Wednesday, November 14, 2012

The 2013 Recession - Part I


Typically the stock market has a 4 year cycle with the presidential election year being the top and the year after being the worst.  Usually the decline comes from the Fed fighting inflation by raising rates but that seems unlikely soon.  So, where will it come from this time?

No matter who wins the presidency, the "Fiscal Cliff" will be only partially averted and there will be some combination of reduction in spending and increase in taxes which will take some money out of the economy in January.  Regardless of whether that is necessary for long term debt reduction, it can't be good short term.  

Germany has elections somewhere in August to Oct. 2013 so they will try to keep the Euro afloat until then.  I can't see how they can manage that for very long without writing off big loans to Greece and no one wants to do that any more.  So, the Euro starts collapsing before 11/2013 with a dramatic drop in their stock markets.  They will be weakening well before that so the International markets and European economy simply accelerate their decline after late Summer 2013.

The Fed's "quantitative easing" (QE) (printing money to increase investment and get the economy moving) by buying mortgages has driven mortgage rates to historic lows driving income investors to dividend paying stocks.  Growth investors are then driven to riskier stocks and so on down the line so all markets look better.  This has kept the market indices from falling (since those are mostly dividend paying stocks) but at some point QE stops working if everyone sees even the dividend paying companies aren't doing well because markets are collapsing around the world.

So we have a recession on top of the Great Recession.  More CA cities go bankrupt, CalPERS does even worse on investments, CalPERS unfunded liabilities explode, LA votes all their employees into 401(k)s, and every other city starts wondering why they don't either file for bankruptcy or shift everyone to 401(k)s (or both).

On the bright side, ah, well...

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