The Recession Cometh
Jenson Hagen
After the great run-up in stock prices, the economy will experience 15 years of recessions. After the housing bubble bursts, home prices will deflate for the next 15 years. The economy will first be marked by stagflation where high inflation is coupled with low economic growth. Then the economy will experience deflation with a continued slow economy.
You might think I’m foreshadowing what America might face. Instead, I’m telling you what has occurred over the last 15 years in Japan. The Nikkei index, which reached 39,000 back in December of 1989, today stands at less than 16,000 or roughly 41% of its peak value. At their worst moment, housing prices dropped to 65% of their peak values in the major Japanese cities. In Tokyo, that number reached 80%.
You can believe or not believe that America will fall victim to “irrational exuberance” as characterized by Alan Greenspan. I am more than capable of dealing with disagreement. In the months leading up to the stock market crash of 2000, I told everyone I know to get into the bond market. “Are you stupid? My portfolio has doubled in the last year,” was my most favorite reply. I got out. October 10, 2002, just after the Dow bottomed, I got back in.
Three weeks ago, before the stock market started its decent again, I got out. Why? Because the CPI (inflation) data was about to be published. There is a fundamental flaw in how we calculate inflation in this country. We use a system of rents and rent equivalents to account for housing inflation. One-third of the CPI represents housing. One-half of the “core CPI” represents housing.
Follow me here. Over the last decade, the migration into homes during the go-go 90’s has left rent prices fairly contained. CPI data has virtually ignored housing inflation for the last 10 years. This is about to unwind itself. The National Association of Realtors announced that rents will increase by 5.3% this year alone. Question! What happens when 1/3 of the inflation data is set to increase by 5.3%?
The Recession Cometh
June 14, 2006
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7:31 p.m.
Jun 3, '06
I, too, began warning in February 2000 of an April crash ahead, and pulled out on the Friday just before Hell Week.
I'm not in synch with your current projections, however. I think we're in a correction quarter that'll be followed by a fast rebound quarter. To me, the major event on the horizon is the leading edge of retired babyboomers, which means 2008 for early retirees and 2011 for most.
The artificial props of low interest rates has ended and the government's spending on weaponry is declining. Housing prices peaked last August. But the porkbarrel spending of this election year should keep things from collapsing for a few more months.
From December 2006 through October 2010 is the range where I anticipate an enormous amount of economic distress will occur, with the first three years of it especially bad. Beyond the stockmarket, the overall economy will likely take 10-11 years to recover.
Which is why I think we're seeing so much GOP cronyism plundering the public treasury now. They don't think there'll be anything to plunder for many years to come... and they may be right.
Yeah, right now, I'd short the stockmarket. But near the end of July, if I'm reading my 'tea leaves' properly, it'll be time to buy for the final rise before the biggest fall.
Jun 3, '06
I agree with the thrust of Mr. Hagen's comments, while professing ignorance on the timing of coming events. We face what the old Soviet ideologues termed a "correlation of forces," adverse in our case. Our energy import bill is rising and now approximates a quarter trillion dollars a year. Costs will keep on rising despite short term fluctuations because mother nature's energy tank is running low. Our twin deficits--internal and external, represent a claim on the future that will be difficult to pay. We have the twin burdens of an increasing elderly fraction of our population and rising health care costs for all of us. Driving toward immortality may be the costliest trip any society has undertaken. Historically, we created more productive citizens through the magic of education. We might now be approaching the efficient maximum of how many citizen years can be devoted to formal education before rising annual worker income is fully offset by falling percentages of lifetimes spent working. As a nation, we remain an economic organization whose competition is growing stronger, bolder, and more productive. A frequent outcome of stronger competition is falling profits, for nations as well as for corporations. Our rising population imposes higher costs if we seek to protect the environment against the ravages of more and more billions of consumers and poluters.
There is much that we can do as a nation to mitigate these trends, but I think that the net outcome will be a lower national standard of living. Current evidence of that is the eroding quality of citizen financial preparation for future retirements.
Jun 3, '06
Many market observers understand the nuances of CPI calculations: we should all recognize the Core CPI understates actual consumer's perceptions (they have to eat and consume energy!)...
