Recession? What Recession?

[August1991]

Economists at Canada's largest bank have reduced their expectations for economic growth, while saying the domestic economy "remains firm."

The Royal Bank of Canada now projects national growth this year of 0.9 per cent, down from its previous prediction of 1.4 per cent.

Toronto Star, 8 Oct 2008

A key index of pending US home sales rose 7.4 per cent to 93.4 in August, much more than expected by economists, as bargain-hunters moved to take advantage of the stricken housing market, writes James Politi .

...

The association's senior economist said home buyers responded to improved affordability with house prices low.

Financial Times, 9 Oct 2008

Isn't that shocking. Canada's GDP growth will only be 0.9%. And even more shocking is that lower prices lead to more people buying. Who would have thunk it?

Ah yes, lower prices. Have you seen the price of oil? That's just more proof that we are in a recession.

[bush_cheney2004]

...Ah yes, lower prices. Have you seen the price of oil? That's just more proof that we are in a recession.

Yes...the absence of hyper-profits and hyper-debt loading is now defined as a recession.

[msj]

Canada doesn't have an official recession dating method unlike the US.

As such, Canada tends to use the layman method of "two consecutive quarters" of real GDP decline.

In the other thread, I mentioned a while ago that February was a negative month for Canada GDP and wondered if that was a sign of recession (either at that time or if it was coming on).

The 0.9% GDP certainly doesn't look good and, assuming population growth that is higher 1% or higher, then it is effectively a recession (or at least to most people will feel like one).

Unlike the US, however, Canada does not have nine consecutive months of job losses.

That is counted in the US for determining a recession but, once again, I don't think Canada uses that method of determining the start and end of recessions.

As for lower oil prices - they are often a symptom. When the economy is doing well people can afford to pay higher prices for oil and the price of oil increases due to higher demand.

When the economy is not doing so well then demand falls while supply may continue to produce. As such, the price of oil falls.

Canada, as a producer of oil, has a complex relationship with the price in that a higher price is good for Alberta, BC, and Atlantic Canada but not necessarily very good for other parts of the country.

As for lower prices - yes they generally are good. But if they are coming as a result of slack demand, rather than sustainable increases in productivity, then we are looking at the symptoms of an economic slowdown in hindsight.

What's worse is if lower prices come at a time that credit is tightening and savings rates are going up. Yes, the economy does go into a recession with lower prices, tighter credit and a rising savings rate.

In fact, that should not come as a surprise or "shock" to anyone who has been paying attention to the unraveling of the credit bubble since August 2007.

Well, maybe it is a shock to those who believed in the "decoupling" argument.

[Guest American Woman]

The US dollar sure is rising against the Canadian dollar again-- it's at $1.20 right now. Is that because your economy sucks too?

[msj]

The US dollar sure is rising against the Canadian dollar again-- it's at $1.20 right now. Is that because your economy sucks too?

I would think it is a reaction to commodity prices.

Commodity prices are declining and if the world is in as much as a mess as people seem to think it is in then those prices are likely expected to continue to drop.

As such, currencies that correlate with commodity prices drop too.

This is the most likely reason although other factors could show themselves to us regular folks in time.

[Guest American Woman]

It's just difficult for me to understand why our dollar is doing better against your dollar, the Euro, the British Pound, etc., and why gas is now only $3.39 a gallon as opposed to $4.29 at one point this summer, when our economy is tanking. Seems to me these are all good things for us. It must be like you said-- the world is in a mess all over.

[Bryan]

The US dollar sure is rising against the Canadian dollar again-- it's at $1.20 right now. Is that because your economy sucks too?

I don't know, but as a Canadian, I'm loving it. When your dollar is high, I can charge less than my competitors, and still end up making more when I make the exchange. It's beautiful. It's like getting a 20% raise.

We export a lot of stuff to you guys. Now it's going to cost you less to buy it. That is good for both of us.

