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How bad could the US recession get?
While the majority of commentators now believe that a US recession is only a matter of time, a lot of them are still hoping that it’ll be a matter of a quick ‘in and out’, a bit like the ‘mini-recession’ that followed the bursting of the tech bubble.
The country will suffer in the first half of 2008, but then the impact of Federal Reserve interest rate cuts will kick in, everything will pick up in the second half, and by Christmas we’ll be stuffing ourselves with turkey and flat-screen TVs again and wondering what all the fuss was about.
Now regular readers won’t be surprised to learn that we think it’ll take a lot more pain than that before the collapse of the credit bubble has fully unwound.
But you don’t just need to take our word for it…
Stephen Roach, the highly-regarded, if perennially bearish Morgan Stanley economist, believes that the coming US recession will be far worse than the one that followed the tech bubble.
He points out that the affected parts of the economy, house-building and consumption, are six times bigger than the part that was affected back then – spending on IT.
“We have, as relatively sophisticated, well-developed economies, gotten hooked on credit as never before. If we had been running our economies the old-fashioned way… where saving and consumption were funded by income, maybe we wouldn’t be in this mess we are in now.”
There’s going to be a lot of navel-gazing on this topic over the coming year, I suspect. Already columnists all over the press, many of whom would never normally touch a financial story, are writing oddly cheery pieces about how we could do with a recession to kick our addiction to vapid consumerism. This sort of piece normally ends with some complaint about how we throw too much food away and a recipe for turning your potato peelings into a tasty broth.
Now there’s nothing wrong with this new-found appetite for thrift and a more spiritual appreciation of life. But they shouldn’t be so quick to cheer. The reason that no one likes recessions is that they are miserable. The reason that we’re always going on about how unsustainable the recent boom has been is because we’d frankly rather have avoided a recession. The fact that we think it is now too late to do so, doesn’t mean we’re looking forward to it.
Recessions involve people losing their jobs, their homes, and often their marriages in the process. At the moment, because we’re at the cusp where boom turns to bust, some people are clearly thinking the recession will be a bit like the January sales. “Oh, I’ll be able to pick up that house I’ve had my eye on at a bargain basement price.”
But it won’t. House prices will fall because banks won’t be happy about lending as much money as they once were, even to those with exemplary credit ratings. And the people who do have enough money in the bank to take advantage, will be too fearful about their own job security to spend it.
At some point, asset prices will be cheap again and it’ll be the right time to buy. But there are an awful lot of bumps in the road to navigate before that point.
As Roger Bootle points out in his column in this morning’s Telegraph, until the middle of last year, hardly anyone knew what a subprime mortgage was – it’s now “regularly discussed in the Dog and Duck.” Now the latest obscure term to hit the headlines is “monoline”, the bond insurers whose credit problems threaten the whole edifice of securitisation that the boom of recent years was built upon.
These won’t be the last arcane terms that crop up as more of the financial system’s stitching comes undone. And as Bootle says, “if a trader at a French bank can lose billions, heaven knows what the position the Spanish banking system will be in as property prices continue to fall.”
Of course, not everyone feels so glum about the outlook for the British and American economies this year. Nigel Doughty, of Doughty Hanson, tells the paper: “I think everyone is being too gloomy about 2008. This year could be a lot better than many expect for both the US and the UK.” Thanks goodness for that, eh? But Mr Doughty’s not finished.
“I suspect 2009 is the year to be more worried about.”
Not exactly an optimist then. For more on what we think you should be buying amid the market turmoil, see this week’s cover story: (Don’t panic: here’s what to buy now. And if you’re not already a subscriber, you can get your first three issues free, by clicking here:
Turning to the wider markets…
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Poor earnings rattle Tokyo
In London on Friday, the FTSE 100 index slumped just before the close to end the day 6 points in the red, at 5,869, thanks to late sell-off of financial stocks. For a full market report, see: London market close
Elsewhere in Europe, the Paris CAC-40 closed 37 points lower, at 4,878. And the Frankfurt DAX-30 was 4 points lower, at 6,816.
On Wall Street, the Dow Jones gave up early triple-digit gains to end the day at 12,207, a 171-point drop. The tech-rich Nasdaq was 34 points lower, at 2,326. And the broader S&P 500 fell 21 points to end the day at 1,330.
In Asia, weak earnings for the likes of Nippon Steel and optical glass maker Hoya Corp saw fears of an economic slowdown resurface, sending Japan’s benchmark Nikkei index down 541 points to 13,087. In Hong Kong, the Hang Seng was down 1,068 points at 24,053.
Gold and platinum hover near all-time highs
Crude oil futures slumped over 1% to $89.58 this morning, whilst Brent spot was at $90.06 in London.
Spot gold was hovering near the all-time high of $923.40 hit in New York on Friday this morning, last trading at $916.00. Silver had fallen to $16.40 an ounce. And platinum was last trading at $1,687, near Friday’s all-time high of $1,689.
Turning to forex, the pound was at 1.9799 against the dollar and 1.3464 against the euro this morning. And in London, the dollar was at 0.6798 against the euro and 106.6 against the Japanese yen.
And in London this morning, Hometrack announced that house prices had declined for a fourth consecutive month in January. Average prices fell 0.3% to £174,700.
Our recommended articles for today…
Is this a bear market rally?
– Did last week’s bounce mark the start of a bear market rally? And if it did, which sectors have already priced in recessionary risk – and which still look expensive? For more on last week’s events and longer-term trends for equities – including what the next batch of earnings could show -see: Is this a bear market rally?
Self-cert mortgages: a warning from the last crash
– Self-certification and subprime mortgages aren’t new phenomena, as this cautionary tale from the early 90s shows. Last time round, the easy availability of loans and extravagant valuations led to bankruptcy and huge losses for lending banks. And it will again. To find out how one man borrowed himself into oblivion, click here: Self-cert mortgages: a warning from the last crash