More importantly, the Federal Reserve is well aware that "home price inflation" is minimized while CPI measures of "rental inflation" will eventually catch up with real estate prices. Or, we could experience a significant period of declining or flat real estate prices, which doesn't have to produce a textbook recession (lots of real estate speculators will get hurt, but that only leads to more personal bankruptcies, not a recession).
The U.S. has never experienced a 15 year recession/depression and we never will. It is unlikely than any recession will last more than 2 years, given the fiscal and monetary tools available in the United States. A collapse of the U.S. Dollar, with resultant double digit interest rates, would likely produce stagflation (stagnant growth with high inflation), which is quite different from a recession. Assuming staflation can be avoided, then the Federal Reserve can always turn up the monetary juice, and VOILA, recession is brief and shallow.
If any of you accurately picked the top of the last stock market based on something more advanced than heuristics, you should be posting us from the high rise offices of Goldman Sachs, J.P. Morgan, or Citibank. If you have a methodology to identify the top of the next stock market (plus or minus a month), they are going to make you very wealthy.
Calling a market top is nearly impossible to do with any accuracy. If you keep telling your wife every month: "the stock markets going to go down big time", then you will eventually be proven correct. Thinking it "has to" go down is not an investment strategy. Shorting a market index takes a lot more stomach than most individual investors possess, and you have to be able to afford being wrong for months or years. Lose big and go home has been the death of many hedge funds in the last couple of years, and most of them had superior credentials than the average blog poster.
The economy is quite strong, corporate profits have never been higher. Barring oil supply disruptions, revolution in China, or a new (9/11 magnitude) terrorist attack, it seems unlikely that a U.S. recession is just around the corner.
But that's just one opinion, and everybody's got one.
Jun 3, '06
First of all, I must point out that market timers are just gamblers who can't remember their investment losses, commisions paid, taxes paid, and tranaction costs incurred. I strongly recomend that every investor here check into passive index investing and spend most of their time figuring out the right asset allocation for their own situation rather than guessing when they can beat Wall Street insiders by timing themselves in or out of the market.
That being said, Jenson is probably right on the money when he predicts a prolonged period of monetary problems for U.S. residents. We know that Bush, Hastert, and Lott/Frist have overseen the greatest raid on the Treasury ever. We are in for very tough times. The poorest among us will suffer the most.
Jun 3, '06
Well Said Pedro.
The Govmint is trying it's hardest to make the inflation numbers at the bottom of the spectrum. They do this by encouraging the peons to invest in housing, but low and behold they use rent for calculating the housing inflation numbers. The more houses the more supply available to renters, so the rent prices stay very low along with the so-called "CPI".
As Pedro said try to find the right assets, because they will continues to inflate, especially the ones we really need. But never come late to an inflation party.
Jun 4, '06
So now it's a Bush Conspiracy to keep rents low?
You must be joking.
MY KINGDOM for an economist!
Jun 4, '06
Does anyone remember how the S&L bailout was turned into a mechanism for bank consolidation? History will more than likely repeat itself.
Jun 4, '06
It seems to me, as a non-economist, that the greatest danger to the economy is the baby boomers planning to live on their investments in retirement. I suspect the boom market of the 90's was largely fueled by baby boomers moving their extra earnings into stocks as their kids left home. The flip side is that when they sell, someone is going to have to buy. It may be foreign investors will make up the difference, but I'm not clear about the implications of that. Are import companies like Nike and Walmart going to still have value as the American economy's share of the world market declines?
Jun 4, '06
LMAO
Not sure where you are getting your strawmen.
Nobody said anything about a Bush Conspiracy to keep rents low, are you reading a different board perhaps?
Jun 4, '06
Gee fellas, I don't know where I got that silly idea, except for the below comment:
Posted by: THartill | Jun 3, 2006 11:25:44 PM
The more houses the more supply available to renters, so the rent prices stay very low along with the so-called "CPI".
I can only assume that "Govmint" refers to the Bushies...Perhaps Mr. Harthill would like to revise and extend his remarks.
Jun 4, '06
It's called inflation and it's what the Government does, it's what they have always done, they try to max out their currency by making more available and decreasing the value. Until it reaches a "breaking point" and the SHTF.
This started way before Bush was at the helm, in fact I'm sure every elected offcial in D.C is happy with the current money supply situation except Ron Paul.
So assume what I actually wrote, the "Govmint" as in the ones that choose how much currency is available.
