth is quite firm. The issue is whether this set of circumstances is unstable, and must end in difficulty. In this respect the Australian and New Zealand economies have moved faster than the major economies and provide an interesting test of the risks posed by their circumstances . We note that:
– The long upswing in house prices is ending but with very little impact on household consumption. In Australia house prices over the last six years have increased more than in the United States, and at a rate comparable with the UK. Beginning from well behind, the ratio of household debt to disposable income now exceeds that in the US and the UK. Australian house prices may or may not have fallen but since the first quarter they have almost certainly stopped increasing at the rapid rate of the last six years. Yet this arrest of house price inflation coincides with the highest level of consumer confidence in decades, firm trend retail sales, and robust output and employment growth. New Zealand surveys also report that house prices have flattened or fallen, and there the associated circumstances are quite mysterious. New home construction continues to boom, retail sales growth remains strong. Overall, demand remains too strong.
– Compared to the US and the UK, interest rates are already quite high in Australia and New Zealand. Unlike the US, the vast majority of Australian home mortgages are on variable rates linked to the bank bill rate. In New Zealand there is a higher proportion of fixed rate mortgages, but in both countries homeowners are much more sensitive to changes in short term rates than homeowners in the US. In Australia the cash rate has been increased 50bp since November last year, and in New Zealand 100bp since January this year. These increases may have contributed to the slowdown in house price inflation, but do not appear to have much impact on household spending, or on saving intentions. They have not sparked a property price collapse, or anything which begins to look like one.

But how can they raise them? Last Thurs a rate hike was accepted as inevitable, now it is in doubt.

Thommo,


From the same commentry, it looks like US rates will go up on Wed -

The main focus this week is the US FOMC meeting on Tuesday night/Wednesday morning, where a 25bp increase in the Fed Funds rate to 1.50% is widely anticipated. The key US data release is arguably July retail sales (Thursday) as an indication of whether consumer spending has bounced back in July after a soft spot in June, in line with Greenspan’s theory. Also of note in US data, Friday sees producer prices, the trade deficit and preliminary August consumer sentiment from the University of Michigan survey. Initial estimates of Q2 GDP growth are also released for Japan (Friday), Germany (Thursday) and the Eurozone (Friday).
Since the US FOMC hiked rates 25bp on 30 June, the oil price has increased from US$37 to above US$44, the Nasdaq has dropped about 10%, while 10 year Treasury yields have dropped almost 20bp. We expect another 25bp Fed Funds rate hike to 1.50% early this Wednesday morning. We initially thought the Fed would drop the word “measures” in this statement (given Greenspan’s backtracking from this commitment in his mid-July testimony), but with weak June growth, tame core PCE inflation, higher energy prices and perhaps the new terrorism warning, we now think “measured” will stay. However, the door to more aggressive rate hikes will remain open with the qualification about “responding to changes in economic prospects”. We expect both growth and inflation risks to remain balanced.

and Oz rates up in Sept or Oct (this came out BEFORE the RBA statement this morning)

Today’s Reserve Bank of Australia Statement on Monetary Policy must defend the Bank’s decisions to leave the cash rate unchanged for the last eight months, while leaving open an implication that on current trends the cash rate will sooner or later need to be increased. With an election imminent, any explicit suggestion of higher interest rates in the near future would ignite political controversy. Because of this we expect an unusually subtle Statement. It will reassert the Bank’s view that median house prices have fallen in Sydney and Melbourne, allowing this claim alone to be a substantial justification for leaving rates unchanged since December last year. It will record that core inflation through the June quarter remains a little below the mid point of the 2% to 3% range sought by the Bank. In the May Statement it forecast that core inflation would be 2.5% at the end of next year. In today’s Statement it will probably recognise that the balance of risks has shifted to the upside. Oil prices have been persistently and markedly higher than in May, when the assumption was made that the oil price would fall to a medium term average. The currency is about where it was then, but there has been more evidence of higher import prices and it is no longer sensible to attach any great weight to the probability of the currency markedly appreciating. There has been no evidence of growing pressure on wages, but employment continues to gain and the unemployment rate continues to fall.
The most interesting discussion is likely to come in the context of the rate of growth of domestic demand, which in the year to March was nearly twice the rate of growth of production. There are no good grounds to revise down the May view that overall growth is likely to remain strong. Despite the alleged fall in house prices, consumer sentiment is at a record high, and credit growth remains somewhat stronger than expected. The Bank might note that import growth appears to have reaccelerated, that the slowdown in home construction is very slow indeed, that exports are well up in the last eleven months, and the employment gains have been solid. All these points would signal a subtle shift in rationale. They would open the argument, to which the Bank resorted in 2000, that domestic demand growth is a bit too strong. The implication is that interest rates are a bit too low. A shift in the argument in this direction would open the way for a rate increase discussion after election day, which now looks to be either September 18 or October 16.

 

[Aceyducey]

Now the statement below from New Scientist provides an insight into one of the potential areas of weakness in the US.

If you want to look for reasons why the US economy may not successfully recover in this business cycle, this is food for though.