[jdobbin]

Ah yes, lower prices. Have you seen the price of oil? That's just more proof that we are in a recession.

Is there a reason why you have posted this in the Canada-U.S. section. I'm not sure what point you wish to make.

[msj]

It's just difficult for me to understand why our dollar is doing better against your dollar, the Euro, the British Pound, etc., and why gas is now only $3.39 a gallon as opposed to $4.29 at one point this summer, when our economy is tanking. Seems to me these are all good things for us. It must be like you said-- the world is in a mess all over.

This helps explain what's going on with the dollar:

I have no doubt that the Fed’s custodial holdings are increasing far more rapidly than global reserves.

That either means that:

a) Central banks are shifting from euros to the dollar, adding to their dollar holdings;

b ) Central banks reserve managers have also lost confidence in the international banking system — and in money market funds — and are moving into the safest dollar asset around.

I would bet that this is more a flight away from risky dollar assets toward Treasuries than a flight into the dollar.

Central bank reserve managers are scared. Understandably so. Central bank reserve managers’ primary goal is to avoid losing money — and to have all the liquid assets their country needs. Right now that means holding Treasuries and not much else.

As for the price of gas going down: it is slack demand.

Does it seem normal to you that the price of gas would go down during an economic boom and go up during an economic recession?

Sure, supply is an issue but it takes time to ramp up production during good times and it takes time to decide to stop production in the first few quarters/years of a recession.

Edited October 11, 2008 by msj

[August1991]

Unlike the US, however, Canada does not have nine consecutive months of job losses.

Even by that measure, the US "recession" is a strange one. The job "losses" in the US mean that US unemployment is still lower than Canada's 6.1%.

Roubini has been predicting a recession for about 7 years now. If I predicted sub-zero temperatures in Montreal for weeks on end, I'd eventually be proved right too.

---

msj, you must admit that this financial panic is reminiscent of 19th century panics. The prices of financial paper fall, and in the midst of the panic, many people fear a deluge but in the real world, life goes on.

Between 1870 and 1910, the US suffered several financial panics in which many people thought they had lost everything. And yet at the same time, the US also rose to become a world power, eventually supplanting Europe.

Financial panics and the ability of a country to produce real goods and services are not directly correlated.

Edited October 11, 2008 by August1991

[msj]

Even by that measure, the US "recession" is a strange one. The job "losses" in the US mean that US unemployment is still lower than Canada's 6.1%.

Roubini has been predicting a recession for about 7 years now. If I predicted sub-zero temperatures in Montreal for weeks on end, I'd eventually be proved right too.

---

msj, you must admit that this financial panic is reminiscent of 19th century panics. The prices of financial paper fall, and in the midst of the panic, many people fear a deluge but in the real world, life goes on.

Between 1870 and 1910, the US suffered several financial panics in which many people thought they had lost everything. And yet at the same time, the US also rose to become a world power, eventually supplanting Europe.

Financial panics and the ability of a country to produce real goods and services are not directly correlated.

1) The US and Canada measure unemployment differently which means that one cannot simply compare them. Apples to oranges is not fair.

2) The US system employs a birth/death model (businesses not people) which understates job gains during economic recoveries and understates job losses during economic contractions.

Wait a few more months and take a look at the adjustment to BLS data. They are going to be big.

3) Given that the US has been in a recession twice during the past 7 years then it is not surprising for anyone to predict that the US was going to go into one.

Roubini has pointed to the causes of this economic crisis for many years. It is always difficult to time exactly when the mess hits the fan but it is better to be early than to not see the mess coming in the first place.

4) As has already been pointed out in another thread - financial meltdowns tend to lead to lower economic growth as compared to other types of slowdowns.

The "real" world is effected. Look at the increasing foreclosure rate in the US over the past year. Look at it again in 6 months to a year.

Look at the unemployment figures in the US as the birth/death model adjustments are made.