Jun 4, '06
So you believe the Bush Administration has been trying to keep rents low? That's like saying they been trying to keep gas prices low: it isn't working! My rent has doubled in the past 12 years, and I'm living in the SAME PLACE!
I don't think the White House controls the cost of rent, or even cares how much renters have to pay. If we're renting, they probably figure we aren't likely Republicans, and we're unlikely to vote for them.
Jun 4, '06
Jen
I can only hope you wrote this comment without seeing my response.
My rent has doubled in the past 12 years, and I'm living in the SAME PLACE!
But how much the house you are living in today worth and what was it 12 years ago?
"Easy money" keeps people building houses, we have to damn many already. Millions of people own 2 houses, mostly for the tax write-off. There is alot of houses and they are cheap to own (Cause of tax savings) so there are lots to rent, so the rent prices stay low. And the inflation index uses rents for deciding how much homes are inflating.
So a recap
The Govmint:
Offers everyone easy money by lowering interest rates and printing more.
People use the easy money to finance the housing boom.
Asset inflation hits the housing market because everyone is throwing their hard earned money (That hasn't even been made yet) into it.
The number of houses skyrockets because the value of them rises quickly.
Therefore there are more houses to rent, this along with tax write-offs keeps the rent prices down.
Inflation numbers stay low, the economy picks up and unemployment numbers stay low. (Reportedly)
Until they SHTF, think late 20's.
Jun 4, '06
My rent doubled! I don't live in a house, I rent an apartment.
How is that keeping rents artificially low?
I don't think there are "too damned many houses". If there were too many, then home ownership would be much higher and there would be very few renters.
Jun 4, '06
Ownership is the highest ever.
<img src="http://i39.photobucket.com/albums/e156/NorthOregonCoast/home_ownership.jpg" border="0" alt="Photobucket - Video and Image Hosting">
And why would there be FEWER renters when MORE houses are for rent?
Jun 4, '06
There should be Fewer renters when MORE HOUSES are for sale: because renters become owners.
I still don't see there are too many houses, either for sale or for rent. I understand supply and demand: if there was too many houses (either for sale or for rent), then sales prices or rents would be going down, not up. The cost of housing has increased no matter how you look at it: maybe buying a house has gone up faster than rents, but they've both gone up.
Most of the people that I know are renters, and they would rather own a house, but they can't afford the down payment or they had some credit problems in the past, or they can't qualify for a large enough mortgage.
You're not making any sense to me Mr. Hartill.
Jun 5, '06
You're not making any sense to me Mr. Hartill.
You must be a Republican or a Democrat, because I look at things through the eyes of a libertarian and many ways that Repubs and Dems look at the world make no sense to me either.
I still don't see there are too many houses, either for sale or for rent. I understand supply and demand: if there was too many houses (either for sale or for rent), then sales prices or rents would be going down, not up.
Look at the sale prices, going down and more down all across the country, except a few Western States (Inc Oregon) and this will change quickly with measure 37.
Wait for it, it's coming sooner than you think.
Jun 5, '06
Hi,
I agree with his opinions as I recently published an eBook entitled "How To Prosper In The Changing Real Estate Market. Protect Yourself From The Bubble Now!". As you can infer, it is for people interested in real estate.
To learn how to protect yourself from the real estate bubble and the coming recesssion, go to: www.myrealestatebubble.com
Warm Regards, Louis Hill, MBA
9:18 a.m.
Jun 5, '06
LMAO, I think you may have misunderstood Jenson's and my mention about a long recessionary period. I don't think either of us meant to suggest the entire period would be a recession, but more a period of dipping into and out of recessions (Jenson, correct me if I read you wrong).
The Fed usually does a fairly good job adjusting and advising, so most recessions are 1 to 2 year events anymore. However, with the pressure on the dollar due to so much of our debt being held by China and others, and with strains on our health care, a potential avian flu pandemic on the horizon, the possibility of passing peak oil, and other new problems, I wouldn't rule out longer recessions than that.
Pedro, you're generally correct that market timers are gamblers, but that also depends on the purposes of the market timing. I know many daytraders and have been one myself, and most of that's clearly gambling. Those who time with a longer term view are pretty mild gamblers. For them, seeking a peak or valley that takes years to develop is simply trying to protect one's assets from major, extended market reversals.
