Recession? Where?

http://calculatedrisk.blogspot.com/2007/09/dude-wheres-my-recession.html

Most of my readers read calculated risk but this was so good I wanted to make sure everyone saw it and wanted to add a few comments. The stock market continues to climb the wall of worry though besides the NASDAQ, the Dow and S&P really haven't gone anywhere. From the first big bounce the S&P and Dow are essentially where they were a little over two weeks ago on August 22nd. It looks good on a graph though with higher highs and higher lows. The market seems to be clinging to the hope that a rate cut will solve everything on Sep 18th. (I am still not 100% convinced the Fed will make a cut) A rate cut to me shows there is something wrong. There is so much on the line right now. Trillions of dollars. Do you really think you will hear anything majorly negative out of the people who really are in the know? These guys are the ones who also have the most to lose. Over the weekend the typical comments where like what Joseph Ackerman, CEO of Deutsche Bank, offered that, "There have been signs that the markets began to stabilize and liquidity is returning a bit but, without a doubt, some 'blocked' transactions will take some time to work through." At the same time though across the street Axel Weber, president of the Bundesbank, said "the current turmoil in the financial markets has all the characteristics of a classic banking crisis, but one that is taking place outside of the traditional banking sector." ????? I mean these people are from the same side of the world seeing the same things and coming to drastic different conclusions. One says the market is stabilizing and the other says the financial markets are showing all kind of signs of a banking crises.

The conflict isn't just with peoples opinions. It is also with the economics numbers coming out. Yesterday the economic numbers (housing) were horrendous. Today numbers outside of housing were pretty good. Calculated Risk I thought did a great job of showing a very plausible theory as why. I also think it implicitly shows (though he did not discuss directly) why the worst is still ahead. Bubbles throw everything out of whack. Normal relationships still usually follow but the timing is off because there is more fuel to burn through before you run out. The housing bubble was so big and the short term benefits so big from people who benefited from the bubble that there are extra reserves to burn through before the gauge reaches empty.

Not only that but remember that typically you see 9 months for the economy to be affected by a rate cut from the time of the cut. Well what we just went through was multiple rate hikes essentially. As I have said before the market did overnight what the Greenspan was unable to do in all of his rate hikes. LIBOR continues to climb. Tighter standards are being seen everywhere from housing (duh), to commercial deals, private equity, to refinancing. This takes time to slow the economy down and unfortunately I just cannot see how we do not enter into at least a mild recession. It is possible of course but history is firmly against not having a recession after a massive bubble but people like Mr. Ackerman will continue to hope that this time is indeed different. That this bubble does not cause a true bubble outcome, that 12 months ago will return very soon. Why? Simply because he (along with others), have the most to lose.