Anticipating a recession
October 15th, 2005Today’s NY Times has two articles that increased my hunch that the country is headed for a recession. First, the new bankruptcy law takes effect on Monday and many people are filing for bankruptcy to avoid the consequences of the new law. The increase in bankruptcy filings is staggering:
That’s not too much to get excited about: the new bankruptcy law is supposed to make it harder for debtors to cancel out existing debt with lenders. It only makes sense that people would file for bankruptcy now rather than later. What is significant enough to get excited about is that inflation hit its highest monthly rate in 25 years. The federal reserve has been increasing interest rates recently and this will continue to happen, likely at a greater pace, as inflation rises. My expectation is that higher interest rates will result in home-owners with adjustable rate mortgages not being able to pay their monthly mortgage payments. They will then have to sell their homes in an inhospitable housing market, losing the equity that they have put into their home. And filing for bankruptcy won’t be any easier than it is today.
January 23rd, 2006 at 6:06 pm
People that take out those wacky mortgages don’t have any equity in their homes to begin with which is why they need to find such a loan in the first place (ie buy more home than they can afford).
There’s no question we’re going to see cracks in the housing market. We’ve already started to see it: mortgage apps are down, the length of time houses are sitting on the market is up(even though this time of year sucks to sell a house anyway) and you’ve seen some flatting of the price escalation in some markets. I don’t think a slight prick of the housing bubble alone pulls us into a recession. One interesting point on the tougher bankruptcy laws will help financial services companies like Bank of America (BA) since they just bought MBNA the world’s largest credit card processor. That law will kill them for 4th qtr. numbers but going forward should be a good thing.
Now back to this recession talk:
To me the real bad scenario that will do it will be a combination of a housing fall with a pull back in capital spending and hiring by corporations. Corporations have become so lean and cash rich over the past few years that hopefully they can help soften some of the strain consumers will feel when they can’t take out anymore equity by using their house as a credit card.
Now would be a real good time to load your portfolio up (for more than 26 shares at a pop Aaron) on Procter & Gamble (PG), Altria (MO), and Hershey (HSY) just in case things do get a little soft. Always remember this simple saying, “When things get tough people still smoke, eat, and shit.” That hits all the stoks I just listed above. Avoid Walmart, Target, BestBuy etc. They’ll get killed if things get tight.
There’s my two cents.