What is the Shape of the Recession: V , U or L?
That was the question asked a few days ago by Abdullah Dyer on LinkedIn.
The following is my contribution, pretty much verbatim, to the various opinions offered up.
In the U.S. I expect a ‘W’ with a another ‘V’ after that. Based on what I wrote in 2007, the current recession would end early 2010 with another recession around 2013 and a final one before that decade is out.
The middle recession could be pushed out if the current problems take longer to filter through. Given my expectation of another oil price spike some time in the third quarter of the 2010s, i.e. 2015-2017, that could be the case. Recessions always follow price spikes. However, the Kondratiev winter, which began 2008, has always suggested to me that things end with a recession and then another recession occurs a few years in to the next Kondratiev wave. The Gen-Bs in K-waves always battle to build the growth.
Keep in mind that, as well as the secular bear for stocks on a P/E ratio, residential and commercial property is also in a secular bear on a P/E ratio basis. Price inflation is still in a secular bull, so is unemployment. The massive Wave 4 wedge for commodities continues as that secular bull remains in tact.
The massive fiat fraud being perpetrated by politicians and central bankers will not be ‘managed’ well. Politicians, being the populist headline whores that they are, will undoubtedly leave it too late to contain the price inflation which will eventually be unleashed when the current printing frenzy finally filters down to Joe Ordinary. Look at the previous secular bull in price inflation and the current one. The numbers may be slightly different but the end result will be the same, though price inflation this time will peak much higher than it did in the 1970s.
When the current Wave 3 for stocks is over I expect a decent sized Wave 4 wedge formation to begin. Given the nature of wedge formations, fluctuating profits and moods as the economy meanders either side of the flatline would make the perfect backdrop to that. As would the vacillations in price inflation and interest rates as the ‘risk’ the general public are willing to take with discretionary spending, in housing or in investing for example, is capped. We are also in secular bulls for saving, a secular bear for personal debt on a percentage basis and, I believe, a secular bear for homeownership and a secular bull for household size.
None of this, in the great scheme of things, is necessarily bad. But they are the natural consequence of what has gone before. A lot of what Governments are doing will protract problems and even make some worse. Trying to keep insolvent banks and businesses afloat is not the solution. Diverting limited resources away from productive areas to destructive ones is just plain wrong.
Asian countries will reassert themselves first, with something more akin to a ‘V’ than a ‘U’ as they focus this time on internal markets. Because of 1998 and the Asia crisis Asian countries changed how they did things. Because of 2008 and the subsequent collapse of export-driven demand, they will adapt again.
Adapting to the new environment is what is important. Opportunities are a plenty. Asia will undoubtedly adapt. The socialist countries of the West, such as the U.S., U.K. and continental Europe, are bogged down with a generation, or two, who have been raised to believe they are entitled to it all. Which is why in all those countries only the minority of households are net tax payers, the majority are tax consumers.
Any western country that is willing to remake itself, and the U.S. has an entrepreneurial spirit second to none, can take ground from the slower and more backward looking competition. Tax policy should be supportive. Protectionism must be avoided.
The future lies in moving forward, not endeavouring to return to the past. Should Government not realise this, should they pander to those who have their hands out, albeit because some were sold a Bill of Goods by other politicians, then the ‘L’ shape becomes much more likely.
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