Tag Archives: financial advice

A Painful but Healthy Adjustment

money mazeMy Comments: Reassuring comments here from a trusted thinker on the markets. No guarantees but if you have at least a 5 year time horizon, we will be OK. Just don’t get caught up in the media rhetoric and the pointing of fingers. Almost all of it is stupid, ill informed, and self-serving. Life happens, and this is normal. Which is not to say there are no ways to continue making money.

August 24, 2015 by Scott Minerd

The recent global equity market selloff reflects a long-awaited—and I believe ultimately healthy—market correction. A number of commentators speculated that after Monday morning’s sharp decline in U.S. stocks, the intra-day reversal indicated that we reached a bottom. In the very short run, I would agree. However, longer term, neither fundamental nor technical data support that we have reached the levels of capitulation associated with the end of a market correction.

One example is the Chicago Board Options Exchange SPX Volatility Index (VIX), often referred to as the “fear” index. While it spiked significantly higher, the VIX still failed to stay at the levels normally associated with capitulation like those experienced in 2011. Over the coming days I expect the market will try to find some short-term footing, but I doubt we have found a bottom yet. Buying risk assets now would be like catching a falling knife—if you do so you are likely to get quite bloody in the short run.

The market rout has spawned numerous news stories attempting to explain the source of the sharp declines in global equities. Many have highlighted the decline in emerging markets, which, on balance, have now officially reached bear market territory, given the over 20 percent decline in the MSCI emerging markets index since April.
Some markets have done much worse, especially when measured in U.S. dollars. Brazil is the poster child for the ravages of a full-fledged bear market. Even with the devastating declines, emerging markets have yet to show any signs of bottoming based on either economic fundamentals or market technical indicators.

While in the U.S. fundamentals remain supportive of continued economic growth, technical indicators point to lower prices in U.S. risk assets. Looking at the S&P 500, the sudden collapse in prices should provide near-term support, but after some consolidation I would expect us to revisit the lows and ultimately test the 1,820 level. A decline to 1,820 on the S&P 500 would represent a 15 percent drop from the peak, which would be a healthy correction in a long-term bull market. As this correction plays out, I would expect yields on below-investment-grade energy credits to widen by another 200 to 300 basis points. Other equity markets and higher quality credit assets are likely to sell off in sympathy as well.

So what is causing all of this turbulence? The source is the massive misalignment of exchange rates, which finds its roots in quantitative easing. Case in point, consider Japan, which has weakened its currency by over 50 percent against the U.S. dollar, while China, Japan’s largest trading partner, has basically pegged the renminbi (RMB) to the dollar.

Strains on the terms of trade between countries that have devalued and those that have not have built to the point that perpetuating these disparities is destabilizing to the countries that have staunchly fought devaluation. Witness China’s recent move to devalue the RMB versus the dollar, proving that artificial equilibrium is not only impossible to maintain, but ultimately disruptive to markets and economic growth.

Now we are facing the turbulent path to a new equilibrium. The coming weeks will be difficult and it is hard to hazard a guess as to when and how this will all end. Nevertheless, I place great faith in governments’ willingness to use the printing press. It is a handy tool to prop up asset prices and temporarily spur economic growth. For that reason I don’t see recession on the horizon for the G-7 nations or China either.

In time, policymakers will react. I would assume that the reaction time is fairly short. No one seems inclined to test the limits of how far asset prices can fall. Yet, given the current bias by the U.S. Federal Reserve to raise rates and the Peoples’ Bank of China to support the RMB, some more time will need to pass before more dramatic action is taken.

I would suspect that this will all climax by late October, but only time will tell. For the time being more downside risks remain. As I have mentioned before, cash is king, treasuries will outperform, and patience is a virtue. I don’t believe we have reason for panic, but complacency is dangerous too. Look for opportunities and more signs of capitulation.

