OK, now I’m convinced we’re headed for a recession if we’re not in one already.It wasn’t just Federal Reserve Bank Chairman Ben Bernanke signaling that more interest-rate cuts will be needed. Or Democrats lining up behind President Bush’s $150 billion economic stimulus plan. Or the massive losses and layoffs at major U.S. investment banks. Or even Wall Street’s continued slouching toward a full-blown bear market.
What got to me was Jeff Thredgold, economist for Vectra Bank Colorado. Thredgold has upped his odds for a recession from only 20 percent last summer to 50 percent today. This was disturbing to me because in July I wrote about his new book “EconAmerica: Why the American Economy Is Alive and Well.”
“That, of course, was a long-term view,” Thredgold said.
And near term?
“Clearly, the odds of a recession are rising,” he said. “My inclination now is, we may get by (without a recession) but by the skin of our teeth.”
Other folks I talked to say the skin has already been ripped clean — but don’t worry, it’s no big deal.
“There’s nothing wrong with a recession,” said Denver money manager Vitaliy Katsenelson. “If you are going to have an expansion, you have to have a recession. That’s how it works. And guess what? We’ll get through it. And we’ll be fine.”
Might not have a house. Might not have a job. But beer is cheap, and so is love.
Any downturn only highlights the central thesis of Katsenelson’s recent book, “Active Value Investing, Making Money in Range-Bound Markets.” But other investment professionals are similarly resigned to the R-word.
“This financial crisis has gone beyond subprime (lending) and housing, and it’s symptomatic of an economic overindulgence,” said John Claxton of Denver’s RBC Dain Rauscher. “We’ve been here before. It’s an ugly part of a natural process that the American enterprise goes through from time to time.”
The Russell 2000 index of small company stocks has slid more than 20 percent from its high, putting the small-cap universe in a classic bear market. The Dow and S&P aren’t far behind with pullbacks of roughly 15 percent from their highs.
If the Fed comes out with a surprise rate cut before its regularly scheduled meeting at the end of the month, the market could bounce back quickly. But that rate cut may need to be 75 basis points or more — not the Fed’s usual 25. And lowering interest rates could exacerbate our weakening dollar and creeping inflation.
Meanwhile, the market is unimpressed with Bush’s stimulus plan. The Dow continued falling Friday, even as he announced it.
“All we are talking about here is a Band-Aid to stop the bleeding,” said Claxton. “The patient, in the end, may not be any better.”
But it’s an election year, and voters vote their pocketbooks, so our elected leaders had better do something.
A recession is likely to favor Democrats who can cast themselves as agents of change. But Democrats dare not stand in the way of a plan aimed at heading off a recession. So suddenly everybody is for giving money to voters.
In so brazenly meddling with the economy, Washington may be sowing the seeds for the next big bust once again.
We got out of the Internet bust by fueling a housing bubble. The Federal Reserve guided interest rates down to record lows, and Bush cut taxes without cutting government spending, spreading borrowed money everywhere.
This made life easier after 9/11, but it also led to where we are today. Now the housing bubble has burst, consumer delinquencies keep rising, the national debt has nearly doubled to more than $9 trillion, and it won’t be long before aging baby boomers stop working and start demanding Social Security checks.
The worst thing, though, is that if we are going into a recession, it’s a consumer-led recession.
The 2001 recession — brief and painless as it was — was fueled by the excess capacity of businesses. Too many airplanes. Too many telecommunications lines. Too many silly companies with at the end of their names.
This time it’s people who can’t pay their debts, and a slew of nation-sized banks stuck with billions of defaulted mortgage-backed securities.
This time, it’s likely to be more painful and take longer to unwind. This time, I’m not sure our central bank or our federal government can do anything to stop it.
Al Lewis’ column appears Sundays, Tuesdays and Fridays. Respond to Lewis at , 303-954-1967 or alewis@denverpost.com.
