Financial Armageddon!!

[eri]

NEW YORK (AP) — Are investors overreacting to the prospect of arecession?
The slightly better jobs report on Friday notwithstanding, the odds of a recession appear to be climbing, and that's bringing back scary memories. Though stocks may look cheap thanks to record corporate profits, that was also true the last time the U.S. was heading into a downturn. Based on recent recessions, profits could fall a third if the economy crumbles.
Investors have been worried about a new recession for months. Headlines last week ratcheted up the fear.
On Tuesday, the Federal Reserve Chairman Ben Bernanke testified to Congress that the recovery is "close to faltering." Goldman Sachs said Europe could fall into recession by the end of the year, and push the U.S. "to the edge" of one itself. A co-founder of theEconomic Cycle Research Institute, a forecasting firm that called the last three downturns, made the rounds of TV news shows to say a U.S. recession was all but inevitable.
http://news.yahoo.com/bad-us-falls-r...163657631.html

[sweatervestspence]

I'd like to think this is over done, but we are headed for the second dip of recession.

[eri]

PITY the world’s savers. Economists and other busybodies chide them for not spending more, thereby stimulating the economy. Meanwhile their pension schemes are steadily being made less generous, a process that will require them to save more, not less, if they want to enjoy a comfortable retirement.
................................
Investors’ choices will be guided by how they think the crisis will unfold. The best hope is that the authorities will “muddle through”: stabilise the European sovereign-debt crisis, steer developed economies back on to a path of 2-3% annual growth while simultaneously devising realistic plans to reduce government debt over the medium term. But if that rosy prospect does not materialise—and the odds are against it—the world is looking at three scenarios.

One possibility is that the developed world will attempt to inflate its debt away, perhaps by ever-larger doses of quantitative easing. A surge in commodity prices in 2010 and early 2011 has pushed inflation higher than it was a year ago in each of the G7 countries, and in Brazil, Russia and China as well (India is the exception among the BRICs). Inflation normally suggests investors should go for gold. But its stratospheric price, and the fact that most economists think that inflation will fall back as the global economy slows, argue against it.

A second possibility is that the European authorities make a fatal miscalculation, allowing Greece to default chaotically, without adequately propping up the region’s banks or protecting bigger economies such as Italy and Spain from collateral damage. The result could be a very sharp fall in European GDP, with knock-on effects in the rest of the rich world. That scenario argues in favour of US Treasuries.
This newspaper persists in believing that Europe’s politicians cannot be stupid enough to allow the euro to collapse; but, like their equally uninspiring peers in America, they are unlikely to do much to help the West’s economies grow.

So we suspect that the rich world faces a third scenario: Japanese-style stagnation. Recessions are likely to be more frequent than they were in the 1980s and 1990s, and the overall growth rate sluggish. Such an outcome would make it very difficult for the developed world to work off its debts; more countries would fall into the kind of debt trap faced by Japan.

http://www.economist.com/node/21532286

[Bluekiwi]

Good article, its important to look at what the possible outcomes are for the GFC, and to have some sort of idea of what the implications are for each of them.
And apply each scenario to our own situation and property strategy to see what contingency plans we need to be looking at.
I would like more indepth analysis of such scenarios but most economists are more happy to fence sit.

[Ahar]

I would like more indepth analysis of such scenarios but most economists are more happy to fence sit.

Economists are (in)famous for having 20/20 hindsight.....it goes with the territory.

There are so many factors to take into account.....very much a "wot-if' scenario....but on a mega scale.

It's not just one contry's actions that has to be brought into the equation, but many.

Face it, there aren't many folk who are brave/stupid enough to make that sort of call.

Mmmmmm.......but I think I might have been talking along these lines last year

Brave or stupid????