Get Ready For A Bear Market

moneyMy Comments: This person may be right, or not. Yesterdays sell-off sure was ominous but you never “know” until it’s too late. One way to profit from the downturn is with alternative investments. Only very few investment managers use them as a matter of course when promoting their skill set to the public.

Those of you who know me may know about a company called Portfolio Strategies. My associate Alan Hagopian and I use them almost exclusively when positioning our clients money for the very same reasons described in this article from Axel Merk. We don’t try to hit any home runs, but being able to make money when everyone else is losing theirs is very helpful.

Axel Merk, Merk Investments Aug. 4, 2015

Increasingly concerned about the markets, I’ve taken more aggressive action than in 2007, the last time I soured on the equity markets. Let me explain why and what I’m doing to try to profit from what may lie ahead.

I started to get concerned about the markets in 2014, when I heard of a couple of investment advisers that increased their allocation to the stock market because they were losing clients for not keeping up with the averages.

Earlier this year, as the market kept marching upward, I decided that buying put options on equities wouldn’t give me the kind of protection I was looking for. So I liquidated most of my equity holdings. We also shut down our equity strategy for the firm.

Of late, I’ve taken it a step further, starting to build an outright short position on the market. In the long-run, this may be losing proposition, but right now, I am rather concerned about traditional asset allocation.

Fallacy of traditional asset allocation
The media has touted quotes of me saying things like, “Investors may want to allocate at least 20% of their portfolio to alternatives [to have a meaningful impact on their portfolio].” The context of this quote is that because many (certainly not all!) alternative investments have a lower volatility than equities, they won’t make much of a dent on investors’ portfolios unless they represent a substantial portion of one’s investment. Sure, I said that. And I believe in what I said. Yet, I’m also embarrassed by it. I’m embarrassed because while this is a perfectly fine statement in a normal market, it may be hogwash when a crash is looming. If you have a theoretical traditional “60/40” portfolio (60% stocks, 40% bonds), and we suppose stocks plunge 20% while bonds rise 2%, you have a theoretical return of -11.2%.

Now let’s suppose you add a 20% allocation of alternatives to the theoretical mix (48% stocks, 32% bonds, 20% alternatives) and let’s suppose alternatives rise by 5%: you reduce your losses to -7.96%. But what if you don’t really feel great about losing less than others; think the stock market will plunge by more than 20%; and that bonds won’t provide the refuge you are looking for? What about 100% alternatives? Part of the challenge is, of course, that alternatives provide no assurance of providing 5% return or any positive return when the market crashes; in fact, many alternative investments faired poorly in 2008, as low liquidity made it difficult for investors to execute some strategies.

Why?
Scholars and pundits alike say diversification pays off in the long-run, so why should one deviate from a traditional asset allocation. So why even suggest to deviate and look for alternatives? The reason is that modern portfolio theory, the theory traditional asset allocation is based on, relies on the fact that market prices reflect rational expectations. In the opinion of your humble observer, market prices have increasingly been reflecting the perceived next move of policy makers, most notably those of central bankers. And it’s one thing for central bankers to buy assets, in the process pushing prices higher; it’s an entirely different story for central bankers trying to extricate themselves from what they have created, which is what we believe they may be attempting. The common theme of central bank action around the world is that risk premia have been compressed, meaning risky assets don’t trade at much of a discount versus “risk-free” assets, notably:

Junk bonds and peripheral government bonds (bonds of Spain, Portugal, Italy, etc.) trade at a low discount versus US or German bonds; and
Stocks have been climbing relentlessly on the backdrop of low volatility.

When volatility is low and asset prices rise, buyers are attracted that don’t fully appreciate the underlying risks. Should volatility rise, these investors might flee their investments, saying they didn’t sign up for this. Differently said, central banks have fostered complacency, but fear may well be coming back. At least as importantly, these assets are still risky, but have not suddenly become safe. When investors realize this, they might react violently. This can be seen most easily when darlings on Wall Street miss earnings, but might also happen when central banks change course or any currently unforeseen event changes risk appetite in the market.
CONTINUE-READING

The Next Hiroshima?

deathMy Comments: As a financial planner, my job is to identify existential financial threats faced by a client and attempt to remedy the potential problem before it becomes a real problem. For the record, an existential threat is something bad that might happen. The idea is to take steps to keep them far in the background so the negative consequences don’t surface. Some we can deal with and some we can’t.

