A Recession--Boring!

Ritholtz at the Big Picture provides a short form of Doug Kass’ Possible Surprises for 2007. The interesting element of the list this year comes in the thought We may be missing key Variables in the Market. 2007 could be a terrible year, but no one pays attention. I will paraphrase an old adage, and ask: What if they called a Depression, and no one came (kids, the adage is What if they declared a War, and no one came). We are awash in Money (except for the Federal Treasury), and in unpaid Mortgages. Paper Financial instruments are as profuse as leaves on the ground, and they could become a dead Write-off over the next 2-3 years; not complete loss, but possibly without Profits or scheduled Repayment plans completed. Would this be so bad?

The Bush Tax Cuts produced the huge Profits, and removed any Tax from these Profits to absorb the quick buildup of the Money Supplys. The funds are out there, seeking investment, but in the wrong hands; labor needing the funds to pay off the mortgages and Consumer Credit. The other end of the spectrum, though, shows a alternate pattern. Retailers could suffer a 5% loss of Sales for the next couple of years, and We might still get an increase in Employment of an additional 2 million Jobs. I expect I had better explain the Reasoning.

The United States has been enduring a rapid increase in Population in recent years. It is totally immaterial whether this Population increase comes from the Birth Rate or Immigration, in that massive numbers of Households have to be established for Immigrants or High School Graduates. Household construction requires initial Purchases, repayment, then upgrading followed by further repayment procedures; a Buying pattern which takes around 12 years, Many attesting it takes a lifetime. Retailers have had record years in Sales, much of it in the high-end Purchasing of high-tech Products. Such Sales will drop in recessive conditions, as the nuevo Rich decide they must return to sound Spending practices, after they find record Dividends disappearing and they cannot get their Homes sold on schedule. Their lack of Consumption will be counter-balanced by the new Household building process. But why do I say that Employment rates will increase?

Household construction is unlike high-Tech Purchasing. The Former requires large Purchases which are not easily transportable, unlike the Later Purchases. Retail staff is required to deliver these larger purchases, so layoffs in the Retail arena will not project the same rate of decline as elsewhere; though Retail staff may become younger and stronger. The larger purchases will also change the matrix of Trade, as Household products present a much-reduced Profit margin. Larger, more difficult Trade product, combined with lower Profit margins, may lead to a marked increase in domestic production at the expense of foreign Trade products. The added domestic production will require additional labor elements. The increased need for Labor will bring higher Wages and sustained Retail Sales, though at a lower level than the current record Sales years.

American Business will have to return to Production efficiency to obtain their Profits, surrendering their addition to sell foreign products. It will also have to surrender the practice of Wage suppression to achieve Profitability, foregoing the delight of quick Profits in Offshoring production. A bad note appears in the greater American dependence on foreign Energy, but with a sharp decline in American purchase of foreign products, there may even be a permanent drop in Oil prices (increased Production coupled with less foreign demand). People may ask exactly when this will occur? The Answer states that it might have already started in August of 2006. Does it matter? lgl