When Warren Buffett announces he's betting against the dollar, his decision to do so is based on a belief that a peak in the dollar's value has arrived or is near. He still maintains a diversified portfolio, however, as he knows better than to place all his assets on one horse.
As far as working at Goldman Sachs, no thank you. I lack the temperament to sell, in general, and saw an awful lot of bad advice doled out when the tech market declined from 2000-2002. By most brokers. And yeah, my calls are based on heuristics anyway, more rooted in studying charts and locating patterns. (Lots of people were calling for NASDAQ's fall during its final 7 month rise.) Its chart demonstrated a perfect exponential growth curve and the only way I narrowed it down was from another patterning I saw that turned out to be correct. And I'm not always correct; I've been off by a few months, and since I began blogging about politics, I've not devoted the time to the market that I did a few years ago. So no-one should consider me an investment counselor.
But you said The economy is quite strong, corporate profits have never been higher. Barring oil supply disruptions, revolution in China, or a new (9/11 magnitude) terrorist attack, it seems unlikely that a U.S. recession is just around the corner. which I consider only partly true.
Yes, the economy's strong and profits are high. But oil supply disruptions (or threats thereof) have been pretty regular in recent years, creating a lot of excessive speculation. You didn't mention the nuclear sabre-rattling going on with Iran, or the potential for extremists to overthrow Pakistan's government, both of which could also trigger serious problems.
The more predictable events, like babyboomers retiring or a housing market slide, coupled with the decline US automakers are experiencing, foreshadow some looming problems ahead. Just the problems some are already having with variable rate mortgages suggests record numbers of foreclosures may be coming pretty soon. Especially since wages are dipping behind inflation rates.
As you noted, we all have opinions, and mine remains that 2007 has a very strong probability of being a recession year. That doesn't mean I think anyone should pull out of the market. It just means I'll be considering a portfolio shift sometime this autumn to more recession proof stocks.
Jun 5, '06
Wow,
I guess we have to believe you since you are speaking almost two weeks in the future, lol.
15 years, gimmie a break. Even the great depression turned around and employment got better after a few years, and a new Government.
I don't like Bush's policies either and all the debt, or the ridiculous housing prices. But the economy is growing tech is improving and the world keeps changing, and it's a good thing. More people's lives are improving then not at this very second due to humans solving other humans problems.
If you can't see it I'm sorry, keep focusing of depression economics and stash dollar bills in your matress, which will by the way be worthless if we are to believe the loonies (no pun intended).
Jun 5, '06
I understand supply and demand: if there was too many houses (either for sale or for rent), then sales prices or rents would be going down, not up. The cost of housing has increased no matter how you look at it: maybe buying a house has gone up faster than rents, but they've both gone up.
Well - you understand the basics of supply and demand. But they don't really apply to the recent housing market. In a "normal" market people would not pay more for a house than they could collect(or pay) in rent for that same house. One of the concerns about a housing bubble has been that those two things have not been in synch. Housing prices have gone up, but the rents on a similar house (or apartment or condo) have not gone up at the same rate.
In fact, people have been buying real estate and leaving it empty, expecting to make their money when they flip it. During the time they hold it empty, it is not really part of the housing market. the second thing that has happened, is many of houses that are on the market are empty. Because selling has been relatively quick and easy, people have been taking the risk of buying without having a buyer for their existing home. Finally builders build houses if they can make a profit. While the market effects what they can get for a house, in the recent market in Portland any house was selling at a premium over what it cost to produce.
Markets are only rational over the very long haul, "irrational exhuberence" seems to be the norm in the short run. Whether its tech stocks or houses. There will be a correction as some point, just as there was for the stock market.
Jun 14, '06
If a recession is coming then we should see a good signal after options are due at the EOM.
According to article I read titled "US rushes from gold, but it still has local lustre" www.theaustralian.news.com.au
It states that more than 70 per cent of hedge funds lost money in May and the huge sell-off across commodities this week indicates that managers were scrambling to raise cash to meet their margin positions.
However, I see it as nothing more then short sellers taking advantage of the current situation.
I heard Hong Kong short sales rise to eight-year high amid stocks slump, but with 30% of the Hedge Funds making money in the month of May it got to be more then some Hong Kong Hedge Funds.
There is a rumor that rogue traders from the Peoples Republic of China are driving the price of commodity like silver down. Wonder if there any nake short selling.