In real life, these existential threats range from an asteroid hitting the earth to understanding that on the day you get married, you are now exposed to a divorce proceeding. These comments by Richard Haass appear in the context of the Iran agreement that is opposed by almost everyone in the GOP.

The threat posed by a nuclear armed Iran may not be so existential. We need to better understand the dynamics involved before resorting to a knee jerk response, conditioned by the last 7 years of visceral objection to the person sitting in the White House.

Richard Haass, August 6, 2015

The 70th anniversary of the bombings of Hiroshima and Nagasaki has understandably garnered reflection and more than a little debate. Much of the looking back has underestimated the case for the American use of nuclear weapons (to avoid what would have been a prolonged and costly invasion of Japan to end the second world war) and overlooked the subsequent utility of nuclear weapons in helping to keep the cold war cold.

Less commented on, though, is a question not of history but of the future: is the world likely to go another 70 years without nuclear weapons being used? The short and troubling answer is no. Even worse, the potential for such use has increased in recent years and seems likely to rise further. The potential for use is least among those that maintain the largest inventories of nuclear weapons and have possessed them the longest. The chance of the five formal nuclear weapon states — the US, Russia, China, Britain and France — deliberately using such weapons is minuscule.

The fact that they have robust arsenals capable of surviving a first strike by someone else and still delivering a devastating response makes the possibility of any such initial use remote.

These countries also possess intelligence capabilities that give each of them a good picture of what the others are doing, reducing the chance of miscalculation leading to catastrophe. Diplomacy and arms control arrangements further buttress stability.

Russia is the one country that gives one some pause, in part because President Vladimir Putin operates with fewer constraints than any of his predecessors since Stalin. Still, the political differences between him and the US, however real, do not rise to the level of nuclear use. More worrying is the chance of political instability developing in Russia, and the possibility that some terrorist group could gain control of one or more devices.

The greatest potential for nuclear use, though, comes from those countries that have acquired these weapons more recently. Pakistan, with a large and growing arsenal of more than 100 weapons, is arguably the most serious concern. One can all too easily imagine a conflict with India not just breaking out but also escalating. Pakistan, the weaker of the two states in conventional military terms, might be tempted to use nuclear weapons as an equaliser.

Pakistan also represents another nuclear-related concern, one that stems from its potential internal instability and lack of firm civilian oversight. It is at once a strong state, in terms of nuclear might, and a weak one, in terms of political fragility — a bad combination when it comes to seeing that nuclear weapons are not used or acquired by terrorists.

North Korea is yet another country that might use nuclear weapons. One can imagine a crisis set off by an act of aggression on the part of Pyongyang, or by a crisis that results from some form of internal collapse. A desperate leadership might turn to nuclear weapons to survive.
“These possibilities may seem like the stuff of fiction. In fact, they are anything but”.

In addition, to stave off collapse, the cash-starved government there might also be tempted to sell nuclear weapons or critical components to other countries or organisations with few if any qualms about using such weapons.

What might be the fastest growing threat to extending the nuclear peace for another 70 years, though, comes from the Middle East.

Israel already has a substantial nuc­lear arsenal. Meanwhile, the just-negotiated agreement with Iran allows the Islamic Republic to keep most of the prerequisites of a large nuclear weapons programme, and to add to its inventory of centrifuges and supplies of enriched uranium in 10 or 15 years respectively. Other countries in the region, including Saudi Arabia, the United Arab Emirates, Turkey and Egypt, may well follow suit.

