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Fear of a Double-Dip Recession in US market?
Here I am presenting some excerpts from another investment Guru, Jon D. Markman. His observations on a reputed finance News; A new report contains some very good (!) news for investors: he observes, double-dip recessions are very rare!
That means that a drop back into recessionary conditions looks less and less likely even (?) as unemployment creeps higher and has crossed the 10% threshold for the first time in a quarter century.
After reviewing U.S. economic history all the way back to the 1850s, Deutsche Bank AG (NYSE: DB) economists found that double-dip recessions are exceedingly rare: There have only been three episodes in which the economy has fallen back into recession within a year of a previous recession ending; and that is out of 33 recessions that have taken place since 1854. On an average, one recession per 5 to 6 years! Recession followed by inflation and then again recession, in the hide and seeks game of economics!
Why there are more recessions in USA? Is it because most of the markets in USA are involved in speculative activity? As the tendency to indulge in speculative activity spread to other countries along with those recessionary tendencies, spread in other countries. Desire to indulge in speculative trade is encouraged by an intense craving to earn money without doing any real work; called lazy money. So long as this speculative tendency is controlling the market activities, frequent and at times very intense recessions are not a surprise.
Two of the three double-dips happened in the years prior to World War II – in 1913, and again in 1920. The more relevant example was the double-dip recession of the early 1980s, which was driven by the fight against double-digit inflation rates.
U.S. President Jimmy Carter imposed credit controls in March 1980, which resulted in a sharp but short-lived recession before the economy expanded again for 12 months. Then U.S. Federal Reserve Chairman Paul A. Volker hiked short-term interest rates to 20% in the summer of 1981, as he pushed the economy back into recession but dealt a deathblow to inflation.
This happened because US market is not used to such high interest rates; similar effect we should not expect in other countries where high rate of interest are common, like India. Hyperinflation is expected to develop out of condition of continuous inflation. It is always seen that inflation does not affect higher-level economies but does affect adversely the poor or low-level economies within the same country. The policy to retain very low interest rates even in the situation like constant inflation can damage financial conditions of poor section of the society excessively but may help some smart businesses who will benefit out of such low rate of interest. At times one may suspect that the policy of keeping low rate of interest is deliberately maintained to help that section of business out of nepotism.
With deflation just as likely as inflation, at the moment a repeat of the 1980s just is not in the cards, as the Fed is set to keep rates at very low levels until the end of 2010. Keynesian neoeconomics suggests; to avert inflation increase in the interest rate is essential. The question is how correct this policy of retaining low rates in spite of the continuation of inflation. Is it the ulterior motive of the policy makers to encourage those favored businesses may be because policy makers are having some special interest in them? Can somebody ask the policy makers for explanation for such a weird behavior particularly when they claim to be Keynesian economist?
So while the public will continue to be preoccupied by a still rising unemployment rate and political chatter over the perceived failure of the Obama administration’s stimulus package – the market will continue to anticipate the improvement just over the horizon.
One final note: The economists at ISI Group note that outside of the United States, employment already started to grow in 11 economies. These include Japan, Canada, Singapore, Brazil, Russia, Sweden, and Taiwan. Stocks have sniffed out the fact that a global employment turn is already happening. The U.S. economy just is not fully participating yet, but it will. India has not improved its employment condition in spite of copying US policy of keeping low and still lower rates of interest! Who is benefiting out of these unreal and unnecessary low rates of interest? Can any body question the authorities to explain?
While making some observations one comfortably connives the fact that recession did not begin in those countries but it began in US and those countries were only affected by the effects of the original recession in US. Since, they were suffering from only the side effect, their recovery is quite natural but to expect the same with US would be wrong!
History shows the Federal Reserve has never increased interest rates while unemployment was still rising. In fact, the Fed has waited at least six months after the peak in unemployment and when the unemployment rate has dropped by 0.7% from its high before hiking rates according to the Deutsche Bank report. Moreover, during periods of low to no inflation – like we have now – the Fed can wait twice as long before raising rates.
