Still no recession
0.6% growth? not high, but certainly not a contraction.
In fact, as anyone who has been following my blog knows, I've been putting money in stocks recently. If it's a bear rally as most folks believe, I'll get hammered. If it's a signal of having hit bottom or near bottom, as I do, I'll have good returns.
With that said, I have recently experienced one thing that will cause a recession, and that worried me greatly. About that in a moment.
Before I go there, I have a theory about why the financial wise-heads keep missing the true sense of what's going on, both on the downturns and the upturns. Have you noticed this? all those greyhairs with tremendous experience and knowledge of the markets are continually - this is not the first time - stumped when markets sour, just as they are when they start smelling like roses. It's as if they just can't get a handle on this stuff, and their frustration about it shows in their analysis and op eds. Why? it's not like they don't know what they are doing.
Here is my theory. What used to work until the late 80's no longer does, for one reason - technology. Technology is what allowed day trading to occur, then become common place. Note that this deterioration of the ability to predict or even have a reasonable assessment of what's going in the very near future has been gradual - and about 20 years in the making. The thing is that capital can now move a lot - a lot - faster than it ever did in history. We are talking orders of magnitude here. And yes, the common folks do matter here, because as a group they can move equities. And they don't have to call their broker, they go online and with two clicks they buy or sell, or trade options, or do a whole bunch of stuff that used to take time before. Larger investors in the same position, and they all try to "beat the market" and "be contrarian" and most importantly, get ahead of everyone else. The actual access to the world's capital markets has been significantly democratized and liberalized, which means that folks act faster, and money moves at a tremendously increased velocity. when taken together, they all create an effect that serves to do four things:
1) changes in markets are much more rapid
2) changes in markets are much more extreme
3) changes in markets occur earlier
4) changes in markets occur more frequently
In other words, if a typical downturn would cause a 20% drop in equities which would take 3 years to correct itself in 1970, now the same exact downturn (from a fundamentals perspective) can be 40% and take 6 months to correct. The band narrows. Why? because technology allows money to much more easily move out of the market, then move back into the market. And remember, everybody tries to predict what's gonna happen, so it tends to cause the downswings and upswings to occur earlier in the cycle - much earlier, in fact. Lastly, because of this convenience factor, the capability to move much larger amounts of money much faster around the world, changes in markets occur more frequently, the role of market makers increases, and hedge funds (which essentially specialize in one thing - taking large gobs of money and move it around as fast as they can) can bloom.
But to economists who are classically trained, none of this has an impact on their thinking. So they are continually surprised as to the speed and force of movements in markets. They are simply not used to thinking in terms of technology as an enabler.
And this also explains in a simple manner (I like simple) why recessions tend to be shorter these days, even if they feel quite severe. But it's exactly what's happening, it's not a surprise, it's simply the net effect of technology supporting rapid, vast movements of investor money. Take this recent housing one - the actual numbers should not have caused a meltdown like they did (including the Bear Starnes and Citigroup fiascos), except that they did, and note the surprise on those CEO's faces. Note their comments: "we don't understand how the credit markets could seize up so quickly", and "this has never happened before". They were right, in a sense, but they ignored the impact of technology. Call me naive, but I really believe this effect is quite severely underestimated by many economists and Wall Street types.
And now back to my comment earlier about what will cause a recession.
Last week I tried to use my Bank of America credit card to pay for my lunch, as I do every day. The charge got denied. I was surprised; I have had that card since 2000, with a prime + 2% rate, and a $30,000 line, and I had less than $4,000 balance. Anyway, I used another card and called BofA.
First I got transferred to fraud control, but they looked it up and said nothing was wrong on their end. Then she said I was at my credit limit. I asked her to tell me what it was, and she said "$3,900". OK, that's a problem. I asked to get transferred to underwriting, and spoke to Kevin.
