Recession, Rate Cuts and Stocks: Why This Time It's Different

by: Kirk Shinkle December 01, 2008    

Kirk Shinkle

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On a day when the National Bureau of Economic Research says the current recession is both official and a full year old and the Federal Reserve Chairman says he's willing to cut interest rates from an already rock-bottom 1 percent, the contrarian in me expected to see at least a few folks start shouting "Buy!"

That's because during most downturns, by the time a recession is officially announced, the damage has already been done in stocks. That, mixed with possible rate cuts that are "certainly feasible," according to Ben Bernanke, should theoretically be good news for battered shares. Not this time. Here's why:

Consumers are only going to get more strapped. Bearish banking analyst Meredith Whitney is warning the credit card crunch will be the next shoe to drop when banks cut back some $2 trillion worth of credit lines over the next 18 months.
Factory sector pain is still getting worse, and manufacturing is still seeking a bottom, according to the Institute for Supply Management.

In case you missed it today, the S&P is down another 6 percent and, as Felix Salmon rightfully points out, it's not really because of the recession call, which was already obvious to any market watcher with a pulse. It's because the faltering economy is still in the process of catching up to Wall Street expectations that remain overly optimistic, even after what has been a truly awful year.

Related:
The NBER's statement is here.
Bernanke's remarks are here.

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This article has 11 comments:

  •  
    Dec 01 04:49 PM
    You miss one larger point, credit card companies lowering credit limits is a positive thing, not negative. We need to reverse years of living beyond our means, and begin saving not borrowing. Yes, short term it will hurt consumption and the economy, but we must go through it. Hopefully the emerging economies can pick up the consumption slack.
    Reply | Link to Comment
  •  
    Dec 01 05:19 PM
    It's going to take a lot of time for the investors to adjust to the new economic
    model which will have a large element of Govenment Control involved in
    everyday decisions. I would say conservatively we are in for a sluggish time for an indefinite period going forward and would possibly touch the
    DEPRESSION mode once again.......MarvinMBA
    PS: Cash is King buying more and more everyday...forget about interest rates on your cash...the value is in increased buying power as time moves forward!!!!!!
    Reply | Link to Comment
  •  
    Dec 01 05:38 PM
    OK this time its different. It appears you are solidly within the consensus here. Bearish sentiment is very high and risk aversion is at a record. There are virtually no returns for ten years in a treasury bond and the corporate market is virtually closed. Short term interest rates around the world are plunging and gasoline prices are at multi year lows. There is a new and popular president about to take office whose intangibles are off the charts. Huge fiscal stimulous packages will be passed and implemented within weeks not just in the US but also in China and other countries. The US Federal Reserve is engaged in unprecedented monetary stimulation - the money supply is going hyperbolic. The banks have recieved billions in capital injections and are being told in no uncertain terms to lend to qualified borrowers. Large banks are being backstopped and the Fed is buying mortgage paper by the billions. As a result lower mortgage rates are allowing homeowners to refinance their mortgages. The news flow is a constant drumbeat of negativism. Everything is given a negative spin as the fires of fear are fanned. Yes its different this time. None of this matters. Its just all going to he--.
    Reply | Link to Comment
  •  
    Dec 01 07:41 PM
    "the S&P is down another 6 percent today... because the faltering economy is still in the process of catching up to Wall Street..."

    Well, it could just be because the S&P 500 was UP about 20% last week. I think it's called profit taking.
    Reply | Link to Comment
  •  
    Dec 01 08:53 PM
    Stocks are junk, cash (US) is next to fall. Too much money out there and no one wants it anymore. I would not doubt the yen to move to 1 on 1 against the dollar in a few years.
    Reply | Link to Comment
  •  
    Dec 01 11:11 PM
    According to Keynes, the root cause of an economic downturns is an insufficient aggregate demand. When the total demand for goods and services declines, businesses throughout the economy see their sales fall off. Lower sales induce firms to cut back production and to lay off workers. Rising unemployment and declining profits further depress demand, leading to a feedback loop with a very unhappy ending.

    90% of the time you can make statistics show whatever you want 50% of time

    nomedals.blogspot.com
    Reply | Link to Comment
  •  
    Dec 01 11:36 PM
    i think it's not abt credit card, they know who owe how much, but for corporate debt it's so huge and if business is down still we shall see huge jobless and bankruptcy. tht will be the next crisis in 3 to 6 months , starting with airlines failure after the baltic rate
    Reply | Link to Comment
  •  
    Dec 02 09:10 AM
    Thankfully there are people like you saying it is different this time. Thanks for the contrary indicator. Just like in the past,i.e others claiming it is different this time, you will most likely be proven wrong.
    Reply | Link to Comment
  •  
    Dec 02 09:57 AM
    People, Housing Crash 2 starts in May 2009. If you getback into stocks orbuy ahouse now you will catchthe falling knife for sure.

    There is 1.1 trillion$ in option, liar, and interest only ARMS starting to reset in May 09. They run until November 2012. Housing prices are going down another 40% and only GOD knows what will happen to stocks and bonds.
    Reply | Link to Comment
  •  
    Dec 02 01:03 PM
    good call!


    On Dec 01 05:38 PM jepittman wrote:

    > OK this time its different. It appears you are solidly within the
    > consensus here. Bearish sentiment is very high and risk aversion
    > is at a record. There are virtually no returns for ten years in a
    > treasury bond and the corporate market is virtually closed. Short
    > term interest rates around the world are plunging and gasoline prices
    > are at multi year lows. There is a new and popular president about
    > to take office whose intangibles are off the charts. Huge fiscal
    > stimulous packages will be passed and implemented within weeks not
    > just in the US but also in China and other countries. The US Federal
    > Reserve is engaged in unprecedented monetary stimulation - the money
    > supply is going hyperbolic. The banks have recieved billions in capital
    > injections and are being told in no uncertain terms to lend to qualified
    > borrowers. Large banks are being backstopped and the Fed is buying
    > mortgage paper by the billions. As a result lower mortgage rates
    > are allowing homeowners to refinance their mortgages. The news flow
    > is a constant drumbeat of negativism. Everything is given a negative
    > spin as the fires of fear are fanned. Yes its different this time.
    > None of this matters. Its just all going to he--.
    Reply | Link to Comment
  •  
    Dec 04 09:22 PM
    NBER made a crappy call, and probably did it for the worst reason (politics). They admit themselves that they used a non-standard (ie made up) definition of recession, when in fact by standard - 2 quarters of negative growth - we could not be in recession until Q3 and Q4 of 2008 (assuming, as is safe to assume, that Q4 is negative growth).
    NBER claimed to look at personal income. Well. Personal income rose through H1 2008 to July, Q2 growth was a healthy 3%. The oil bubble that hit $140 is what kicked us into recession, and it happened in July of this year.
    If you judge this recession as starting in H1 2008 with rising growth and rising income, you would have to judge the 2001 recession as starting in Q4 2000 ... which they didnt do. It's inconsistent and wrong.
    The recession started in July.
    Reply | Link to Comment
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