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Is Recession A Bad Thing?
Author: Ravi Prakash (info)
Website: http://www.optionstradinglessons.com/
Posted: September 11th, 2007 at 7:40 am EST
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It seems that the “R” word is something everyone is afraid to utter in public, in case it really happens. What if we did have a recession of sorts? Would that not allow the economy to heal itself and rid itself of the practice of providing risky loans to people with even riskier finances? Would it not allow the financial world to learn from its recent and past mistakes? The pressure on the Feds to reduce the Fed Funds interest rate is mounting at an astounding speed. Many are calling for a 0.50% cut instead of 0.25% (latest being the guys at Goldman Sachs). What will happen if at the next FOMC meeting they decide to hold interest rates steady? The most obvious conclusion would be that the Stock Market will take a big dive. Not necessarily. All the economic indicators point to conflicting evidence of both inflation and economic growth. Definitely no overwhelming signs that recession is a given or that economic growth will be fine.
The Market did take a hit on Friday, the culprit being the August employment number; which came in worse than anybody expected (lost 4,000 jobs). The most common scenario many are hoping for or predicting is that the Feds will drop interest rates. The Market will then rebound, people will refinance homes at lower rates and suddenly there will be more money readily available for LBO and M&A activity and finally mortgage loan defaults will slow down. In all my years following financial markets, I have yet to see everything play out exactly by the books. It just does not work that way in real life.
Now with oil prices above $75 a barrel and climbing, I do not see how this will not add to inflationary pressure. I would love to be a fly on the wall at the FOMC meeting. I wonder how they perceive rising oil prices. Some feel that if there is a recession then demand for oil will fall and thus we will see a drop in oil prices. But with current unemployment still relatively low at 4.5% (compared to 6% in 2003), I do not see demand for oil dropping enough so as not to put pressure on inflation. Since the start of this year I have maintained that the Feds will not be able to drop rates. I know I might be proven wrong very soon, but I think the Feds are under political pressure too. This is gearing up to be an interesting month.
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Economics, Ravi Prakash, Stock Market, Trading
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