In California, where the real estate bubble was more obnoxious than other parts of the country, unemployment is running at something like 8.8%.

Those are real people.

So are the 1 in 6 homeowners who are upside down on their homes. But I'm sure none of these people feel any stress.

5) Why do you keep pointing out that the US has survived terrible crises in the past?

We all know they have.

The world has. Of course people survive through tough times.

The depression and then WWII was probably the worst 16 or so years in human history for a very long time. People got through it.

It doesn't change the fact that much can be done to ensure that economic slow downs occur due to business cycle slow downs as opposed to poor regulation leading to huge socialized bailouts.

6) I'm sure those who are unemployed and those who are underwater on their homes and wondering what's next for them are thinking "gee honey, this ain't so bad. You know in the 1870's the world went through a pretty significant depression but look how much wealthier people were by 1902."

Edited October 11, 2008 by msj

[msj]

It's just difficult for me to understand why our dollar is doing better against your dollar, the Euro, the British Pound, etc.,

Here is a more informed opinion based on some data, regarding the US dollar.

Basically, it looks like the US dollar going up isn't necessarily a good thing - the US Fed is off loading quality (T-bills) for junk (i.e. buying those crummy mortgages from the banks) while the foreign central banks are loading up on T-bills.

Guess it's better than doing nothing - but it's always better for the Fed to be thought of as the "lender of last resort" rather than actually becoming the "lender of last resort."

But, you know, an ounce of prevention is worth a pound of cure, and all that...

[August1991]

The US dollar sure is rising against the Canadian dollar again-- it's at $1.20 right now. Is that because your economy sucks too?

It's largely because the price of oil is down. Canadians export oil.

As such, currencies that correlate with commodity prices drop too.

I agree.

Is there a reason why you have posted this in the Canada-U.S. section. I'm not sure what point you wish to make.

US/Cdn exchange rate but our main fear is what ordinary Americans will do.

We Canadians have no reason to fear anything among ourselves. We can trust other Canadians and we can even trust Americans.

Our fear should be whether ordinary Americans decide to buy less of our oil. If so, it would change some of our decisions.

The "real" world is effected....

5) Why do you keep pointing out that the US has survived terrible crises in the past?

We all know they have.

The world has. Of course people survive through tough times.

The depression and then WWII was probably the worst 16 or so years in human history for a very long time. People got through it.

The whole question is how much the "real" world is affected.

So far, the only real world effect is that Obama seems likely to win the presidency.

----

Equity prices go up and down. They are volatile. Only a fool would base serious real world decisions on equity prices. Ditto house prices.

msj, I don't think you quite understand the nature of markets. (I'm not saying that you are not a smart market trader. Sorry for the double negative.) To go academic, a market is a collective reflection of individual choice. In a market, people learn. Americans learned from 1987 and they have seen previous housing market collapses.

I'm a populist. I trust the rational wisdom of ordinary people.

In this particular case, the Fed and other central banks provided liquidity - they essentially provided trust. When it comes down to it, that's what the Sovereign in the past provided. In the movie, Six Days Seven Nights, Harrison Ford goes behind a bush and screams and yells. He's like governments now. The State should provide trust. The Fed has done this now (willy-nilly, academically) unlike it's total abdication of trust in 1930.

Too many Leftists, anti-American, want to see the collapse of Western society - they wet their lips viewing this financial "crisis", that they don't really understand. As I have posted elsewhere, the New York Stock Exchange has lasted far longer than the Soviet Union or any socialist experiment. Capitalism, and free markets, move and change.

Lastly, BTW, I think Bernanke has been a disaster as Governor and it's now a certainty that no academic will ever be named again to the position.

Edited October 17, 2008 by August1991

[msj]

It's largely because the price of oil is down. Canadians export oil.

I agree.

US/Cdn exchange rate but our main fear is what ordinary Americans will do.

We Canadians have no reason to fear anything among ourselves. We can trust other Canadians and we can even trust Americans.