We could witness a race to establish a nuclear identity. Several governments could see value in striking first, be it to prevent an adversary developing such a capability or, amid a crisis, from actually using it. Brittle governments could lose control of weapons or materials to groups such as the Islamic State of Iraq and the Levant or al-Qaeda. And terrorists could marry nuclear materials to conventional explosives and cause widespread panic and harm, even without detonating a nuclear explosion.

These and other such possibilities may seem like the stuff of fiction. In fact, they are anything but. Preventing further spread of these nuclear weapons and their use may
well turn out to be the great challenge of the 21st century. One hopes the world is up to it.

The writer is president of the Council on Foreign Relations

More Social Security Mistakes

My Comments: Did you know you can choose from any one of 96 months to start your Social Security benefits? If you live to normal life expectancy, your choice of month can mean as much as several extra $100k for you and your family. The message: don’t sign up without first exploring what is in your best interest.

Sandra Block, July 30, 2015

Social Security will probably represent a big part of your retirement income.

One common mistake is to use the wrong retirement age when deciding when to file for benefits. Many people think that they’ll be eligible for full benefits at age 65, but that’s not always the case. If you were born between 1943 and 1954, your full retirement age is 66. Starting with those born in 1955, full retirement age will gradually rise in two-month increments to age 67 for people born in 1960 or later.

Why is this important? Once you reach full retirement age, you can claim your full Social Security benefit. Claim earlier and your benefits will be reduced. In addition, once you reach full retirement age you can earn as much as you want without forfeiting some of your Social Security benefits.

A second mistake is to ignore how filing for benefits will affect your spouse. There are several things married couples can do to increase their combined benefits. For these strategies to work, you must coordinate the timing of your claims. For example, the higher earner could delay filing a claim until age 70. Meanwhile, the other spouse could claim a spousal benefit, providing some income in the meantime. If you’re the higher earner, the timing of your claim could also have a big impact on the amount of benefits your spouse will receive if you die first.

Finally, if you filed at 62 and now regret it, don’t overlook the possibility of a do-over. You can withdraw your application within 12 months of the date you filed, pay back your benefits, and restart at a higher amount later. If you’ve already passed the 12-month mark, you still have options. Once you reach full retirement age, you can voluntarily suspend your benefit. You’ll earn delayed retirement credits until you start claiming benefits again.

This is just the tip of the iceberg. There are many more costly Social Security mistakes that you need to avoid in order to maximize your retirement benefits. Read more HERE.

US-Iran Treaty Can Send Oil to $40

oil productionMy Comments: I’ve already said that I much prefer a negotiated deal between adversaries than continued threats to bomb the crap out of them. In todays economic and political environment, that option poses too many risks that I’m unprepared to accept.

Here’s some economic thoughts about what might happen, now the deal is in place. Yes, Congress has 90 days to approve, and no, the oil industry will be unhappy, but it’s time to think what is best for ALL OF US, and not just the few.

by Barry Ritholtz – July 14th, 2015

While the world is distracted by the unending Greek saga (will it or won’t it leave the euro?) and the epic Chinese stock-market meltdown (and manipulation), something really important is going on. Three words sum it up: Iran and oil.

Negotiators have reached a deal with Iran to constrain its nuclear arms program. Despite the pessimism and outright fear-mongering, an agreement has been reached.

Don’t let China’s stock market and Greece’s debt melodrama distract you from paying attention to this issue — now that this deal is all but consummated, the repercussions are potentially enormous.

The agreement to end 13 years of sanctions against Iran over its nuclear aspirations is likely to be the defining foreign policy achievement of the Obama administration. Iran had opportunistically pursued its nuclear ambitions after 9/11, accelerating the program once its biggest regional enemy, Saddam Hussein, was removed by the U.S. military invasion.

Normalizing relations between one of the largest military powers in the Middle East and the major nations of the West is a huge, game-changing event. Iran’s ruling party wants access to global markets, technology and capital; Iranian youth would like access to Western consumer goods, culture and most of all, the Internet. How much any of these become part of the end result of a deal has yet to be determined.
What is perhaps most fascinating about this deal is the role and ambitions of China and Russia.

