Today was a terrible day on Wall Street. The averages were down by huge amounts and nearly every stock price fell. If this were an isolated event, it would not matter. The problem is that so far in 2016, days like this have been the norm and not the exception. What does it all mean?
It seems that the stock market is predicting a recession beginning in the near future. Now remember, just because the market predicts a recession it doesn't mean it will happen. There is a famous quote which is attributed to multiple people that says, "the stock market has predicted nine of the last five recessions." In other words, we get a lot of false negatives if we only look at stock prices. Nevertheless, a falling stock market, especially one that is falling as rapidly as the present, often means a recession is around the corner.
There are a lot of reasons to think that we may be approaching a recession. The economy of China (the world's second largest) is faltering in ways that we have not seen in decades. Europe and Japan are at best stagnant. There is no area of the world economy that is growing in a way that can provide increased demand so as to avoid a recession. On top of this, the central banks of the world are almost all at rates approaching zero. There is no way to cut interest rates so as to increase economic activity. In large industries like energy, the main economic considerations are being pushed aside in favor of political considerations. The Saudis are pumping oil like it is going out of style even though the price keeps falling; they want Iran and Iraq to get less revenue from their oil in order to weaken the forces of those countries. The Saudis also want to drive American shale oil producers out of the market. Low energy prices are good, but when energy companies get forced into bankruptcy, many thousands will lose their jobs. This impact will spread through the economy.
The worst thing about a recession now is that we will need to work through all the mess created by the policies of the last eight years. We may have gotten to the point where even removing the excessive regulation and discriminatory taxation measures that block business creation and growth may not be enough to get things moving again.
Let's all hope that the market is wrong. If not, we're in for a rough ride.
It seems that the stock market is predicting a recession beginning in the near future. Now remember, just because the market predicts a recession it doesn't mean it will happen. There is a famous quote which is attributed to multiple people that says, "the stock market has predicted nine of the last five recessions." In other words, we get a lot of false negatives if we only look at stock prices. Nevertheless, a falling stock market, especially one that is falling as rapidly as the present, often means a recession is around the corner.
There are a lot of reasons to think that we may be approaching a recession. The economy of China (the world's second largest) is faltering in ways that we have not seen in decades. Europe and Japan are at best stagnant. There is no area of the world economy that is growing in a way that can provide increased demand so as to avoid a recession. On top of this, the central banks of the world are almost all at rates approaching zero. There is no way to cut interest rates so as to increase economic activity. In large industries like energy, the main economic considerations are being pushed aside in favor of political considerations. The Saudis are pumping oil like it is going out of style even though the price keeps falling; they want Iran and Iraq to get less revenue from their oil in order to weaken the forces of those countries. The Saudis also want to drive American shale oil producers out of the market. Low energy prices are good, but when energy companies get forced into bankruptcy, many thousands will lose their jobs. This impact will spread through the economy.
The worst thing about a recession now is that we will need to work through all the mess created by the policies of the last eight years. We may have gotten to the point where even removing the excessive regulation and discriminatory taxation measures that block business creation and growth may not be enough to get things moving again.
Let's all hope that the market is wrong. If not, we're in for a rough ride.
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