Here is what transpired. Sometime in the middle of April, without notice and without warning, BofA decided to slash down my credit line from the one I had for years to what I owed rounded up to the next $100. Why? his excuse was high outstanding revolving balances. Well, sure, I have $60,000 in those because they are all at low fixed rates - from 0% to 3.9%. I don't want to pay them down quickly. It's cheap money, why shouldn't I use it? he agreed that made sense. So he asked about my income. I told him what it was. He said that was just fine. But he still could not approve raising it back to the $30,000 limit. We literally spent an hour dancing around this issue, with me rebuffing every one of his claims about why they took it down but at the end he didn't change anything, going back to the high revolving debt mantra.
I told him I'd be happy to support an actual underwriting process, sending him documentation to back up my finances. At some point he agreed to take the paperwork. I asked "what would I need to prove to change your decision?". He started dancing again. So it was just to get me off the phone.
I called my friend who is a VP at BofA and asked him about it. He told me what I was expecting: the bank was in complete, utter and absolute panic mode. They are looking at all their credit card holders as risk now, not profit centers, and have done this to apparently millions of their customers at once. He was disgusted by the whole affair, but he was on the retail side so could nothing to assist me at all. He also said that even if he had any influence in credit, it most likely would not help at all, because the risk managers at the bank were in total panic. He also suggested - remember, this is a VP at the bank - that I take my consumer dollars elsewhere, because the current mood at the bank is so sour, he doesn't see it changing any time soon.
Like, wow. I love having friends in the know who can be candid with me, and I sort of expected this, but it was an interesting set of comments. And if anything will cause a recession, this will; consumers need to get money from somewhere in this environment, and credit cards are the most reliable engine they have had to dealing with downturns. That is why they have been such amazing profit engines for the issuing banks. Cutting down consumers' feet in this way, with no warning and so severely will cut spending in such a brutal fashion that the economy will shrink. We are, luckily, not dependent on this line, so I could shrug it off. But what about people who are? the poor souls who lost their jobs and need their line to tide them over for 2-3 months before they find a new one? I don't know whether this level of panic us unique to BofA, but if it isn't, things could get ugly.
In fact, as anyone who has been following my blog knows, I've been putting money in stocks recently. If it's a bear rally as most folks believe, I'll get hammered. If it's a signal of having hit bottom or near bottom, as I do, I'll have good returns.
With that said, I have recently experienced one thing that will cause a recession, and that worried me greatly. About that in a moment.
Before I go there, I have a theory about why the financial wise-heads keep missing the true sense of what's going on, both on the downturns and the upturns. Have you noticed this? all those greyhairs with tremendous experience and knowledge of the markets are continually - this is not the first time - stumped when markets sour, just as they are when they start smelling like roses. It's as if they just can't get a handle on this stuff, and their frustration about it shows in their analysis and op eds. Why? it's not like they don't know what they are doing.
Here is my theory. What used to work until the late 80's no longer does, for one reason - technology. Technology is what allowed day trading to occur, then become common place. Note that this deterioration of the ability to predict or even have a reasonable assessment of what's going in the very near future has been gradual - and about 20 years in the making. The thing is that capital can now move a lot - a lot - faster than it ever did in history. We are talking orders of magnitude here. And yes, the common folks do matter here, because as a group they can move equities. And they don't have to call their broker, they go online and with two clicks they buy or sell, or trade options, or do a whole bunch of stuff that used to take time before. Larger investors in the same position, and they all try to "beat the market" and "be contrarian" and most importantly, get ahead of everyone else. The actual access to the world's capital markets has been significantly democratized and liberalized, which means that folks act faster, and money moves at a tremendously increased velocity. when taken together, they all create an effect that serves to do four things:
1) changes in markets are much more rapid
2) changes in markets are much more extreme
3) changes in markets occur earlier
4) changes in markets occur more frequently
In other words, if a typical downturn would cause a 20% drop in equities which would take 3 years to correct itself in 1970, now the same exact downturn (from a fundamentals perspective) can be 40% and take 6 months to correct. The band narrows. Why? because technology allows money to much more easily move out of the market, then move back into the market. And remember, everybody tries to predict what's gonna happen, so it tends to cause the downswings and upswings to occur earlier in the cycle - much earlier, in fact. Lastly, because of this convenience factor, the capability to move much larger amounts of money much faster around the world, changes in markets occur more frequently, the role of market makers increases, and hedge funds (which essentially specialize in one thing - taking large gobs of money and move it around as fast as they can) can bloom.