China’s motives are more obvious: It would like to blunt the projection of U.S. military power around the world, disengagement of the U.S. from Middle East politics and — most of all — a reduction of geopolitical tensions that tend to raise oil prices.
Russia’s interests are more complex, since it benefits from higher oil prices. Putting Iran’s huge oil production back on the market could exacerbate today’s global crude glut. Speculation that this will happen has already helped push down the price of oil, which has fallen by about a third in the past 12 months. Further signs of a Chinese economic slowdown also are weighing on crude prices.

Given the current situation, including sanctions against Russia for its role in destabilizing eastern Ukraine, one has to wonder what advantage there is for Vladimir Putin & Co. if Iranian oil begins to flow freely to the global market.

The Houston Chronicle quoted Neil Atkinson, an oil analyst at Lloyd’s List Intelligence in London, who observed, “It’s finally dawning on the market that the overwhelming weight of supply growth isn’t just going away… Iran is a huge factor. I can see $50 in sight for West Texas Intermediate [when a deal is reached].” Iran has 40 million barrels of crude stored on at least 23 ships that could be released into the market relatively quickly, the Chronicle added.

So what’s driving the Russians to be so cooperative? Perhaps the lessons of the 1980s are still fresh in Putin’s mind. What brought down the Soviet Union wasn’t the result of military failures or armed conflicts through surrogates. Rather, it was the economic might of the U.S. Supporting a huge military requires a large, efficient and productive economy and the Soviets simply couldn’t compete with the U.S. As much as former U.S. President Ronald Reagan is praised for the collapse of the USSR, Adam Smith deserves more credit.

The Russians may have figured out that fighting the American economy has been a losing game for them.

A peaceful, non-nuclear Iran might help to limit the U.S. presence in the Middle East, according to Gary Samore of Harvard’s Belfer Center. “The Russians don’t like to see the U.S. going around the world, bombing countries,” he noted.

Given the painful sanctions on Russia — and the related precarious economic state it is in because of much-reduced oil prices — greater cooperation between Russia and the U.S. could be mutually beneficial. Both want to see a defeat of the Islamic State. So does Iran. All benefit from a more stable Middle East, albeit for very different reasons.

Putin is smartly playing a long game. Lower oil prices will be painful in the short run for Russia. But an aggressive U.S., with an expansionist military around the world may be even worse. Hence, the surprising willingness of Russia to sign on to an agreement to lift sanctions against Iran.

The key takeaways of the deal with Iran is that it has the potential to lower energy prices, reduce tensions in an area fraught with conflict and create an opening for Russia to find a way to end the sanctions now hobbling its economy. A Russian economy that is better integrated into the world economy will have far better growth prospects.

It will be interesting to watch the contortions and hysterics among members of Congress opposed to the Iran deal. But as of now the critics of the accord lack a veto-proof majority. However much they might complain, it is likely to just be political noise.

Watch the price of oil. Consider what increases in supply and reduction of Middle East tensions do to its price. Then imagine what that could mean for the global economic recovery.

THE FOUR ESSENTIAL CHARACTERISTICS OF ALL BEAR MARKETS

money mazeMy Comments: This article comes from January, 2009 and was written by Nick Murray. Two months later, the bear market that started in mid 2008 was over, though it took some time to realize.

Meanwhile, we’ve been in a bull market for over six years now, and many are suggesting we are overdue for a correction. These comments will help you better understand how this is all going to play out.

By Nick Murray, January, 2009 (gratefully used without permission; I have no idea where it was published)

This material is loosely adapted from my forthcoming book, Behavioral Investment Counseling. Bits and pieces of this material have certainly appeared, explicitly and implicitly, in this newsletter over the years, and will not be unfamiliar to longtime readers. They are collected, synthesized and offered here in the interest of rushing some more long-term perspective to the front lines in the current pitched battle against panic.