[Ahar]

One possibility is that the developed world will attempt to inflate its debt away, perhaps by ever-larger doses of quantitative easing.............. the fact that most economists think that inflation will fall back as the global economy slows, argue against it.

eri.....inflation will happen....it's not if, but when (now here I'm talking the long term, which could be very long) Why do I think this? You simply cannot have the massive increase in money without a corresponding effect on inflation...think Zimbabwe or Germany pre WW2. To think otherwise is to ignore one of the basic tenets of economic theory.

Japanese-style stagnation......this might be more likely to happen....i.e. this first then inflationary pressures will build when the world works its way out of recession.

As for the "fatal miscalculation, allowing Greece to default chaotically" ....I actually think the default might very well come from another country. That is Greece will make an "organised" default, followed by another country "joining in the fun" and in a very much disorganised fashion......resulting in recession etc.

IMHO what I think will happen....brave/foolish me.......is stagnation, perhaps triggered by Govt bond defaults.....but with extremely high interest rates.....this being a result of the world being veiwed as an increasingly risky place. And increased risk demands increased reward to undertake it.

Now it's this scenario that made me fix my loans.....and if I'm wrong......I'll live with it.

[Bob Kane]

eri.....inflation will happen....it's not if, but when (now here I'm talking the long term, which could be very long) Why do I think this? You simply cannot have the massive increase in money without a corresponding effect on inflation...think Zimbabwe or Germany pre WW2. To think otherwise is to ignore one of the basic tenets of economic theory.

Many people have said this but it hasn't happened yet.
I don't think it will happen.
We know how to curb inflation these days.
Zimbabwe and Germany pre WW2 are so different to countries today that I don't think they can be used as examples.

[Perry]

Many people have said this, but it hasn't happened yet.

Is it not actually happening, but in slow motion?

[speights boy]

Hyperinflation in slow motion ???

[Perry]

No. Just accelerated inflation. Fast enough
to erode away the problem: slow enough to
not alarm the great unwashed (masses).
The 'fudging' of the CPI is in aid of that.
(So Kieran would say, I suspect. )

[Austrokiwi]

I am still surprised at the number of people who talk of inflation ( even hyperinflation as being the threat) The world economy is limping along and the velocity of money is dropping. Recession and deflation are more likely problems. To fight the deflationary forces GVTs are printing money...but they are not getting the stimulation they want to see.

Interest rates my go higher............ if they do more people will find problems buying houses or maintaining their mortgages as a result they will cut spending. We do seem to be in an extended secular bear market

[Perry]

So, AustroKiwi, (given what you've just observed) would you say that
recession is a consequence of printing more currency? Or vice-versa?

[Austrokiwi]

The currency has nothing to do with it. the recession is due to debt and poor risk management amongst a number of drivers. The printing of money is a symptom not a cause. In this case the recession and threat of deflation (since 200 has created the need to inflate the economy and so money has been printed. What happened in Germany in Austria in the 20s was a different situation with the printing of money being the cause not a symptom. It seems that one group of fast money makers has sold the idea that this will lead to inflation while they ignore the fact The money being printed is only just managing ( some are saying failing) to stimulate the economy enough to keep it functioning at a sluggish level. In the last two weeks( may be three) the Brits started printing money so as to keep inflation above 2% thats another indicator that deflation is the real threat. If the PIIGS go bust we won't get inflation ( we will get high interest rates) we will see deflation. in 2008 the threat was a 1930s style depression......in the 1930s the government let banks fail and did not inject cash into the system, based on the catastrophe that created in 2008 central bankers injected cash and thats what they are continuing to do. I personally think the next 10 years are going to see a fight against debt and deflation not inflation.

[Bluekiwi]

The worst case scenario for property investors is:

1. High interest rates outstripping yields.
2. And deflation on house prices.

Could that happen here ?

[drelly]

It would depend on your circumstances as to how bad it was. Someone 80% geared is at far greater risk than someone 30% geared. While either would suck, if our debt levels are low enough, it would only be an inconvenience and not a crushing blow. Interest rates peaked at around 26% in the late 80's and I doubt yields were rising at the same rate, so that has happened before.