US Recessions - An Observation

Alchemist

Administrator
Staff member
#1
I have been looking at the historical data on US recessions.

I found something interesting.

List of US recessions.

(Also, take a look at US Business Cycles Data).

US hasn't had any major recession since "The Great Depression".

The Great Depression lasted from 1929 to 1938....10 years.

(Actually, there was some growth between 1933 and 1937, but recession of 1937 is considered a continuation of 1929-1933 depression).

After that, all US recessions have lasted only around 3-6 quarters.

Good sign?

Not really.

If one looks at the events/reasons that lead to these recessions, one worrying fact emerges.

In the last two hundred years, recessions caused by systemic financial crisis have lasted much longer than recessions caused by other factors.

2001 recession - caused by dot-com burst - lasted 2 years.
1990 recession - more of a cyclical downturn - lasted 1 year.
1980 recession - caused by high oil prices + high interest rates - lasted 2 years.
1973 recession - another recession caused by "oil shock" - lasted 2 years.

Recessions caused by high oil and commodity prices, are self correcting.

A recession reduces demand for commodities and this itself decreases inflationary pressures.

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However, this is not the case when recessions are induced by systemic financial crisis.

1819 recession - caused by first major financial crisis in US - lasted 5 years.

The first major financial crisis in the United States featured widespread foreclosures, bank failures, unemployment, and a slump in agriculture and manufacturing.
1837 recession - caused by bank failures - lasted 6 years.

A sharp downturn in the American economy was caused by bank failures and lack of confidence in the paper currency
1857 recession - triggered by failure of Ohio Life Insurance and Trust Company - lasted for 3 years.

Failure of the Ohio Life Insurance and Trust Company bursted a European speculative bubble in United States railroads and caused a loss of confidence in American banks
1929 great depression - triggered by collapse of stock markets - lasted for 10 years.

Stock markets crashed worldwide, and a banking collapse took place in the United States. This sparked a global downturn, including a second, more minor recession in the United States, the Recession of 1937.
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US economy currently faces not only a systemic financial crisis, but also an inflationary crisis.

If the historical data is to be believed, it seems unlikely that the US recession is going to end any time soon.
 
#2
Simple and Good

Hi Alchemist,

Great effort by you.

Now that the verdict is out.

We must be staying in cash for a long time.

I guess as instruments which used to give better returns will now yield lesser and the interest rates will also go down

So until we are out of the downturn, things are not going to be good in terms of return on investment

However staying in cash would help as we put that to good use when things start looking better.

Now we can start sharing our views on how to survive such a recession/downturn.

Regards,
Manik2012
 

Alchemist

Administrator
Staff member
#3
We must be staying in cash for a long time.

I guess as instruments which used to give better returns will now yield lesser and the interest rates will also go down

So until we are out of the downturn, things are not going to be good in terms of return on investment

However staying in cash would help as we put that to good use when things start looking better.

Now we can start sharing our views on how to survive such a recession/downturn.

Regards,
Manik2012
Don't worry.

A US recession won't mean a recession in India too.

A serious US economic downturn may bring down India's GDP growth to 5%-6%.

Earnings growth rate may also come down to 10%-15% for companies in the main indices (Sensex and Nifty).

As long as the Indian economy will be growing, equities will remain the best investment option.

My feeling is that the next few months will be lackluster for equities and investors should wait for the right prices.

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India will face a recession if the US economy collapses totally.

Chances of this happening are less than 3%.
 

Alchemist

Administrator
Staff member
#5
How did you come up with 3% number?
I didn't use any formula to arrive at this figure.

I used a number because it conveys my opinion better.

I could have said

"not much chances"
"hardly any probability"
"highly improbable"
"not much possibility"

etc.

These phrases may have different meanings at different time.

However, when I put a "number" or "probability" to it, my meaning becomes clearer.
 
#6
With the recent bloodbath, it is more clear than ever that we are looking down the barrel as far as markets are considered. The whole sentiment has done a turtle turn from the time of launch of Reliance Power IPO. It is amazing how sentiments changes... the mood of euphoria and seeing the market to 25000 has taken a u-turn and talks of 13000 are in air.

Things ahead also look gloomy owing to 1) Crude Oil, 2) High Interest Rates, 3) High Inflation, 4) Lower Earnings Expectations.

Any perspective from users about how long such mood will last and what will actually take it to change.
 

Alchemist

Administrator
Staff member
#7
With the recent bloodbath, it is more clear than ever that we are looking down the barrel as far as markets are considered. The whole sentiment has done a turtle turn from the time of launch of Reliance Power IPO. It is amazing how sentiments changes... the mood of euphoria and seeing the market to 25000 has taken a u-turn and talks of 13000 are in air.

Things ahead also look gloomy owing to 1) Crude Oil, 2) High Interest Rates, 3) High Inflation, 4) Lower Earnings Expectations.

Any perspective from users about how long such mood will last and what will actually take it to change.
If you are asking about US markets, I don't see much hope.

If you are asking about the Indian markets, you will find your answers here:

Sensex At A Glance

Investing in FY 2009
 

Alchemist

Administrator
Staff member
#9
I haven't seen the videos....need a lot of time to download such big videos.

