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Recession

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In the last 12 months some people have speculated about a recession starting to happen. Until the last few weeks, it wasn't something people thought was imminent. A week or so ago, the markets in the U.S. and Canada were hitting record highs. The Canadian dollar seemed unstoppable. And sales, at least in Canada, were booming all over.

Confidence seems to have evaporated in the market. Central banks are flooding the market with liquidity but big companies even today are saying they don't have access to capital. The sub-prime mortgage has imploded in the U.S. and consumers and lenders are both hurting. Walk-Mart and Home Depot have put out sales warnings, the first of many companies that are saying they are seeing signs of a slowdown.

Everything goes in cycles and things have been sizzling along in North America for quite some time. Energy consumption might take some of the sting out of recession in Canada but there is no doubt that every market could feel the pinch.

As summer winds down and the people return to the work and school in the fall, I think the market will start showing more of a trend as to where it is headed. At the moment, it does start to look that a major correction is imminent.

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In the last 12 months some people have speculated about a recession starting to happen. Until the last few weeks, it wasn't

As summer winds down and the people return to the work and school in the fall, I think the market will start showing more of a trend as to where it is headed. At the moment, it does start to look that a major correction is imminent.

Such was the prediction last October as well according to this story:

http://www.telegraph.co.uk/money/main.jhtm.../cncanada10.xml

In the USA, a recession is usually defined as two or more consecutive quarters of negative growth in GDP, the last being in 2001. It was mild as recessions go, and largely avoided by Canada.

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Confidence seems to have evaporated in the market. Central banks are flooding the market with liquidity but big companies even today are saying they don't have access to capital. The sub-prime mortgage has imploded in the U.S. and consumers and lenders are both hurting. Walk-Mart and Home Depot have put out sales warnings, the first of many companies that are saying they are seeing signs of a slowdown.
This is a necessary and healthy correction. Too many people that should know better were making stupid decisions based on easy credit terms. The markets are going to come down to earth and the US will likely experience a slow down and a drop in property prices. However, for every person that loses their home there is another that gets a home that they probably never thought they could have afforded 12 months ago.

Also the world has changed and the US economy not longer as significant as it once was. Japans trades more with China than with the US.

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In the USA, a recession is usually defined as two or more consecutive quarters of negative growth in GDP, the last being in 2001. It was mild as recessions go, and largely avoided by Canada.

It might have been avoided altogether had it not been for September 11 and how it affected all manner of confidence.

This time, the dynamic could be different. It remains to be seen what the fall out in the housing market might be.

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This is a necessary and healthy correction. Too many people that should know better were making stupid decisions based on easy credit terms. The markets are going to come down to earth and the US will likely experience a slow down and a drop in property prices. However, for every person that loses their home there is another that gets a home that they probably never thought they could have afforded 12 months ago.

Also the world has changed and the US economy not longer as significant as it once was. Japans trades more with China than with the US.

The world is also more interlinked. A drop in demand in one place affects other places simultaneously. Also, so much international money was supplied to the U.S. for credit that we are seeing some of that retrenching now. It is causing liquidity problems for some bigger companies.

Things might not devolve to the point of recession but the market was acting over confident. The U.S. was showing signs in its new home starts at first, then defaults on mortgages and now we're seeing mortgage companies being affected. In turn, it has affected the market. We haven't seen the signs yet in Canada. We simply went straight to market sell-off.

For the first time in a very long while, the economy might show signs of slower growth. Whether that indicates a recession, we'll have to see in the next two quarters.

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I have been watching things closely. I will agree that this looks to be a large correction, but I do not think it will be a recession. Recessions usually require more than one stimulant to start. US sub=prime mortgages do not have the fortitude to start a world-wide recession on their own.

I have my home up for sale in Calgary, so at least I hope not. But I do tend to be realistic, even pessimistic, in outlook when I have it all hanging out.

We'll see! Wish I had an extra 20k kicking around right now to top up my mutual funds though!

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Things might not devolve to the point of recession but the market was acting over confident. The U.S. was showing signs in its new home starts at first, then defaults on mortgages and now we're seeing mortgage companies being affected. In turn, it has affected the market. We haven't seen the signs yet in Canada. We simply went straight to market sell-off.

For the first time in a very long while, the economy might show signs of slower growth. Whether that indicates a recession, we'll have to see in the next two quarters.

If you read the newspapers, everything's great, but I haven't met many people on the street lately who think so.

It's not a good time to lay out $400K for a new house anywhere in Canada.