The US has so far found only one cow infected with BSE [mad cow disease]. But the mantra of all the experts New Scientist contacted, is that "there is no such thing as an isolated case", so it seems likely that BSE has been circulating North America for several years.

The infected cow was the tip of an iceberg whose size can only be guessed.

Despite this, American consumers seem blithely unconcerned and sales of beef remain unaffected - but as the threat of a global epidemic becomes ever more real, the US needs to be on its toes.

Source: New Scientist, 7th August 2004

Bear in mind that Australia has no reported cases, and an imminent free trade deal with the US....so for us the destruction of the US beef industry could be a very good thing!

Also keep in mind that the UK economy, while severely affected by BSE, wasn't kept down for very long.....economies are resilient! A massive BSE scare in the US may not provide as much or as long a downturn as pessimistic commentators may predict.

You could also argue that the US political machine is already rife with the human consequences of mad cow disease. That could explain a large amount of their recent policy

An all-chicken patty anyone?

Cheers,

Aceyducey

 

[Mr. Fabulous]

Acey posted this:
The US has so far found only one cow infected with BSE [mad cow disease]. But the mantra of all the experts New Scientist contacted, is that "there is no such thing as an isolated case", so it seems likely that BSE has been circulating North America for several years.

The infected cow was the tip of an iceberg whose size can only be guessed.

Despite this, American consumers seem blithely unconcerned and sales of beef remain unaffected - but as the threat of a global epidemic becomes ever more real, the US needs to be on its toes.

This has been talked about for years, it's not a new view. In most countries, cows are now (due to greedy corporate interests) fed back to themsleves. Yes, cows are in the feed fed to cows. This is how Mad Cow Disease started in the UK. Cows are vegetarians, but have been forced to become cannibals in the chase for the almighty dollar.
Even one of the head honchos of beef farming in the US was forced to admit this on Oprah after the MCD scare started in the UK, which lead to Oprah's now famous 'I'll never eat another hamburger again' statement. The fact is that another outburst of MCD was not so much a question of 'Will it happen again?' but 'WHEN will it happen again?'
Oh, and if you think it can't/won't happen here, think again, because cows have been cannibalised here for who knows how long. Just one more reason in the long long long line of reasons to eat vegetarian.

 

[wrappack]

Random thoughts.

Forget about cheap oil in the medium to long term. Short term it may dip, but medium to long term, it must rise. Why? dwindling (easy to get to) resources, new resources (further offshore, smaller, less profitable deposits) will be more expensive to mine. But the real answer can lie in three words. China, china, china. Why does every country in the world suck up to China? After all, they have horrendous human rights (currently executing prisoners, selling their body organs to foreigners), tianamen square, one could go on and on. Why bestow upon them the olympics? (then again, we let adolf have them). Well, currently they have a billion people, essentially rural. Thats about four times the US pop, and about 40 times the aus pop. THey are about to industrialize and revolutionise themselves and the world. And every country in the world wants a piece of them. Every telco wants to be their telstra, every developer their westfields. We will bow to them, develop them, and their massive spending power will need massive amounts of everything, particularly oil.

The US economy is having what they call the 'jobless recovery'. Ie getting out of recession, but all the jobs they are creating are sweatshop jobs offshore. Already they are heavily skewed towards massive executive pays, and stuff all for the plebs who do the work. This has rewarded a portion of the US with massive wealth, and most with none.

I think sometime things will go snap. Basic economic theory is that we have a cycle, for many reasons. The higher the high, the lower the low. We have had such a huge recovery, based a lot on sweatshop labour paid for by our line of credit loans. At some stage, the average person in the street (?80%) are in for a rude awakening. What could happen then? What if houses retrace their prices to four years ago, (part way through the boom) and rates went up 2%? What would happen to consumer spending (which seems to be the major portion of our economy, as opposed to production), and thus, the economy?

 

[L Bernham]

If you're interested in the theories/thoughts raised in the above post by wrappack , you might be interested in this article I was recently shown discussing the differences between the classes etc re the outsourcing of jobs.

Interesting read

 

[Peter Parker]

The US economy is having what they call the 'jobless recovery'. Ie getting out of recession, but all the jobs they are creating are sweatshop jobs offshore.

Though as unemployment is a lagging indicator, you'd need to wait a couple more years before we can say for sure.

Though the 1990-91 recession was comparatively short (a recession being based on two consecutive quarters of negative economic growth) it look a long time for the labour market to recover, so the phrase 'jobless recovery' was popular at that time here.

Unemployment was still above 10% in early 1993 and above 8% for several years after that.

I think sometime things will go snap. Basic economic theory is that we have a cycle, for many reasons. The higher the high, the lower the low. We have had such a huge recovery, based a lot on sweatshop labour paid for by our line of credit loans. At some stage, the average person in the street (?80%) are in for a rude awakening. What could happen then? What if houses retrace their prices to four years ago, (part way through the boom) and rates went up 2%? What would happen to consumer spending (which seems to be the major portion of our economy, as opposed to production), and thus, the economy?