I fully agree with what this guy says.

In fact, there are dozens of analysts/economists/observers who had correctly predicted the burst of the US economic bubble.

Most Indian analysts still don't fully understand the seriousness of problems with the US economy and are trying to predict a bottom for the US markets.

In my opinion, US is a bankrupt country.

If it weren't for the fact that the world uses US dollar as the reserve currency, US economy would have collapsed much earlier.

Everyone in US is deep in debt and there is no way this debt came be repaid.

The US government has $10 trillion of debt and another $50 trillion of unfunded liabilities.

The individual US states are running out of money.

The US auto industry is nearing bankruptcy.

The US consumer is deep in debt.

Sooner or later, the world will stop putting money in US treasuries and then the US government will have no other option, but to start printing money in a big way.

The end result would be hyperinflation in the US and a total collapse of the US dollar against other currencies.

It isn't a question of "if" this will happen or not.

The question is "when" this will happen.

The pace at which US economy is deteriorating, it seems the time is close.............may be a few years or even just a few months away.
 
#11
The US auto industry is nearing bankruptcy.
Bravo !

Everyone in US is deep in debt and there is no way this debt came be repaid.

The US government has $10 trillion of debt and another $50 trillion of unfunded liabilities.
updated figures ...

The US government has $11.4 trillion of debt and another $63.8 trillion of unfunded liabilities.

"Each citizen's share of this debt is $37,222.77" and "Average Liabilities per household is $668,621".

I always admired and considered the Socialy Security system provided in western countries as Good Governance of a Developed Country. I never knew they created such a hole out of it !

Apne desh me, we do not get any govt provided socialy security by birth. We earn all kind of insurance and retirement funds for our family ourselves.....aren't we better off ?
 

Alchemist

Administrator
Staff member
#12
Apne desh me, we do not get any govt provided socialy security by birth. We earn all kind of insurance and retirement funds for our family ourselves.....aren't we better off ?
not really.

Indian economy too has its risks.

we are running abnormally high deficits and government debt levels are alarming too.

read this:

A Balance Sheet crisis in India??

(do read the blog regularly...it's one of the best around).

these things will be neglected till there is growth in the economy.

once growth starts tapering off , the sins of poor fiscal management and over-spending will catch up....;).
 
#13
double dip?

Fears of double dip recession is still there.

More Stimulus

the private sector created 67,000 jobs in August, many more than expected.
That is better than expected results.

The US unemployment is still rising up adds support to fear of a second recession.
 
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Alchemist

Administrator
Staff member
#15
The stimulus is almost over.

To be fair, lawmakers have tried quite a few tactics to help the economy since 2008. Banks were bailed out, the auto industry was rescued and unemployment benefits were extended. Congress passed a gigantic stimulus package that included tax breaks and money for infrastructure projects.

But now that money has all dried up.
So what now?

QE3?

and for how long can this money printing ("Quantitative Easing") go on?

Sooner or later, the bubble has to burst.

Of course, the nation's debt is a major problem. Over time, Washington's budget deficits have piled up to more than $14 trillion in debt. That's so high that lawmakers find themselves with less room to act.
If the economy continues to erode, there is one more stimulus option for policymakers to pursue:

The Federal Reserve might be tempted to embark on another round of bond-buying in an attempt to pump cash into the economy.

The Fed's current $600 billion in monetary stimulus is scheduled to end later this month, and weakening economic conditions will almost certainly lead to calls for another round of "quantitative easing."
A really pessimistic view by Norman Ornstein:

"I am not sure you could even get the votes [for a stimulus package] if it was clear we were headed for a depression," said Norman Ornstein, a resident scholar at the conservative American Enterprise Institute.
Economic stimulus runs dry - Yahoo! Finance
 
#16
The Indian capital markets are run by FII money which is indirectly linked to stimulus packages in the US.

With US economy slowing and no sight of QE3, it mean FII money in India is at risk of moving out.

How should one play the markets now?
 

Alchemist

Administrator
Staff member
#17
The Indian capital markets are run by FII money which is indirectly linked to stimulus packages in the US.

With US economy slowing and no sight of QE3, it mean FII money in India is at risk of moving out.

How should one play the markets now?
Keep cash ready and buy whenever you find undervalued stocks.

In the long-term, it is better for India that the western economies slow down.

Even though withdrawal of "quantitative easing" may affect fund flows and sentiment in the short to medium term, slowing economies in the west would also bring down prices of commodities, which is exactly what India needs right now.

"QE3" may mean higher stock prices, but "no QE3" would mean higher earnings for many Indian companies, which obviously would be better for long-term investors.
 

Alchemist

Administrator
Staff member
#19
Thanks Alchemist. Looking for your guidance on identifying the undervalued stocks :biggrin:.
My view that the withdrawal of quantitative easing would be a long-term positive for the Indian economy is based on the assumption that there will be no repeat of 2008 financial crisis.

If instead of a gradual deterioration of economic conditions in the west, we get a violent adjustment in the world's financial and currency markets, India won't remain unscathed.

All financial markets would sink in such a scenario. I think the probability of such a crisis is less than 10%, but all possible outcomes must be kept in mind before investing one's hard-earned money.
 
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