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Possible recession in 2008

Page history last edited by Brian D Butler 11 years, 5 months ago



Possible recession in 2008


many analysts are predicting recession in early 2008. 


why:  see our discussion on deleveragecredit crisis of 2007,  margin call 



How might a US recession effect the rest of the world?


What frightens, in the American crisis, is the speed with which arise bad news. First, it was the problem of real estate mortgages, which can cause a loss of up to $ 500 billion. Then, the main American banks, led by Citibank, publicized the worst balance sheets in history. Last week, said that the insurers of credit could lose $ 15 billion.




Effects on Brazil:


recession in the United States and reducing the speed of growth in China and other Asian tigers was enough to down the prices of key agricultural commodities and minerals, which should affect the trade balance


"The bubble that is dissipando will bring harm to some industries and a possible slowdown of activity," he said. In banks and consultancies, forecasts of growth of the Brazilian economy in 2008 already have been reduced from 5% to 4.5% - or even less.


 more:  how would a USA recession effect Latin America ?





Opportunities for Investors



Pro: Companies will cost less to acquire. This will be an across-the-board sort of thing, much like price inflation affected all sectors in 2006 and early 2007. Expect private equity to return to its pre-boom knitting of zeroing in on underperforming sectors, like financials and consumer. In fact, it’s already happening. A panelist at the Wharton conference mentioned that PE firms tried getting involved in many of those bulge-bracket bailout deals that ultimately went to sovereign wealth funds.



Con: Existing portfolio companies will be harder to exit. Not just to the public markets, but also to strategic acquirers. We’ve heard lots of talk about how corporate America is sitting on piles of cash, but major market sell-offs have a way of lowering those levels. Sponsor-to-sponsor deals are still an option, but then you run back up against the issue of reduced purchase prices.



Pro: Motivated spin-off sellers. Big companies always like to refocus on “core businesses” in the tough times, even if the sale prices can be a bit tough to stomach.



Con: A bear market could drive down private equity fundraising. One reason for the record tallies of 2005-2007 was that institutional investor caches kept rising, thus boosting the real dollars associated with a 5% or 7% alternative allocation. Well, it also works the other way, which could mean fewer real dollars available.





Commoditiy led inflation + recession =  potential "stagflation"


Stagflation is any economists worst nighmare.  Low economic growth plus high inflation.  The economists would like to cut interest rates to spur economic growth, but can because they must raise interest rates to fight inflation.   There is a real possibility that inflation is rising in 2008, and that there is a recession coming.  Will this be the 1970's all over again?  some analysts are saying that it might, but many things are significantly different now, so the parallels are not fair.   But, remember...after the 1970s, the US economy recovered, but the Latin American economies fell into a spiral of recession and debt crisis.   When the US economy slowed, and credit dried up, commodity prices plummeted...it led to massive budget problems across Latin America.  So, the million dollar question to ask today is:  if the US were to fall into stagflation, will commodity prices fall?  If they were to fall, and if the US were to be in recession, what would happen in Latin America?






Counter view:


  1. The US may go into recession, BUT, commodities are no longer directly dependent on the US economy (as they were in the 1970's).  So, the implication of this theory is good for Latin America, but really bad for the United States. 
    • Its good for Latin America because it means that (even though the US goes into recession), the commodity prices will not fall like a rock, and commodity exporting nations shouldnt hurt that much.  
    • Its bad for the US because (unlike the 1970's), a recession in the US wont drive down commodity prices, which wont help tame inflation, and set the stage for a rebound.  If commodities remain expensive, then a rebound in the US will be much more difficult (expecially if the US dollar remains weak, making imports such as oil that much more expensive).    On the other hand, a weak US dollar should help boost US exports (especially if foreign countries demand remains strong)....







Research needed:


correlation between a US recession and worldwide commodity prices


  • how dependent on US demand are commodity prices
  • If the US used to be the biggest buyer of commodities, but now its China, Europe, Japan, etc....
  • Dierect analysis
    • how much commodities are imported directly into the US
    • how much commodities are consumed in the US
  • Indirect analysis
    • how much (as%) of China's production is exported to the US?
    • What % of commodity usage from China is associated with US trade?
    • worldwide - what % of worldwide production is linked to the US (% of GDP consumed worldwide)
  • With these statistics, we might begin to have a better understanding of the correlation between a US recession and worldwide commodity prices.

















































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