One favourable consequence is that a 2% rise in interest rates would do mroe to dampen demand in the current low rate/high debt environment than the 5%+ hike in the late 80s. Thus rates might not need to be raised to previous levels to have the desired effect.

The reference to sweatshop jobs offshore appears to be because people are borrowing to buy consumer goods from overseas. And at the business level, buying services like call centre services from OS.

This has adverse implications for national balance of trade stats. But because a service is cheaper (ie provided more efficiently) then we have more money to spend on other areas, so our wealth is higher (a key argument for free trade).

It is interesting to look at comparative price movements of various items in the consumer basket over the last 30 years relative to CPI. Eg

- clothing (down)
- small appliances & electronics (down - massively)
- food (steady)
- rents (steady)
- newspapers and books (maybe =cpi or a bit above)
- cap city house prices (up, though houses have got larger)
- private health & education (up)

If my guess is right, the items that aren't competitively provideable from overseas (ie those with a large local labour component) have risen with or above CPI, whereas those which are sourced from overseas have become cheaper in real terms. This is despite the long-term decline in the value of the Australian dollar which would have made imports dearer.

The shifting relativities between prices has given us an economy where you can buy a cheap TV set for the same price as ONE paperback book ($29.95) and the purchase of the same TV is cheaper than an hour's work for the repairman (if they're still around) of that same telly. Similarly with clothes, where the basics have never been cheaper, though some (especially female!) consumers are prone to pay artificially high prices for particular labels and brands.

Regards, Peter

 

[Aceyducey]

I think sometime things will go snap. Basic economic theory is that we have a cycle, for many reasons. The higher the high, the lower the low. We have had such a huge recovery, based a lot on sweatshop labour paid for by our line of credit loans. At some stage, the average person in the street (?80%) are in for a rude awakening. What could happen then? What if houses retrace their prices to four years ago, (part way through the boom) and rates went up 2%? What would happen to consumer spending (which seems to be the major portion of our economy, as opposed to production), and thus, the economy?

Wrappack,

I think most economist would agree that 'basic economic theory' is wrong.

There is no way to simplistically model a complex national economy, let along a world economy.

Higher highs, lower lows - is totally incorrect from any legitimite economic viewpoint. This implies diverging cycles with each wider & more damaging than the last.

Reality is that governments are primarily a force for stability & work VERY hard to reduce swings within cycles. Hence Australia totally missed the last global recession - in fact many Australians aren't even aware that it occurred.

True governments in the past haven't done so well managing the swings - modern economics really only traces back a single human lifespan. Give us another few hundred years to learn & the human race will probably be quite good at economic management.

The 'what ifs' everything collapse are frankly less valid & realistic than the 'what if' everything goes really well for the next fifty years....

Funnily enough the prospect of long-term economic stability & growth doesn't seem to excite peoples' juices as much as the prospect of imminent death & destruction......

Personally my view is that in the future we'll have bad economic times & good economic times....

Interest rates will long-term average higher than they are today, as will inflation. Energy prices will trend upwards for the next thirty years & we'll see a huge increase in the number of nuclear reactors & hydrogen fuelled cars from about 20 ears out onwards. Water will becomethe cause of more wars & we'll see much more expensive prices for our scarcest resource.

States will rise & fall. AIDS will be defeated, as will blindness, deafness & many, but not all, genetic conditions. We won't have a cure for cancer, but will remain hopeful. We'll take holidays in space - but only once every 5 years because of the cost. Disease & famine will continue to kill many children & the cycle of violence in many states will not have been broken.

I do not expect any kind of total collapse of human society as we know it. I do not expect that falls in the economic cycle will lead to widespread ruin & I certainly don't think that the hoarders of cans & gold bullion will ever have their darkest fears & wildest hopes realised.

Sorry to the doomsayer guys, but IMHO the excitement in the next thirty years won't be in the 'economic collapses' when the cycle turns down - it will be in the achievement & resilience of humans to survive and thrive DESPITE bad times.

Cheers,

Aceyducey

PS: Wrappack - Sweatshops are where western societies began their rise to a primarily middle-class society. While it's horrible to think of children working 12 hour days for a few cents, that's precisely what was happening in Australia, the UK, Europe & US less than 200 years ago at the start of the industrial revolution.

It mightn't seem nice or fair, but we know that the approach worked. It resulted in wealthy, free & democratic states with strong labour laws & huge middle classes.

Let's give the third world a chance to achieve the same outcomes - freedom, economic independence, self-respect.

It's already working in many states in Asia. It simply takes time.

 

[Ralph]

So is the message - don't buy inner suburban (2km - 15km out of most Oz major cities) property for a few more years?

Sorry, should add, if it's a quality IP and you're in for the long-term

 

[Sunfish]

So is the message - don't buy inner suburban (2km - 15km out of most Oz major cities) property for a few more years?

No! It is certainly not what my original post said. Though I cringe when I re-read my heading it was an attempt to get you to look beyond "inner suburban (2km - 15km out of most Oz major cities) property ". Australia is totaly dependant upon Japan, China and the US of A.