Greenspan Warns of Likely U.S. Recession

Batten down the hatches

Another view is here.

For a little historical context we can look here.

Based off the average age of this forum, most people were not of an age where they would have really encountered and felt the last true recession in the United States. (1992 or so depending upon where you happened to be.)

The second article notes the following information.

Consumers also face high energy prices, higher interest rates, stagnant wages, negative savings and high debt levels, he noted.

Some of these factors, for example energy prices, can't be controlled for with regard to personal choice. However some of the other factors, higher interest rates, negative savings and high debt levels can be controlled.

As someone with a few more years under the belt than some on here, I cannot emphasize the effect that lack of liquidity will have on this next recession. Debt has been so readily available and cost so little for so long in this country that it will truly be interesting to see how people deal with less availability of it in a the future. Credit has so distorted the economy that things are no longer valued on what they are worth, but on what they can get in terms of credit. It is so strange to think of people thinking of interest rates being at 6.25 percent for homes loans as being high or even crippling. I still have an 8% mortgage on one of my properties and was thrilled to get it that rate because that was so much lower than the previous rates.

So the point of the thread, if you have experiences of memories of prior recessions, please post them here. If you have any advice or thoughts, add them as well.

Nick

I think the statement relates to parties having differing views on the timeframe as opposed to recession versus no recession.


The early 90's recession showed some very interesting values with regard to government to me. It is what makes me such a believer that the U.S. will go through a period of very strong to possibly hyper inflation.

A recession hits, the government which is supposed to protect shows it's own self interest and simply begins ignoring its own rules.

I was attending the CSU system in California. There were state laws instituted that limited tuition increases to 10% a year. They promptly ignored them and began passing 50%+ increases. I was paid by the state (teacher's aide) with a warrants instead of checks during a budget stalemate. Government will absolutely ignore the interests of anything but itself when the shit hits the fan. They'll suspend inflationary increases, they will ignore benefit promises, they will magically ignore caps and rates for fees and taxes, they will simply lie.


My first property (which I ended up flipped to the tune of $20k on for several years) was signed over to me for free by the person who wanted to get out from underneath it. People did this often. Debt demands cashflow and in a recession, you might not have any so cars, homes and especially toys (rv's, boats, etc.) become very cheap.

As for the upcoming boomer retirement. That could be several threads unto itself. My belief is that the U.S. government will magically unlink benefits and inflation calculations and run the printing presses. Boomers who have run record national debt levels all while saving nothing will be given the option of moving to someplace like Mexico to get by (they can send us workers, we can send them retirees) or they can enjoy the true silver bullet solution, a literal bullet.

Nick

The economy has been and is doing well. The prediction is for late 2007 and 2008.

Nick

You must have some serious mojo power artman, the sell off is almost at 400 points now.

Nick

I had a post with some links to the nice 250 point "other shoe dropping" market close the other day. I didn't get to finish it and since then I have run across this.

Top investor sees crash

Real estate prices will go down 40-50 percent in bubble areas. There will be massive defaults. This time it'll be worse because we haven't had this kind of speculative buying in U.S. history," Rogers said.

"When markets turn from bubble to reality, a lot of people get burned."

Those who have bought at the top, or who believe they can continue some huge payment during downturns and bumps might be in for a large surprise.

"This is the end of the liquidity party," said Rogers. "Some emerging markets will go down 80 percent, some will go down 50 percent. Some will most probably collapse."

I'm not hoping anything goes wrong and for a lot of folks, things really won't be especially bad. They'll stay in their homes which were overpriced and now will become reasonable in price.

I cannot emphasize enough that the principle cause of harm in this recession will be lack of liquidity. The credit has been so easily available for so long that lack of it is as foreign to people as lack of electricity.

Put some money in those savings accounts!

Nick

I personally am not worried because the properties I own have small mortgages and are not heavily leveraged at all. I could have both my houses sit empty for example and still make all the mortgage payments.

The property values themselves are not the big concern. The principle issue is cashflow from the properties. It isn't as if people get in trouble because their home is worth $500,000 and they lose their job. They get into trouble because they believe that they do not need to save in case they lose their job because their home is worth $500,000.

This is the prime point I try to put across when I discuss liquidity. I'm talking literally about being able to get cash into your hand. People have been able to just cash advance a credit card, or get a HELOC and so forth. They have also easily been able to manipulate and manage debt, toss the credit cards or car loans on to the house for example. Many folks have not had to go any extended period without employment and often can restructure debt in the event something does happen. That likely will end.

We are going to come to a point where since debt will cost much more to originate, the terms for qualifying for it are going to tighten. If you have studied fiat money, banks and fractional reserves, you know that credit tightening has a multiplier effect in terms of dollars removed from the economy and circulation.

People have had a negative savings rate, own less of their equity-wise than they have in the past, and are used to being able to easily get long term loans for vehicles and be granted large amounts of unsecured debt. That will become much less so and cash will again be king.

So make sure you have some, not that you believe you can borrow some, but literally have savings on hand.

Nick

Well you never can be sure if Bernarke might throw dollars from helicopters, but I'm of the firm view that this recession will be here by Spring 2008.

