Here I would like to join those very few who predict that a recession will happen sometimes this year. It’s very unpopular to call a recession, as people hate those who properly predict bad times and ridicule those who were mistaken. As my reputation is not really important I have a freedom to say whatever I want.

Any recession has a main theme. We had recessions caused by hyperinflation and by stock market bubble bust. This recession main theme is credit crunch. Credit crunch means that a certain individual or institution may not keep up with servicing his debt while maintaining the usual mode of operation. It doesn’t necessary mean bankruptcy or delinquency, but it mean drop in consumption and inability to borrow more funds in order to service existing debts. Universal reduction in consumption is, by definition, a recession.

It’s hard to say when exactly the recession strikes, but it’s easy to point out some essential milestones that have to be passed by in order to reach the destination.

  • Milestone 1. Major troubles in subprime mortgage market, Feb-March 2007

It may seem strange, but this a first shoe to drop. Subprime mortgage application is, simply speaking, the desire of an individual to borrow money that he is unlikely to be able to pay back. So far this individual is granted such a loan, because there is a big chance that he will refinance it again before defaulting. Watch implode-meter for developments, it all should happen soon.

  • Milestone 2. Some increase in delinquencies in junk bond market, March-April 2007

At this point junk bonds are too expensive. They pay only a little premium above treasuries. I don’t expect anything spectacular, but some delinquencies in manufacturing and small business will increase the cost to borrow more money. Many corporations will start operating in more cost-saving mode, decrease capital expenditures, reduce new hiring.

  • Milestone 3. Housing market is depressed again after some winter optimism, April-May 2007

Too many people count that the housing market bottomed and the worst is behind us. The record warm November/December made all seasonally-adjusted numbers looking too good. When the Spring comes, the illusion will vanish. We will see record inventories, price declines, mortgage delinquencies, construction layoffs – you name it. Housing bubble bust will be worse in 2007 than it was in 2006.

  • Milestone 4. Increase in unemployment, May-July 2007

That’s the last shoe to drop before people will start talking about hard landing on TV. The weekly jobless claims will climb over 350k, new hiring will go down. Retail stores will warn that consumption is not keeping up with expected levels. Consumer confidence will decline.

  • Milestone 5. Stock market decline, July-October 2007

There is just too much money in the markets to expect stock market to decline too soon. It is widely believed that stock market is not a very good leading indicator of recessions. Having said that, one can conclude that there is no reason to expect stock market to decline before the recession starts. Past experience tells that stocks usually feel healthy just few weeks before the official start of each recession. As I don’t expect this recession to start at least until Summer or later, I do not expect any market crashes before that timeframe.

Thank you Elmer Greenspan for what you had done!

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