This is preposterous to connect unemployment with interest rates; the timing given to justify above is also quite ridiculous.
Given their forecast for unemployment – peaking this quarter before falling back to 9% in the latter part of 2010 – Deutsche Bank economists expect the first tightening of 0.25% to occur at the Fed’s August 2010 meeting. They see another 0.25% hike the ensuing September meeting to be followed by a 0.5% hike at the November meeting. After that, the team expects 0.5% hikes during alternating meetings. This would bring short-term interest rates to 1.25% next year and 3.25% in 2011.
Playing with interest rates is a dangerous trend and no body except the smart benefit. Interest rates on loans to industry should not be altered as frequently as done in neoeconomics theory because it builds up a sense of insecurity in the minds of industry not knowing what will be next rate, this practice also affects costing calculations. And adds to bear spirit in the stock market. It is observed that interest rate has no direct effect on the sales or production, one more observation shows that interest rates also have no effect on the employment creation; then why play with it under different pretexts. Primarily it shows that only ‘management’ benefits by low interest rates and nobody else!
Various rescue programs, along with unconventional “quantitative easing” strategies that saw the Fed make direct purchases of U.S. Treasury Department debt and mortgage securities, has more than doubled the Fed’s balance sheet to more than $2 trillion. Some believe that the Fed will start to sell off its assets, thereby pushing up long-term interest rates, before it raises its short-term policy rate. This would raise both mortgage rates as well as the government’s cost of borrowing.
Given the worries over the federal deficit as well as the fragile state of the housing market, I do not think this is likely. Instead, I expect the Fed will increase the interest rate it pays to banks that park extra cash in its vaults instead of lending it out. This helps suck extra dollars out of the system while not disrupting the bond market with an influx of supply.
Starting late next year, look for the Fed to possibly raise its policy rate as well as the interest rate it pays to banks. Mortgage rates and other long-term interest rates should start creeping higher next spring as the Federal Reserve ends its direct purchase program. But a large spike in rates will likely be avoided as the Fed slowly sells the debt it has already purchased. The Fed will try to avoid being seen as the heavy for any dislocation that might follow at all costs.
Buying intensity has also failed to live up to the precedent set by previous rebounds. What this means is that U.S. stocks have put in a pretty meager rebound after the 90% downside day last Friday. These rallies, typically, last five to seven days before they fall apart. To receive a clear indication that stocks put in a durable bottom out October 30, from which an intermediate-term rally can develop, we need to see a stronger rise in volume and an expansion in breadth.
I am not saying it cannot happen. I am just saying that clock is ticking. If the bulls do not show decisive strength, then the bears will interpret that as a sign of weakness and jump back into the fray with claws and fangs flashing. Bull refers to buying spirit and bear refers to selling spirit in the market.
To close on an optimistic note, remember that history, economic fundamentals, corporate profits, and easy monetary policy all suggest that stocks should ultimately vault to higher highs. To make continuous speculation possible operators always prefer to keep prices at higher than the actual and that makes the fluctuation more unreliable for investors. Though, gamblers are comfortable with such arrangement. It may take another harrowing drop to really engage the buyers.
This excerpts from the well-known authority from US shows that present day economists all over, are actually not knowing what to do to avert the repeated surfacing of recession and inflation and they relate these phenomenon to conditions of employment or unemployment without any proof. Playing with interest rates is one other wrong game they are doing without any sensible effect. The true relation between purchasing power and interest rate is on purpose neglected.
Bottom line is present day economists from US are not competent to handle the problem and that is because, they are not wanting to stop speculations; whereas we see that the main culprit after all these difficulties is this doggedness to stick to speculation come what may. I regret to say that this mentality of finance managers to continue to support speculations will keep recessions, inflation, and then deflations to prolong this problem for all; in that only the smart businessmen and their management are going to rip the harvest at the cost of Aam Admi!!
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