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I have been watching things closely. I will agree that this looks to be a large correction, but I do not think it will be a recession. Recessions usually require more than one stimulant to start. US sub=prime mortgages do not have the fortitude to start a world-wide recession on their own.

I have my home up for sale in Calgary, so at least I hope not. But I do tend to be realistic, even pessimistic, in outlook when I have it all hanging out.

We'll see! Wish I had an extra 20k kicking around right now to top up my mutual funds though!

The US is getting rocked because of the sub-primes. Still hasn't had a noticeable effect on the market here.

Selling now in Calgary is interesting. All depends on your expectations. If you can place yourself back to 2004 and think of what you would have been happy with three years down the road I'm sure you will be fine. July was the first month in over two years that the average sale price in a Calgary has gone down from the previous month. By $200 or something miniscule. Still with an average price of $500k most people in this market are doing all right. I still can't believe people have to pay $350 K for totally p.o.s. houses in Forest Lawn, but such is life.

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I have been watching things closely. I will agree that this looks to be a large correction, but I do not think it will be a recession. Recessions usually require more than one stimulant to start. US sub=prime mortgages do not have the fortitude to start a world-wide recession on their own.

I have my home up for sale in Calgary, so at least I hope not. But I do tend to be realistic, even pessimistic, in outlook when I have it all hanging out.

We'll see! Wish I had an extra 20k kicking around right now to top up my mutual funds though!

Demand in Calgary is still such that you should be okay.

The entire world market lives on confidence though and it isn't just the housing market that people have been turning to credit on. Consumers and businesses are also stretched pretty far. If there is a sense that there might be a slowdown and job losses and falling prices, people will hold off spending (or may in fact not have the money to spend as creditors reel them in).

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The US is getting rocked because of the sub-primes. Still hasn't had a noticeable effect on the market here.

Selling now in Calgary is interesting. All depends on your expectations. If you can place yourself back to 2004 and think of what you would have been happy with three years down the road I'm sure you will be fine. July was the first month in over two years that the average sale price in a Calgary has gone down from the previous month. By $200 or something miniscule. Still with an average price of $500k most people in this market are doing all right. I still can't believe people have to pay $350 K for totally p.o.s. houses in Forest Lawn, but such is life.

Sub-primes are only the *first* links in the chain to go. The more general problem is the number of adjustable-rate mortgages that were taken out. These "ARMs" had 2% interest rates for the first 2 years, after which time they ratchet up to market rates.

I would put $350K at the high end of what a young couple with two incomes and no kids could hope to afford. Homes with an "average" price of $500K are out of reach of most people who have not been in the market for a long time, so you gotta wonder what's going to happen when many of those people want to sell (move/retire etc.).

Here's a really good weekly podcast for those who are interested: http://www.financialsense.com/fsn/main.html

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About a year ago, I started a thread on the same topic with this:

I'm not normally given to dire predictions of the imminent collapse of western civilization. But I think it's reasonable to predict that the US economy is on the verge of a slowdown/recession, and this is going to affect the Canadian economy.

Well, I was wrong.

By and large, the roller coaster ride of the 1960s to 1990s were due to the interventionist policies of central banks. By 1980, the central banks learned that they should take a hands off approach and concentrate on price stability. That doesn't mean that recessions are a thing of the past. It's just that they will be different in the future.

For the moment, it appears that there is a problem in one relatively small sector (sub-prime mortgages) of the US financial market. In response, the central banks have responded in Greenspan 1987 style - flood the market with liquidity. This is the general monetarist lesson of 1929 when the Fed did the opposite and provoked a severe recession.

This new-style interventionism leads to the problem of moral hazard as market players learn that they can push the envelope a little further, safe in the knowledge that the Fed will bail them out.

I think the Fed and the ECB were right to provide liquidity but I wish they could do it in a way that left the players a little more exposed. It's like raising the deductible on a car insurance policy.

Getting back to the OP, recession? Some prices go up and some prices go down. If the price of a widescreen TV goes down, no one talks of an impending recession.

Edited by August1991

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It was foreseeable that the subprime mortgages were one day going to implode, once interest rates rose to what was a more reasonable rate with reasonable risk. The trouble is that many of the people thought that low low rates were here to stay, and that is just not sustainable over the long term. Interest rates shouls be in the 6-7 % range, where risk is probably the safest. Once interests start falling, you will always get those who jump on the band wagon, feeling that they can afford things that they could not normally do in the higher interest rate environment. Many took high interest crdit card debt and mixed that in with their own mortagages, because it looked very cheap. But this only made the longer termed debt much more expensive inthe end, and caused many to think that they could also buy many more things they normally could not afford. Manufacturers saw little gain in having money on hand and then decided to boost sales by giviing interest free funiture for 1-2 year terms. What many who took advantage of these things forgot is that once that two or so time is past they are then hit again with high rate interest. What also hurts them is that the mortgage industry is now much tighter and so these same people do not have access or the ability to just mix this in with mortgage loans.