Our fear should be whether ordinary Americans decide to buy less of our oil. If so, it would change some of our decisions.

The whole question is how much the "real" world is affected.

So far, the only real world effect is that Obama seems likely to win the presidency.

----

Equity prices go up and down. They are volatile. Only a fool would base serious real world decisions on equity prices. Ditto house prices.

msj, I don't think you quite understand the nature of markets. (I'm not saying that you are not a smart market trader. Sorry for the double negative.) To go academic, a market is a collective reflection of individual choice. In a market, people learn. Americans learned from 1987 and they have seen previous housing market collapses.

I'm a populist. I trust the rational wisdom of ordinary people.

In this particular case, the Fed and other central banks provided liquidity - they essentially provided trust. When it comes down to it, that's what the Sovereign in the past provided. In the movie, Six Days Seven Nights, Harrison Ford goes behind a bush and screams and yells. He's like governments now. The State should provide trust. The Fed has done this now (willy-nilly, academically) unlike it's total abdication of trust in 1930.

Too many Leftists, anti-American, want to see the collapse of Western society - they wet their lips viewing this financial "crisis", that they don't really understand. As I have posted elsewhere, the New York Stock Exchange has lasted far longer than the Soviet Union or any socialist experiment. Capitalism, and free markets, move and change.

Lastly, BTW, I think Bernanke has been a disaster as Governor and it's now a certainty that no academic will ever be named again to the position.

This topic is getting far too big and choppy to manage but I will address some items where possible:

1) The fall in the CDN dollar due to oil is the most likely cause but I think one has to consider the possibility and extent to which the USD is appreciating against non-commodity based currencies (Yen and Euro).

As such, the link I have provided above yesterday is as good a data-driven explanation as anyone is going to get.

2) The real world effect from this crisis has been rearing its' ugly head now for quite a while.

Just because the stats are slow to pick this up (BLS birth/death model adjustments for example) does not mean that we can't look back and make educated guesses as to just how bad unemployment has been so far this year and how bad it may possibly get over the next year.

I have made posts in the other thread where such information is discussed in a rational manner with details and recommend that you educate yourself on such matters.

I have also posted to links in other threads where you participate showing prior effects on the "real" economy from previous financial and non-financial led downturns.

The effects are real and are more important than silly questions about who will win the White House.

People are losing their jobs and their houses and that is an effect on real people no matter how much you try to dodge it.

3) Equity prices are pretty meaningless. This is a credit crises so if people want to know the extent to which it will effect the real economy then I recommend that they look at the TED spread and other information that is specific to the credit markets.

I have not placed very much emphasis on the stock market because I do not believe in the efficient market hypothesis (if anything, the stock markets have been very poor to price in the credit crisis information but that is an argument too complicated and too long to go into here).

If you were to read the links that I have provided during this past year you would find that they have little to do with the equity markets and lots to do with statistical methodologies, credit markets, and other data driven information.

4) Sure the government can "provide trust."

I just find it odd that the government is considered competent enough to provide "trust" and be used as the lender of last resort when the same people who believe in this nonsense want the government to have so little to do with preventing messes in the first place.

The real socialists here are the one's screaming for the bail-outs.

5) I don't see how a credit crisis that largely grew out of the years for which Greenspan was the head of the Fed can be laid at the feet of Bernanke.

Given the legacy Greenspan has left, I think Bernanke is doing about as good a job as anyone can do.

He is certainly doing a better job than Paulson but given the general incompetence in the Bush administration, between choosing to go to war to hurricane Katrina to the credit crisis, I even have some sympathy for him.

History will not be kind to Greenspan.

Edited October 17, 2008 by msj

[Topaz]

On TV today, they said the next thing to take down the US is the credit cards. US citizens owe the banks 9.8 BILLION and I'm wondering are they going to pay off these debts too? I find it the fault of the banks to give anyone a credit card especially college students! The news did say that the US banks are going to start to cut off people who seem to be over their heads, alittle to late I'd say!