A bear market, as I’ve suggested elsewhere in this issue, is a period of time during which people who believe this time is different, sell their common stocks at panic prices to people who understand that this time is never different. The very first truth of bear markets – the perception after which we must order all our other perceptions – is that all bear markets are fundamentally the same.

If and to the extent that this is true, the question then becomes: in what identifiable (and therefore predictable) ways are they all the same? What can we know about a bear market as we are going through it – despite all its apparently unique terrors – which will never fail to restore our perspective and defeat the urge to capitulate? I believe that there are four such immutable truths.

(1) Bear markets are an organic, natural, constant element of a never-ending cycle. The capital markets are capable of perfectly psychotic behavior — constrained only by their capacity for emotional excess — in the relatively short term (a year or two; rarely more). In the intermediate to longer term, the capital markets in general and the equity market in particular are powerless to do anything but reflect the underlying economic fundamentals.

And as long as human nature is the essential driver of all economic activity, economies will alternately cycle above and then below their long-term sustainable trendlines — overshooting their capacities in optimistic expansions, and then undershooting them in frightened contractions. The dot.com bubble is an example of the former; the great unwinding of 2000 – 2002 the latter. The cheap-credit-fueled real estate/mortgage bubble of 2003 – 2005 typifies the former, and the current unpleasantness the latter.

Human nature being what it is, any economic enterprise worth doing is worth overdoing, and the capital markets must follow not just a similar but the same cycle of euphoria and panic. We have met the enemy, as Pogo Possum said all those years ago, and he is us.

(2) Bear markets are as common as dirt. We are currently struggling through the thirteenth bear market (which I and most others define as a decline in the broad market of about 20% on a closing basis) since the end of WWII. Thirteen episodes in 63 years seem to imply that they occur on an average of about one year in five (though with lamentable irregularity). At that rate, you’ll see eight of them in a 40-year career of working and saving, and six more in the average two-person retirement.

One had better get used to them. Moreover, since their beginnings and endings are impossible to time, one had better develop the emotional maturity and financial discipline to remain invested through them.

(3) Equities’ great volatility is the reason for, and the driver of, their premium returns. “Volatility” does not, other than in the hyperbolic lexicon of catastrophist journalism, mean “down a lot in a hurry.” (Nearly four years in five, equities go up a lot — quite often in a hurry — but journalism somehow never characterizes such markets as “volatile.”) Rather, volatility refers to the extreme unpredictability — up and down — of equity returns in the short term.

For example, you have not only never seen but cannot even imagine bonds providing a 20% total return in one year (through a combination of interest and price appreciation), and then posting a 20% negative return the next year. You would intuitively say that bonds just aren’t that volatile, and you’d be right.

Equities do it all the bloody time. Equities are that volatile. You just never know what they’re going to do from one period to the next. And the premium returns of equities are an efficient market’s way of pricing in that ambiguity. There are no good markets and bad markets; there is one supremely efficient market. And its way of dealing with equity volatility is to demand — and get — returns which have nominally been about twice those of bonds, and — net of inflation — real equity returns that are nearly three times greater. Premium equity volatility and premium equity returns are thus two sides of the same coin.

Take care then, in moments of great stress such as the current environment occasions, not to wish away the volatility of equities, because you are, whether you realize it or not, wishing away the returns.

(4) A bear market is always — repeat, always — the temporary interruption of a permanent uptrend. As I write, the broad market, as denominated in the S&P, is in the neighborhood of 1200, late in the thirteenth of these very common ends-of-the-world (for so each and every bear market is characterized by the media). The tippy-top of the market the night before the onset of the first of these thirteen cataclysms — May 29, 1946 — saw the S&P close at 19.3.

Think of it, dear friends: from the peak before the first bear to something approaching the trough of the thirteenth, stock prices alone (ignoring the compounding of dividends) have risen more than 60 times in about as many years. And why? Because earnings are up 60 times — and, in this great golden age of globalizing capitalism, they are of course still going up. The advance is permanent; the declines are temporary. Always.