So yes this is a correction and it will be a hard lesson for many to swallow, but the greedy hedge funds and mortgage brokers who just a feww months agao had more then enough people willing to keep the balloon floating high, are now faced with investor jitters, so now everyone wants to get out of the riskier investments and seek more secure investments. This leaves a very large credit vaccum that now has taken our markets to task. Housing prices will fall, but I personally do not think they will fall in large volumes. We may see home values drop by 15- 25 % in the top end market of homes but the smaller family type homes will probably only drop 5-10%. That will not be enough to make it so those who lost their by defaulting, to have any chance of negoiating a deal to let them continue on. Along with this we will see the interest free deals on furniture and big ticket items, to end and be replaced by low interest or even deferred interest plans, but for much shorter periods. We will have to wait and see if the public has caught on to there being no free lunch, and in the end will have to pay interest of a reasonable amount, to again start over. This will hurt the countries economies badly.

Canada has no real shield against the events happening here, but we were not as large a player in subprime mortgage game, and so we should feel the pinch a little less then the USA. I am not sure how large the European markets were into subprime but by seeing the problems they are facing, it looks like they will be hurt by this as well.

It would be nice it people planned for these things using a normal interest rate of 6-7%, and then only used the subprime rates to shorten the terms of the loans. Any mortgage company that willingly allowed people to extent terms and add other debts into mortgage loans, deserve the problems they are now facing. Yes many of them will go bankrupt, but they were willingly blind when they got into this and they also knew that markets will correct themselves in time, should have known this was going to happen. I can not feel sorry for them. Hell I remember back when I bought my first home I had a 10.5% mortgage for 25 years. That I paid off 10 yera early, as I could see it was the best use of my money. It seems people now see nothing wrong with 30 or even 40 year mortgages, and that mindset is why we are where we are. I guess the schools are not teaching economics the way they did in my time, as the mortgage examples were almost always used to show you the costliest money is the longest termed loans.

Will it actaully give us a recession by the terms we use for that today? Probably, but it will not come about for about another 6 months. Just my own view on it, as seen thru my eyes.

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It would be nice it people planned for these things using a normal interest rate of 6-7%, and then only used the subprime rates to shorten the terms of the loans. Any mortgage company that willingly allowed people to extent terms and add other debts into mortgage loans, deserve the problems they are now facing. Yes many of them will go bankrupt, but they were willingly blind when they got into this and they also knew that markets will correct themselves in time, should have known this was going to happen. I can not feel sorry for them. Hell I remember back when I bought my first home I had a 10.5% mortgage for 25 years. That I paid off 10 yera early, as I could see it was the best use of my money. It seems people now see nothing wrong with 30 or even 40 year mortgages, and that mindset is why we are where we are. I guess the schools are not teaching economics the way they did in my time, as the mortgage examples were almost always used to show you the costliest money is the longest termed loans.

Will it actaully give us a recession by the terms we use for that today? Probably, but it will not come about for about another 6 months. Just my own view on it, as seen thru my eyes.

I agree that 30 or 40 year mortgages are insane. Don't know what people are thinking. Hopefully I can get into the market next year or '09. 25 years to start. After the first 5 years of the term I hope to switch that to a 15 year amortization....

In Alberta, my view is a little skewed. Our economy is still, and probably always will be, tied to the prices of natural resources. It would take a sub $50 barrel of oil for Alberta to experience a recession. I don't see that happening anytime soon.

Edited by Michael Bluth

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About a year ago, I started a thread on the same topic with this:

Well, I was wrong.

By and large, the roller coaster ride of the 1960s to 1990s were due to the interventionist policies of central banks. By 1980, the central banks learned that they should take a hands off approach and concentrate on price stability. That doesn't mean that recessions are a thing of the past. It's just that they will be different in the future.

For the moment, it appears that there is a problem in one relatively small sector (sub-prime mortgages) of the US financial market. In response, the central banks have responded in Greenspan 1987 style - flood the market with liquidity. This is the general monetarist lesson of 1929 when the Fed did the opposite and provoked a severe recession.