[bush_cheney2004]

On TV today, they said the next thing to take down the US is the credit cards. US citizens owe the banks 9.8 BILLION and I'm wondering are they going to pay off these debts too? ....

You need to buy a better TV.....US credit card debt is considerably more than a measely $9.8 billion....by at least one order of magnitude.

http://www.federalreserve.gov/releases/g19/Current/

[msj]

msj, you must admit that this financial panic is reminiscent of 19th century panics. The prices of financial paper fall, and in the midst of the panic, many people fear a deluge but in the real world, life goes on.

Between 1870 and 1910, the US suffered several financial panics in which many people thought they had lost everything. And yet at the same time, the US also rose to become a world power, eventually supplanting Europe.

This post by Krugman is a reminder of what people like August and Dubya try to do: invoke the long run argument to dodge what is happening in the present and is expected to happen in the immediate future.

[August1991]

This post by Krugman is a reminder of what people like August and Dubya try to do: invoke the long run argument to dodge what is happening in the present and is expected to happen in the immediate future.

Krugman was probably more surprised by the Nobel Prize than anyone else.

As they say, his ego will now need its own zip code.

----

msj, have you seen the p/e of most traded shares? They are in single digits or even down to 2s and 3s. This is a panic. People are terrified.

Have you ever lived through a panic? I did, in Moscow in August 1998. ( I also lived through the start of a Civil War in Sri Lanka in 1983 and the aftermath of one in Lebanon in 1992. IMHO, civil wars and financial panics are remarkably similar: about 5% of the population takes control and makes the life of the other 95% of the population impossible.)

There is nothing wrong with markets, capitalism. This "crisis" is not the end of capitalism or a market system. John Kenneth Galbraith and Karl Marx were wrong. Markets generally work and governments too often don't. IMHO, we don't need a radical change in the world financial system.

I fear a resurgence of Leftist idiots who will now argue otherwise. (Bob Rae may regret his choice to switch to free trade market Liberals.)

----

msj, the NYSE was founded in the late 1700s - when Napoleon was a Corsican dictator in France. IOW, the NYSE has outlasted about five French republics and God-knows how many regimes or estates in Europe.

Between markets and the State, as an institution, I think markets will survive longer. In 2300 AD, I don't know if governments will exist or even if the State as we know it will. I'm certain however that people will trade in markets.

Markets with prices are now an integral part of human existence. Live with it.

Edited October 19, 2008 by August1991

[msj]

Krugman was probably more surprised by the Nobel Prize than anyone else.

As they say, his ego will now need its own zip code.

----

msj, have you seen the p/e of most traded shares? They are in single digits or even down to 2s and 3s. This is a panic. People are terrified.

Have you ever lived through a panic? I did, in Moscow in August 1998. ( I also lived through the start of a Civil War in Sri Lanka in 1983 and the aftermath of one in Lebanon in 1992. IMHO, civil wars and financial panics are remarkably similar: about 5% of the population takes control and makes the life of the other 95% of teh population impossible.

There is nothing wrong with markets, capitalism. It is not the end of capitalism or a market system. John Kenneth Galbraith was basically wrong. Markets generally work and governments too often don't.

We don't need a radical change in the world financial system.

----

msj, the NYSE was founded in the late 1700s - when Napoleon was a Corsican dictator in France. IOW, the NYSE has outlasted about five French republics and God-knows how many regimes or estates in Europe.

Between markets and the State, I think markets will survive longer.

1) Nice use of the ad hominem attack on Krugman.

Once again, same nonsense historical, long run argument. See Krugman link above. Repeat as needed.

2) When one looks into the details one will find ample room for certain common sense regulations (and common sense deregulation).

These forums are clearly not to place to discuss such details but one can find this discussed at various places for which I have already provided links before ad nauseum.

