OK I get it; NOW we are in a Recession!
The whole world has been waiting for two quarters of negative GDP growth to come and go before anyone would technically and officially declare the recession. However, once again the National Bureau of Economic Research (NBER) comprised of scholars, Nobel Prize winners in economics, and hundreds of learned university professors have finally conducted enough empirical research, developed enough statistical measurements, and made enough economic estimates to have concluded that hey, guess what, we are, indeed, in a recession.
Excuse me, but I could have saved them a lot of trouble. For anyone paying attention, it would have been clear that we???ve been on the road to recession since December 2007. But it???s typical for official recession announcements to get released just as we are about to hit bottom, or even when the economic cycle is actually beginning to reverse itself into recovery mode. In other words, these reports are USELESS. You might as well close the barn door after the. . .well, you know.
These announcements are not just old news, they???re an insult to the intelligence of consumers. It???s not as if we haven???t noticed that we???ve been living in a world that???s every bit as uncertain as it was after the 1930s.
If we???d kept track of the following events and tied them all together, we would have known that something catastrophic was coming.
??? The credit-induced mess really began when interest rates were slashed between 2001 and 2004. Easy credit led to over-borrowing and everybody was getting in over their heads. But interest rates started to climb. In 2004 rates peaked at 5.25% and that???s when the stuff started to hit the fan.
??? In 2006 the blow-up started to unfold???all those low-interest, adjustable-rate mortgages began resetting. It brought dramatically higher interest rates and increased monthly mortgage payments. It was not uncommon to see a $1,500 monthly payment balloon to two or three times that amount???way beyond the budget for many unqualified buyers.
??? That led to a 42% increase in mortgage foreclosures between 2005 and 2006???according to Realty Trac. By 2007, nationwide foreclosure rates were 0.75% compared to the previous year. An early victim was NovaStar Financial, which reported a 7% jump in delinquencies in 2006 compared to a 2% rise in 2005. By January 2008, their share price had dropped to $1, down from $150 in May 2006. For the first quarter of 2008, foreclosure filings, according to the Realty Trac index, were 112% higher compared to the same period during 2007.
??? During the first quarter of 2008 Robert Shiller, the famous Yale University economist and economic author, warned that home prices could drop by over 30%???a precipitous drop not seen since the Great Depression.
??? Meantime, the cracks in the central core of the financial system in the U.S. began to reverberate across the entire globe.
??? On July 9, 2007 the Dow hit an all time record, surpassing the 14,000 mark. But two months later, it had slid 8% to 12, 845. The aggressive actions by the Fed triggered a fragile and short-lived recovery.
??? After October 2007, the sub-prime mess was getting messier. Major financial institutions kept on reporting billions in losses, and the economy was flirting with recession.
??? By March 10, 2008, the blue chip benchmark of the U.S. industrial might, sank to 11,740, a 17% drop from a high reached in October. The biggest investor decline in eight decades has sent investors fleeing to U.S. Government instruments, bank deposits and other cash funds
??? From mid July to August of 2008, just about every financial market in both developed and emerging countries had registered double-digit losses.
??? In October 2008, U.S Mutual funds were hit hard by record investor withdrawals as $127 billion were moved to the safety of treasury and cash. Balances fell from a May total of $12.3 trillion peak to $9.6 trillion by the end of October.
??? SP 500 index slumped nearly 41% YTD???its worst performance since 1931, the MSCI World Index has dropped 47%, the average diversified U.S. equity fund has declined 48% this year through November 21???according to Morningstar???and the average non-U.S. fund has plunged 54%.
??? 1.2 million jobs have been cut in the last three months with 533,000 jobs lost in November alone, according to labor statistics???the biggest cut in more than 30 years???bringing the unemployment rate to 6.7%.
As we???ve been reporting on this website, Bear Stearns and Lehman Bros. are kaput, AIG was rescued, many banks failed, well-known companies have gone bankrupt, millions of small business are closing shop, and the government???s $700b bailout has yet to unlock the credit markets. Then there was Citigroup and now the auto industry.
It???s a disaster of epic proportions and there???s still more waiting in the wings???the unraveling of commercial real estate and the explosion of credit card debt and the defaults that are sure to follow. It is true that the most, if not all, economies from the U.S. to China to Spain and Argentina have provided stimulus packages, but it appears that we are in the midst of a prolong recession. How do we know? Not because the NBER tells us so.
Actions taken to prevent deflation instead of inflation, to ignite economic activity and reduce the cost of access to credit, have thus far been fruitless. Meanwhile, the housing market continues to slide, GDP is dropping, consumers are not spending, the financial markets are in disarray and we have a U.S. team of economic fixer-uppers that keep tripping and stumbling into walls. Now we are holding our breath waiting to see what will shake out from the failing/flailing auto industry.
If we are going to survive this, somebody had better come up with a workable plan???and fast! A plan that provides clear transparency, open communication and fewer surprises.
On the other hand, who knows? We might actually be in the recovery period . . . but of course we???ll have to wait until the NERB formally announces it . . . sometime in 2010.
I would highly recommend you read a great new book called "The Big Gamble" by Jose Roncal and Jose Abbo as they delve and provide great insight on the recession and current economic crisis