This new-style interventionism leads to the problem of moral hazard as market players learn that they can push the envelope a little further, safe in the knowledge that the Fed will bail them out.

I think the Fed and the ECB were right to provide liquidity but I wish they could do it in a way that left the players a little more exposed. It's like raising the deductible on a car insurance policy.

Getting back to the OP, recession? Some prices go up and some prices go down. If the price of a widescreen TV goes down, no one talks of an impending recession.

I remember when you first posted your thoughts. I disagreed at the time because demand was still there and there was no indication of confidence problems.

The latest housing data is the U.S. shows that starts are down to the lowest point in 10 years. Unlike a plasma TV which is made elsewhere, the U.S. housing industry is generally a localized industry with many direct and indirect jobs attached to it.

http://www.msnbc.msn.com/id/20296292/

WASHINGTON - Construction of new homes fell to the lowest level in more than a decade in July as builders continued to struggle with the steepest housing slump since 1991.

The Commerce Department reported Thursday that construction of new homes and apartments dropped 6.1 percent last month to a seasonally adjusted annual rate of 1.38 million units. That was down 20.9 percent from the pace of activity a year ago and represented the slowest pace since January 1997.

The housing industry, which had enjoyed a prolonged boom until 2006, has been struggling this year with a deepening slump as builders are slashing prices and throwing in various incentives in an effort to unload record levels of unsold homes. The problems have been worsened by rising home foreclosures, especially in the subprime market, a development which is dumping even more homes onto the glutted market.

Jobless applications also increased today unexpectedly.

In other economic news, the Labor Department reported that the number of newly laid off workers filing for unemployment benefits rose by 6,000 last week to 322,000. The increase was unexpected. Analysts had been looking for a decline of around 1,000.

Similar numbers are not yet happening in Canada. Last week numbers showed house prices had slowed by not fallen in some markets.

Meanwhile, the U.S. stock market is pulling all the other markets down after reaching record highs just a few weeks ago.

http://www.msnbc.msn.com/id/3683270/

NEW YORK - Stocks fell sharply Thursday after a move by Countrywide Financial Corp. confirmed fears of widening problems with some mortgages and tighter access to credit.

A sell-off overseas offered Wall Street little reason to try to stanch the bleeding a day after the Dow Jones industrial average closed below the 13,000 mark for the first time since April and the Standard & Poor’s 500-stock index moved into negative territory for the year.

Investors’ confidence took a drubbing Wednesday on concerns about potential trouble at Countrywide, the nation’s largest mortgage lender. Countrywide, referring again to tightening credit conditions, said early Thursday it was forced to draw on an $11.5 billion credit line to fund operations.

It isn't a recession yet but confidence is definitely shaken.

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Demand in Calgary is still such that you should be okay.

The entire world market lives on confidence though and it isn't just the housing market that people have been turning to credit on. Consumers and businesses are also stretched pretty far. If there is a sense that there might be a slowdown and job losses and falling prices, people will hold off spending (or may in fact not have the money to spend as creditors reel them in).

I hope you are right.

I didn't get a LOC of credit to upgrade my home which is nice as far as paying off debts, but it makes it harder to sell. I'm pretty inner-city, but it seems liek the buyers right now can get exactly what they want and what they want it a brand new home.

meh, hopefully soon.

I've already bought my house in the maritimes. It's just sitting there empty now.

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I hope you are right.

I didn't get a LOC of credit to upgrade my home which is nice as far as paying off debts, but it makes it harder to sell. I'm pretty inner-city, but it seems liek the buyers right now can get exactly what they want and what they want it a brand new home.

meh, hopefully soon.

I've already bought my house in the maritimes. It's just sitting there empty now.

I think you'll get in under the wire but it has been a wild day on the Toronto Stock Exchange.

Commodity stocks are diving.

http://www.cbc.ca/money/story/2007/08/16/markets.html

Toronto stocks plunged anew in early trading Thursday as the current market correction deepened on concerns that the credit crunch will spread to the wider economy.

The S&P/TSX composite index was down 335 points to 12,713 at 10:55 a.m ET, with all sectors lower.

The worst damage came in the resources area, with golds off 7.2 per cent, mining stocks down 6.5 per cent and energy stocks down 4.2 per cent.

The sell-off leaves the TSX almost 2,000 points below the record high set July 19. It's now in negative territory for the year as whole.

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I think you'll get in under the wire but it has been a wild day on the Toronto Stock Exchange.

Commodity stocks are diving.

http://www.cbc.ca/money/story/2007/08/16/markets.html

A 2000 point drop in the TSX in a month because of one sector of the US market. That's just amazing.