3) As for P/E ratio's, I guess some stocks are trading as low as you say.

I prefer a larger sample, and more proof than your word, on such matters:

At Fridays S&P 500 close of 940.55 the S&P: PE on trend EPS was 12.0. This compares to an average since 1960

of about 16 and is almost exactly where the market bottomed in the 1970 bear market and after the 1987 crash.

On this basis Buffett is right that the market is cheap and looks like a long term buying opportunity. But note that at the 1974 bottom, this PE was 8.0 and it remained below 12 for years, when inflation and rates were very high.

[msj]

An interesting link regarding regulation of the financial system.

I still think it is clear that an ounce of prevention is worth a pound of cure.

Or, perhaps it is better stated, that regulation thought out in advance is better than ad hoc regulation done in a crisis:

Treasury Wants Regulators to Change Rules

Of course, then there is the failure on the enforcement side.

[eyeball]

Recession? What Recession?

I doubt if the sorts of economists and accountants who brought our economy to where it is are capable of predicting or measuring anything reliably. Economics seems to require a capacity to suspend one's disbelief that's similar to that of religion.

Is this how global warming skepticism feels? I wouldn't have thought it would be as amusing as this.

[msj]

Here is a good article by James Grant.

Gives a nice general overview of the crisis and the governments' role.

[msj]

A more complete story of falling gasoline prices in the US.

Ask the Economist: How much of a boost will we get from falling gas prices?

Please note the phrase "recessions begin after the peak [in oil prices]."

Edited October 22, 2008 by msj

[William Ashley]

Toronto Star, 8 Oct 2008

Financial Times, 9 Oct 2008

Isn't that shocking. Canada's GDP growth will only be 0.9%. And even more shocking is that lower prices lead to more people buying. Who would have thunk it?

Ah yes, lower prices. Have you seen the price of oil? That's just more proof that we are in a recession.

A recession is two downturns in a row, techincally Canada is looming into a recession, just not on the same level as the US.

Also where are these "lower prices" food costs are 5 to 10% higher. and the dollar is under 0.80 to the USD. With oil prices down, canada's dollar is down, and with that canada buying power meaning all products bought outside of canada are more expensive, which means companies that get products from foreign companies will increase their prices.

[Oleg Bach]

Bankers are worried about there being a run on the bank. They had no problem doing a prolonged run on public confidence. If you take 100% from the public and as a bank absorb 100% then take your operating cost and send the balance back to the public - that is not a bad contract. BUT the bank took 100 and 10% - and in order to balance the books would have to send back the one hundred percent and be left with a pultry 10% of what in fact is public revenue. Currencey is current and is supposed to be transatory (transaction) - You fill up the treasurey and then suddenly the treasurer refuses to cough up the loot - Fiat currencey is simply a declaration of wealth - NOW .. seeing that money is the offical secular state religion - there is a problem - that is ancient.

The Vatican breached the original contract as have the banks...Originally the 12 board members of the ancient original corporation we refere to as Christianity - Made a contract with their share holders - sell your property and put the money in a common purse ( the bank ) Then..you could withdraw from the pruse as per NEED - not want. This contract was broken when the Vatican as an example only fulfilled half the contract - they collected ten percent of all the cash and did not allow any meaningful withdrawls...it is an ancient breach of the original charter. The modern banks must realize that being a banker is not about being so rich you can not spend your wealth in 20 life times - It is about the management of wealth for all - the common wealth...not the hording of wealth creating a stagnant body of useless undrinkable water - The banks will figure it out soon - that the money must now flow down the other side of the hill and water the valley - keeping in on top will cause a depression in the emotion of the share holders and this will result in an economic depression -

In fact there is no real money - so if we are going to continue to play this game we must follow the contract - the the poor must stop being afraid - and the rich must have faith and courage in the system they created...or poverty will decend on the rich and poor alike - Have faith guys - You can't take the god damned stuff with you!