Recession? No, It's a D-process, and It Will Be Long

http://online.barrons.com/article/SB123396545910358867.html?mod=djemWR&page=sp

by zurla • 17 years ago

55 20 17 years ago

online.barrons.com

fiaz2• 17 years ago

I agree with the fact that we are in a "D-process", but I'm skeptical about the "long" part. Something new is happening with the widespread availability of information through multiple channels, and I think because of this our economic cycles are "compressed".

My prediction is that the rate at which businesses change/modify/adapt (especially in the financial sector) will be readily reflected in the information that is spread through multiple channels, resulting in a compression of the time frames of the current "D-process".

whacked_new• 17 years ago

There seems to be some kind of "all other factors held constant" clause hidden here, correct?

The idea seems valid, but I paused to think why it didn't jive with the employment recovery rate plots.

http://www.williampolley.com/blog/archives/2009/02/employmen...

It seems the most straightforward explanation is... actually, I can't think of one, but I have three factors that seemingly count against your theory. 1. increasing income and purchasing power disparity. 2. changing attitudes and/or culture; then we can expect a new kind of "equilibrium curve" due to new consumer behavior. 3. age of previous buyer's generation (unsure about this one).

Also, speed of information is unbalanced with speed of physical processes; you can make an order and track a package of food with millisecond accuracy, but you will still remain hungry for as long as the delivery truck can drive.

Someone more knowledgeable, say something if you will.

numair• 17 years ago

You are ignoring rule #1 in the financial world: "Past performance may not be indicative of future results."

Don't worry, the entire financial world ignored this rule as well (which is precisely why I think this is likely to be a long downturn - rebuilding financial infrastructure is a long process involving lots of time and social work; you can't simply legislate it into being).

nostrademons2• 17 years ago

It seems like everyone involved - homeowners, banks, corporate executives, the government - has an incentive to drag this out, so that this quarter's results won't be as bad as they otherwise would be. (Or in homeowners' case, so they don't end up on the street.) Why take some pain now when the rewards will likely go to your successor?

fiaz2• 17 years ago

I'm actually saying that the rule you have stated above holds true even more so if we take into account the high availability of actionable information. Take for example that with "TARP 1" all sorts of irritating loopholes were exposed in a very short period of time (how long did it take for the general public to be informed of the tax exemption for a specific type of arrow used by child archers??).

I want to emphasize that what I'm stating is that in the past, when critical changes took place, it would be some time before all of the information/knowledge of those changes propagated to everybody and this had an impact on the economic cycle (how long or short they were). In today's "Internet Age", the time it takes for changes to propagate is going to be reduced dramatically.

I should add that a direct consequence (and this is purely hypothetical but not unreasonable to include) is that the volatility of the economic climate will increase with the availability of information.

TrevorJ2• 17 years ago

All the talk of timeframes reminds me of Asimov's foundation trilogy. (The coming dark ages, and the attempts to shorten it, the use of math to describe the actions of large groups of people which is basically what economics is.) Anybody else read this?

habibur• 17 years ago

Yeah! I read it. It was one of my favourate series of all time. Things are exactly as how you have described. I hated the robot series. But Foundation trilogy was a classic!

magoghm• 17 years ago

My son is reading Asimov's Foundation trilogy, so I decided to reread it (I read it 30 years ago), and I keep noticing similarities to the current economic crisis and all the predictions people try to make.

FlorinAndrei• 17 years ago

Good point, but I wonder how much of that is reality, and how much is Greenspan's mistake - you know, that we're entering a brave new world where the old rules do not apply.

steveplace• 17 years ago

When Barrons starts releasing stuff like this, it's time to put your contrarian hats on.

cchooper• 17 years ago

There's a good article in the FT today on a similar theme: how this recession is/isn't like past recessions, particularly the Japanese "lost decade".

http://www.ft.com/cms/s/0/774c0920-fd1d-11dd-a103-000077b076...

biohacker422• 17 years ago

Very interesting interview but I was confused about his predictions for gold and inflation.

He makes the point that deflation is a serious concern so the Fed will devalue and gold will be a great investment. But then he says that the devaluation will barely produce a single digit rate of inflation and stocks will be a great buy.

So which is it, low inflation and cheap stocks, or gold?

Gold doesn't pay dividends so the only way you make a profit is by it going up, or you simply preserve your wealth when there's inflation.

But why would you hide in gold with low single digit inflation?

nostrademons2• 17 years ago

The inflation rate isn't the only (or even a particularly good) predictor of gold's value. From 1971-1979, gold shot up from $35-$900/ounce, a 30x increase, yet cumulative inflation was only 6-8x. Then over the next 5-10 years its price fell from $900 to ~$300, a 3x decline even though cumulative inflation ran about 150%.

Gold is like any other commodity: its price behaves according to supply and demand. When there's massive economic uncertainty, people demand it, so its price shoots up. A bubble, in other words. Economic uncertainty includes deflation, panic, and social unrest as well as inflation.

biohacker422• 17 years ago

So perhaps what he meant is that gold is a good speculative opportunity, not so much a way to escape high inflation.

I prefer not to speculate so if deflation or low inflation are on the horizon I'd rather invest in something that's cheap and pays dividends, and incidentally, is taxed at a lower rate then commodities.

blakeb• 17 years ago

There are a lot of pieces, but I think this might be what he's getting at.

Between now and sometime possibly about a year from now, stocks are likely to go down much further than they already have. So stocks are a bad move right now. Reasons behind this are lack of credit due to all the deleveraging and lack of demand due to consumers scaling back their spending due to also being overextended and seeing their home and portfolio prices dropping as far as they already have. Home prices will continue to drop as well, for a multitude of reasons, one being that tons of people can't afford their payments--hence, we have too many homes worth too much.

The reason gold will hold up or go up, in his view, despite lack of extreme inflation, from what I can tell, is this: asset prices (stocks and homevalues) everywhere are falling. But the money's still floating around. This would normally lead to big deflation. But since governments are all going to be pumping cash into their economies by printing money, they'll offset the deflation and we'll end up about even. In a sense it's inflation--money will be valued less; but so will most assets such as homes and stocks. One big asset that won't be valued less is gold. As more people start seeing it this way, gold will go up and up.

I'd guess that around the time he's forecasting a stock trough is when he'd recommend moving a bunch of your portfolio back from gold into stocks.

kubrick• 17 years ago

It seems like everyone's a prophet these days. I understand why, I think -- we all hate uncertainty. But no one knows the future; this is all too chaotic to predict. Let's hope that fact actually works to our advantage.

nazgulnarsil• 17 years ago

finally someone is pointing to one of the real fundamental issues http://s.wsj.net/public/resources/images/OB-DC115_BATOPC_NS_...

when you have huge negative savings for many many years that is unsustainable. we are now correcting.

Recession? No, It's a D-process, and It Will Be Long

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