But to economists who are classically trained, none of this has an impact on their thinking. So they are continually surprised as to the speed and force of movements in markets. They are simply not used to thinking in terms of technology as an enabler.
And this also explains in a simple manner (I like simple) why recessions tend to be shorter these days, even if they feel quite severe. But it's exactly what's happening, it's not a surprise, it's simply the net effect of technology supporting rapid, vast movements of investor money. Take this recent housing one - the actual numbers should not have caused a meltdown like they did (including the Bear Starnes and Citigroup fiascos), except that they did, and note the surprise on those CEO's faces. Note their comments: "we don't understand how the credit markets could seize up so quickly", and "this has never happened before". They were right, in a sense, but they ignored the impact of technology. Call me naive, but I really believe this effect is quite severely underestimated by many economists and Wall Street types.
And now back to my comment earlier about what will cause a recession.
Last week I tried to use my Bank of America credit card to pay for my lunch, as I do every day. The charge got denied. I was surprised; I have had that card since 2000, with a prime + 2% rate, and a $30,000 line, and I had less than $4,000 balance. Anyway, I used another card and called BofA.
First I got transferred to fraud control, but they looked it up and said nothing was wrong on their end. Then she said I was at my credit limit. I asked her to tell me what it was, and she said "$3,900". OK, that's a problem. I asked to get transferred to underwriting, and spoke to Kevin.
Here is what transpired. Sometime in the middle of April, without notice and without warning, BofA decided to slash down my credit line from the one I had for years to what I owed rounded up to the next $100. Why? his excuse was high outstanding revolving balances. Well, sure, I have $60,000 in those because they are all at low fixed rates - from 0% to 3.9%. I don't want to pay them down quickly. It's cheap money, why shouldn't I use it? he agreed that made sense. So he asked about my income. I told him what it was. He said that was just fine. But he still could not approve raising it back to the $30,000 limit. We literally spent an hour dancing around this issue, with me rebuffing every one of his claims about why they took it down but at the end he didn't change anything, going back to the high revolving debt mantra.
I told him I'd be happy to support an actual underwriting process, sending him documentation to back up my finances. At some point he agreed to take the paperwork. I asked "what would I need to prove to change your decision?". He started dancing again. So it was just to get me off the phone.
I called my friend who is a VP at BofA and asked him about it. He told me what I was expecting: the bank was in complete, utter and absolute panic mode. They are looking at all their credit card holders as risk now, not profit centers, and have done this to apparently millions of their customers at once. He was disgusted by the whole affair, but he was on the retail side so could nothing to assist me at all. He also said that even if he had any influence in credit, it most likely would not help at all, because the risk managers at the bank were in total panic. He also suggested - remember, this is a VP at the bank - that I take my consumer dollars elsewhere, because the current mood at the bank is so sour, he doesn't see it changing any time soon.
Like, wow. I love having friends in the know who can be candid with me, and I sort of expected this, but it was an interesting set of comments. And if anything will cause a recession, this will; consumers need to get money from somewhere in this environment, and credit cards are the most reliable engine they have had to dealing with downturns. That is why they have been such amazing profit engines for the issuing banks. Cutting down consumers' feet in this way, with no warning and so severely will cut spending in such a brutal fashion that the economy will shrink. We are, luckily, not dependent on this line, so I could shrug it off. But what about people who are? the poor souls who lost their jobs and need their line to tide them over for 2-3 months before they find a new one? I don't know whether this level of panic us unique to BofA, but if it isn't, things could get ugly.
posted by Blinkered at 6:38 AM
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