My mental timeline goes like this, the housing slowdown began this year. Many people have finally gotten the fact that the Spring selling season has arrived and amid record inventory, there is no rebound in prices. (When housing is at a normal level, not a red hot market, your home normally sells for more in Spring than trying to sell in December and the first denial claim was, "well now we are just returning to a regular cycle where you have to wait until Spring for further price appreciation)

The truly deluded will hold onto their homes through the entire spring and through the end of the summer and note that they haven't sold. These are the hottest times of the selling season and so when the fall gets here, and the mix of patience, prep, and prayer haven't worked, you will get panic. By this I mean you will finally start getting real price drops instead of the nominal priced drops we have seen.

Most people have been "dropping" their prices from an already overinflated sense of appreciation. They anticipated 10% appreciation, priced that in, it didn't move so they dropped it back down to the non-appreciation price and think they have done everyone a favor. The fall season is when we will see the first set of price cuts.

This sets off a whole series of economic issues. For example if you are flipped on your home, sure you aren't being tossed in the street as long as you hold on and make the payment, but are you also going to drop big money on Christmas without a HELOC? Are you going to drop big money on Christmas when a reverse wealth affect has you feeling $40-50k dollars poorer or mentally tolerating being flipped $25-30k on your home?

This is why you have seen Wall Street not just kick the hell out of certain subprime mortgage companies, you have started to see them kick the hell out of retailers. Again we already see slow down, but not negative growth. People are currently holding on just fine and hoping some good card turn on the river but the rest of us know the odds.

So Spring 2008, Christmas is officially declared to have sucked, we will have the second year of no buyers returning, people will have clamped those wallets shut and recession will be here.

Laugh away,

Nick

It's ARMageddon.


Please, I cannot emphasize the lack of liquidity that will occur this time as we head into recession. I suspect this recession will be worse than 1991-ish but not as bad as the early 80's recession.

Nick

I keep a little over $10k in just pure cash and no consumer debt. Which market do you mean though, stock or housing? You seem to interchange the two. As long as you keep your stops short, you shouldn't feel too concerned about buying stocks, as you noted the housing market is weak right now. People are already declaring a bottom to housing but in my view that is just a dead cat bounce. I keep much more than that in the stock market and could easily sell it to obtain liqudity/cash. I'm not talking about retirement pensions/401ks or items like that. I'm talking savings or your after-tax dollar stock fund. Liquidity to me means money you can easily get your hands on that is not part of your retirement, home equity, etc.


Injecting liquidity back into the market is possible, but it raises inflation which the fed has claimed to want to fight. Inflation is, depending upon the report either right on or already outside the cusp of acceptable. Many claim that inflation is already quite high and the fed has kept taking things out of the reporting basket of goods (that just happen to show inflation) for so long, it is no longer accurate.

If they do inject liquidity and inflation is fully seen as returning, the cost of borrowing will rise anyway and thus the impact will be reduced as well. This is a real tight rope here and so far the fed has walked it pretty well but as the one article noted, the fed cannot do anything about the ARMageddon coming in terms of resetting home loans. That "wealth" will disappear as will any chance of a decent Christmas this year. Loads of these folks are already in a bad situation and are burning through their remaining liquidity as we type in attempts to wait out the situation. I suspect that when next spring arrives and there were no Christmas bonuses, instead possible new layoffs due to lack of sales/activity, we will finally start to see the shit hit the proverbial fan.

Nick

First all those things are indeed true and demonstrate why we have gone since 1992 within a major contraction of any sort. However as with all good things, they must come to an end. China, India Russia and Brazil are going to play Japan in this version of the recession. The insane growth within their own economies are leading to issues with possible hyperinflation already. When the U.S. slows even a bit, their own lack of domestic demand will cause their respective speculative bubbles to burst, force their exporters to cannibalize each other, and finally will lead them in a deflationary recession just as they did Japan.

The United States, as you noted has had no liquidity issues at this point because the excess profits from these exporters, profits which are not being used to create domestic demand, are instead being sent here and trying to earn a return. The trade surplus has continually been held and invested into dollar-based investments. When that paper speculative wealth evaporates within their own countries, those monies will be needed more at home and will not be able to be sent back over here. This means less liquidity here, and higher borrowing costs.

People have been arguing that the fed has essentially been outsourced because they had raised the overnight borrowing rate so many times and had seen no corresponding rise in bond and interest rates for mortgages and other types of lending. Those rates have finally started budging up because inflation is not tamed, and secondly because there is simply less money chasing a return here. The overseas markets are providing insane returns and people will begin pulling their dollars and converting them into their own respective currencies to grab those gains. Those created bubbles will pop and their deflationary cycles will start.

China, India and others do not keep this from being 1992. They will insure it is just like 1992. Trade imbalances and an unbalanced economy driven totally towards exports and not at all towards generating domestic demand cannot be sustained.


It wasn't non-inflationary. The inflation was merely siphoned off. Trade deficits are basically just knocking part of our GDP off and sending it abroad. That money has kept coming back and looking for a return creating speculative bubbles here in housing. If it had been converted to the currencies of the respective countries, then it would have created speculative inflationary bubbles there. However now we have the perfect storm. We have a deflating housing bubble here, due in part to ridiculous financing schemes with neg-am, crazy ARM loans that should not be made available to the general public, and seeing the slower growth here, countries have already started converting dollars (raising rates here) and creating speculative bubbles within their own economies. What they invest in though are export driven sectors which leads to bubbles within the export based industries.

China Bubble

The bubbles will pop. Growth will revert to the mean. Nothing new is revolving around the sun.

India Bubble

Nick

No problem. I don't know who you mean with regard to Uncle Al. You are welcome to give me the list of companies. I'll be happy to research and make money off them.

Nick