Investors involved with the stock market can be forgiven for getting a little twitchy at the moment, after all, it’s nearly that time again when 10 years on from a crash we start to see similar signs.
In a recent article in Bloomberg this week one of their columnist Noah Smith who was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion wrote a very interesting article.
He wrote the following:
Remember recessions? Those times where the stock market goes down, unemployment goes up and businesses stop investing? There was a really big one about a decade ago, but that was a long time ago — there are plenty of young workers now who were kids back when names like Lehman Brothers and Ben Bernanke were in the news.
According to the indicators compiled by the National Bureau of Economic Research, the U.S. economy hasn’t been in recession since June 2009 — almost nine years ago. If the economy sustains its expansion for just 14 more months, this will be the longest the country has gone without an economic downturn in recorded history, surpassing both the 1960s and 1990s booms in duration:
This is a valid point as who can explain just why the economy has been going through the biggest bull market we have ever seen. Noah puts part of the reason down to the severity of the Great Recession itself, coupled with the slowness of the subsequent recovery.
Noah said: “The expansion that began in mid-2009 has really just been a long, plodding climb out of a very deep hole”.
He also states that the United States has not suffered from any unforeseen events more commonly known by economists as shocks.
What type of shocks can cause a recession?
A financial crisis. A large drop in asset prices can spark the failure, or near-failure, of banks and other financial companies, choking off lending and sending the economy grinding to a halt. Often — as macroeconomists have belatedly come to realize — a crash in asset prices is the result of a bubble, such as dot-com stocks in the late 1990s or the housing market in the mid-2000s.
Are we seeing any bubbles expanding at the current moment in time, well Noah thinks so “By traditional measures like the Shiller price-to-earnings ratio, the stock market is pretty overvalued:
At best, this means the market’s expected returns in the future will be quite weak; at worst, it means a big crash is in the offing. Alan Greenspan, who was chairman of the Federal Reserve during the tech bubble, thinks it’s the latter. But everyone seems fully aware that stocks are expensive — there is no stock-buying mania on Main Street like there was in 1999, no story that “this time is different.” Without what Greenspan once called “irrational exuberance,” it’s hard to have a bubble.”
There is concern over cryptocurrencies could wipe out hundreds of billions of dollars if they crash, making enough waves to cause a recession.
The other one to keep an eye for is if China finds itself in deep water. Noah goes onto say:
“Though the country survived a stock-market crash in 2015 without a recession, a real estate crash, with its associated high levels of debt, would be a much bigger deal. That’s why the Chinese government is perennially trying to manage the property market. If it fails to do so, a Chinese meltdown could spill over to the U.S. via trade or financial linkages.”
The bad news is not only banks and bubbles are the only shocks responsible for a recession.
Noah went on to say:
“Macroeconomist James Hamilton has documented how most recessions — including the most recent one — are preceded by sharp rises in the price of oil. Currently, at about $63 a barrel, the oil price is not very high. A supply disruption, such as a war, could send it soaring.”
With the currently rising barrel prices, this is one to be concerned about right now.
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