Time for a recession? and the Fed

[Jcrew]

Greenspan just predicted a 1/3 chance of recession this year. For various reasons I think the chances are more around 2/3. This particular situation we have now is interesting. In the Greenspan era, recessions are confronted with liquidity injection via lowering interest rates. With the rise of hedge funds and their exploitation of the yen carry trade, any similar actions by the Fed this year in the face of recession, will most likely be neutralize by liquidity contraction by hedge funds. Scenario could be played out like this:

1.) Signs of recession.
2.) Fed lowers rates
3.) Dollar sinks against the Yen
4.) Because of their functionally short leveraged yen position, hedge funds must start to unwind.

The question is whether the liquidity injected by the Fed will exceed, equal, or be less than the contraction caused by the undwinding. Further rate decreases causes more unwinding analogous to the pushing on a string scenario. Situation might end up being very sick when this is coupled with subprime credit implosion spreading to the prime world.

[jively]

ECRI (Economic Cycle Research Institute) is a company that has really excellent leading indexes, and have accurately predicted the last 3 recessions while not predicting any recessions that didn't happen. In terms of forecasts, these are the *only* people I ever listen to.

This is a link to their web site and press quotes. One that was really good was a video on TheStreet.com TV where Lakshman Achuthan, ECRI's managing director, was interviewed for about 6 minutes. Although there is slowing now and in the near term, a look at their long leading indicators show "no recession in sight, and I think the risk of a recession is very low and receding."

Here is a link where they reprint a NY Times article from Monday that is saying that most people forecast poorly. Read the bold items.

-Tom

[hawk59]

"ECRI (Economic Cycle Research Institute) is a company that has really excellent leading indexes, and have accurately predicted the last 3 recessions while not predicting any recessions that didn't happen. In terms of forecasts, these are the *only* people I ever listen to.
"

Come on, this is a poker board. The statistical significance of their predictions, when there are at least tens of thousands of economists and institutes making predictions, is close to zero.

[jively]

[ QUOTE ]
Come on, this is a poker board. The statistical significance of their predictions, when there are at least tens of thousands of economists and institutes making predictions, is close to zero.

[/ QUOTE ]
Interesting point. I would at least look at how old these indicators are (link) (1950, 1958), and read some of their material. Link on predictions from 1999 on. They are making correct predictions about non-recessions, recessions, and recoveries in the US and other countries, as well as predictions on future inflation. It's a lot of data points.

Give them a shot.

-Tom

[Hank Scorpio]

I think there's around a 25% chance of a recession. You're not taking into account two things. First, there are still price pressures and signs of inflation. Second, blue chips are still around 10% below their previous highs.

Too many people panic at any new information available, and while I think a recession is still a possibility, it isn't likely. IMO, stocks will bounce back by the end of the year and the Fed will keep IR at 5.25%. Towards the end of next year I'm looking for an IR decrease.

[Uglyowl]

[ QUOTE ]
Towards the end of next year I'm looking for an IR decrease.

[/ QUOTE ]

Hank- The futures markets are pricing in a 100% chance of one reduction by August and 2 by December this year.

Looks like one in July and another in October is the "mean" (50% probabilities).



Chicago Board of Trade Fed Funds Futures

[OnlinePro]

With an almost certain Fed rate drop this year, does this guarentee an upswing in homeprices the start of the new year 08 ?

[morphd]

No, home prices will be flat or declining for years to come. Research the recent meltdown in the subprime mortgage industry and you'll see why. 1st time buyers are effectively priced out of the market in most areas of the country now and foreclosures are starting to rise quickly along with housing inventory.

And don't count on that rate cut just yet. I know it may be priced in but it doesn't mean it'll happen. Inflationary pressures are strong and cutting rates will almost be like sacrificing the dollar.

Oh, and yes, we are certainly going into a recession.

[Jcrew]

[ QUOTE ]
With an almost certain Fed rate drop this year, does this guarentee an upswing in homeprices the start of the new year 08 ?

[/ QUOTE ]

Possible, but I doubt it. Long term housing prices are bounded by affordability rates which has historically been around 2.5x income for the median household for the median house. These bounds can be inflated for short periods if excess liquidity and high appreciation rates occur at the same time(sometimes the former causes the latter). A very plausible scenario is that it may stem the downward price movements by allowing home owners to refinance at an affordable rate and not face forclosure when their ARMS reset. Forclosures are the biggest pressure that drives down house prices.

Rate cuts can easily be offset or exceeded by liquidity contraction on the private. As in the OP, the yen carry trade unwinding could be a huge factor. But the bigger one would probably be as the result of the recent subprime implosion forcing banks to tighten up lending standards. It will be a catastrophe if the problems of the subprime start to infect the prime mortgages.

[morphd]

[ QUOTE ]
But the bigger one would probably be as the result of the recent subprime implosion forcing banks to tighten up lending standards. It will be a catastrophe if the problems of the subprime start to infect the prime mortgages.

[/ QUOTE ]

It's happening, not the best article, but this should give you an idea of what's going on and Alt A loans:
Subprime, Alt A mortgages