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A 2000 point drop in the TSX in a month because of one sector of the US market. That's just amazing.

Confidence in the market can be a fleeting thing. Computerized trading has its problems, one being that sales are triggered by a tick downward in stock prices. It is why the market sometimes has to shutdown because the computers can't handle the herd running to sell or buy.

Housing is such a huge deal, such a large component of the market and if it looks like it is struggling can set off other parts of the market as well.

There was some recovery this afternoon but the stocks are still down considerably from highs a few weeks ago.

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I heard this was coming over a year and a half ago. In the US, this person I was listening to, said that people would be walking away from their homes. I heard another person just recently say that the US inflation is 21% but the Feds keep throwing money at it. I also, read that Russia wants to pay back the US for helping break up their ecomony back in the '80's. I think this is only the start of the down fall of the US economy, especially when alot of foreigners has alot of power in the US stock market and China being the one to break the country.

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I heard another person just recently say that the US inflation is 21% but the Feds keep throwing money at it. I also, read that Russia wants to pay back the US for helping break up their ecomony back in the '80's.

Find better people to listen to. A couple real tin foil hat comments in that bunch.

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I heard this was coming over a year and a half ago. In the US, this person I was listening to, said that people would be walking away from their homes. I heard another person just recently say that the US inflation is 21% but the Feds keep throwing money at it. I also, read that Russia wants to pay back the US for helping break up their ecomony back in the '80's. I think this is only the start of the down fall of the US economy, especially when alot of foreigners has alot of power in the US stock market and China being the one to break the country.

I disagree with many of the things you heard, but one that I know is widely known and is a sure thing, is the one about the USA no longer having control of their economy, and also their dollar, that foreign governments could easily bankrupt the usa dollar, simply by dumping all the reserves that are held now. The real question though is are they willing to do the deed now, or is this something that they will put off to a future time? I was be niauve to think that these things just happened by accident. Since the USA dollar has not been backed by gold reserves for many decades now, it has just printed off paper like there was no tomorrow. Knowing that the rest of the world is not enamered with the present USA and its administration, I would have thought that now would be a good time for things to happen. This whole scenario was also pointed out by Greenspon over a year ago, and I bet you dollars to doughnuts, that when it finally happens you will need many US dollars to buy one doughnut. But only time will tell on this one. If all the worlds countries started demanding to cash in their foreign reservs of USD, then it would not be a pretty sight. Never mind recession, it would be total depression time.

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I disagree with many of the things you heard, but one that I know is widely known and is a sure thing, is the one about the USA no longer having control of their economy, and also their dollar, that foreign governments could easily bankrupt the usa dollar, simply by dumping all the reserves that are held now. The real question though is are they willing to do the deed now, or is this something that they will put off to a future time? I was be niauve to think that these things just happened by accident. Since the USA dollar has not been backed by gold reserves for many decades now, it has just printed off paper like there was no tomorrow. Knowing that the rest of the world is not enamered with the present USA and its administration, I would have thought that now would be a good time for things to happen. This whole scenario was also pointed out by Greenspon over a year ago, and I bet you dollars to doughnuts, that when it finally happens you will need many US dollars to buy one doughnut. But only time will tell on this one. If all the worlds countries started demanding to cash in their foreign reservs of USD, then it would not be a pretty sight. Never mind recession, it would be total depression time.

As of June 30th of this year the Chinese Government held $1.3 Trillion USD in reserve.

So whenever people argue for the US to take a tough line with the Chinese government just remember what China could do if they want.

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As of June 30th of this year the Chinese Government held $1.3 Trillion USD in reserve.
You are in trouble if you borrow $1 million from a bank and can't pay it back. If you borrow $1 trillion from a bank and can't pay it back then the bank in is trouble.... Edited by Riverwind

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You are in trouble if you borrow $1 million from a bank and can't pay it back. If you borrow $1 trillion from a bank and can't pay it back then the bank in is trouble....

How does that apply to this situation at all? I understand it's an old adage, but I don't really see ho it's applicable.

Foreign exchange reserves aren't money lent. China could sell off $100 Billion of it's US dollar holdings, without really hurting their central back, but that would really hurt the value of the dollar.

As for the supposed recession there was major profit taking later in the day on the NASDAQ, Dow Jones and the TSX.

Dow and NASDAQ suffered minimial losses. Less than 16 points for each.

The TSX lost a little over 200 points, but with the recoveries in the US markets

Edited by Michael Bluth

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