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Is This Downturn A Repeat of 2008?
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Is This Downturn A Repeat of 2008?
Even people who don’t follow the stock market closely are aware that the global economy is weakening and appears to be heading into recession.
For those who track the stock market, the signs are ominous: the U.S. was the last major market to notch gains this year and in October the U.S. market followed the rest of the global markets into an extended slide which has yet to end.
Just as sobering, key sectors such as oil, banking and utilities have crashed with alarming ferocity, reaching oversold levels last seen in 2008 as the global financial system was melting down.
These sectors crashing sends an unmistakable signal: the global economy is heading into a potentially severe recession and assets will not be rising in value in a recessionary environment. So better to sell risk-assets like stocks now rather than later, and rotate the money into safe assets such as Treasury bonds.
And indeed, households now own more Treasuries than the Federal Reserve–a remarkable shift in risk appetite.
Many other indicators of recession are in the news: auto and home sales and global trade are all slumping.
Are we in a repeat of the global financial meltdown and recession of 2008-09? The sharp drop in equities is certainly reminiscent of 2008. Indeed, the December decline is the worst in a decade. Or are we entering a different kind of recession, the equivalent of uncharted waters?
And if we are entering a recession, what can central banks and governments do to ease the financial pain and damage? We can’t be sure of much, but we can be relatively confident central banks and states will respond to the cries to “do something.” This poses two questions: what actions can central banks/states take, and will those policies work or will they backfire and make the recession worse?
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Will Cash Always Be Trash, Or Will It One Day Be King?
Will Cash Always Be Trash, Or Will It One Day Be King?
When the phantom wealth evaporates and risk assets go bidless, cash will once again be king, for the simple reason there will be so little of it.
Occasionally it’s a good idea to step away from the daily grind to consider the larger issues we all face–for example, the future of the money we earn and the bits we invest in something we hope holds or increases its value.
At present, cash is trash: cash earns almost no yield, and in some countries it now earns a negative interest rate, meaning it costs you to park your cash in a bank.
Even cash equivalents such as one-year Treasury bonds pay almost nothing.
Those who avoided debt and risky assets since 2009 have seen their cash lose value when adjusted for inflation, while those who borrowed to the hilt and bought risk-on assets such as stocks, junk bonds and high-end housing have skimmed monumental gains for doing what the central banks incentivized: borrowing money and buying speculative risk-on assets.
Correspondent Kevin K. recently sent me a link to a home in the San Francisco Bay Area that was purchased around the crash era (2008-09) for $1.4 million, and sold last year for $2.1 million.
Assuming a conventional 20% down payment of $280,000, the savvy buyer borrowed $1.12 million at historically low rates and offloaded the house 6 years later for a cool $560,000 profit (assuming a 6% sales commission and closing costs).
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