But mustn’t there be some way of defending capital against these horrific if transitory episodes? Must there not be some formula, some reliable strategy for taking capital out of harm’s way? As a matter of fact, no.

Bear markets begin and end often, but not regularly: there is no consistent way of anticipating when an ordinary market correction will deepen into a genuine bear, nor when — having done so — the bear market decline will run its course. Peter Lynch wrote something to the effect that more money has been lost by people trying to anticipate and avoid bear markets than in all the bear markets themselves. (This is the equity market corollary of Paul Samuelson’s observation that the consensus of economists had forecast nine of the last three recessions.)

Bear markets are so irregular and evanescent, and bull market advances so powerful and long-lasting, that trying to time the market becomes the ultimate fool’s errand: it is a formula for long-term returns which are a fraction of the market’s. Churchill famously said that democracy is the worst form of government ever formulated by man, except for all the others. Buy-and-hold is, in exactly the same sense, the worst equity investment strategy ever devised by man.

Except for all the others.

Here’s What the Next Recession Could Look Like

Bruegel-village-sceneMy Comments: There is no doubt that both politicians and financial people generate success by evoking fear in those to whom they are talking. Sometimes it’s legitimate, but much of the time its BS designed to persuade you to part with your vote and/or your money. What follows here is consistent with my belief that while there will be another downturn, it’ll be nothing like the last one.

 

Corey Stern Jun. 20, 2015

Since World War II, the average expansion period for US gross domestic product has lasted less than five years — and the current expansion is now in its sixth year. Does that mean we’re due for another recession?

The GDP slowdown in Q1 of this year had some economists fearing that a recession was near. But recent strong economic data has calmed those fears.

Recessions don’t just happen because they are overdue; they need to be induced by some event.

In a note Thursday, Dario Perkins of UK-based Lombard Street Research pointed to the stock bubble as the most likely cause for an upcoming “lesser recession.”

“Asset prices have risen sharply over the past five years in response to low long-term interest rates and aggressive central bank stimulus,” Perkins wrote. “This presents an important risk to the global economy, perhaps the most likely trigger for the next recession.”

He added, on a positive note, that unlike the most recent economic downturn, the next one would likely only be tied to stock prices. This is because while stock values have skyrocketed over the past few years, home values in developed economies have made modest gains. Though a stock market crash would be a bad thing, it wouldn’t nearly have the same effect on GDP a housing market crash.

Think dotcom bust, not global credit crisis

Perkins illustrated his point by comparing the effect on GDP from both the dotcom crash and the subprime-mortgage crisis. During the dotcom bust, which didn’t affect housing prices, GDP continued to rise for the most part in the quarters following the stock market peak.

He also pulls research from the Bank of England showing that credit trends, while very similar to the trajectory of the business cycle, have peaks that are twice as large and twice as long. The worst recessions are those that coincide with a credit crunch, as in 2009. But we are still in a credit upswing since then. In other words, the next recession isn’t likely to be accompanied by a credit bust, which will further mitigate the harm done.

The next downturn will also be protected by the still sluggish recovery from 2009. That is, there are fewer imbalances, less systematic risk, less household debt, and less bank leverage.

A more mild recession will be good for central banks that have limited tools left to respond to an economic crisis. Interest rates — already near zero — can only go so much lower, and a very high benchmark would be needed to justify restarting QE.

Perkins explains: Suppose, for example, the next recession is caused by the bursting of a bubble in equity prices. Would QE be able to reverse such a decline? And if central banks were blamed for causing this bubble, would they be willing to try to reflate the bubble with the same policy? Obviously we can only speculate about this, but it is clear both the Fed and the Bank of England were anxious to stop doing QE because they were concerned about its potential impact on financial stability.

In short, while Perkins thinks a stock market crash could cause a recession soon, the effects will be nothing like those felt in 2009.

Source: http://www.businessinsider.com/what-the-next-recession-could-look-like-2015-6#ixzz3djPsygjj