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Are we close to the bottom?

January 27th, 2009 · 3 Comments

Impossible to say. There are self-reinforcing mechanisms at work that, unimposed, will take us deeper into a recession. However, there are also reasons to think the economy will stabilize in the near future..

We already commented earlier on falling oil prices and inflation in general, boosting incomes and hence spending power. Another element is falling mortgage rates (and these should fall more).

On top of that, a Forbes article argued that the housing and car markets are at unsustainable low levels. For instance, the normal turnover rate for the US housing stock is 75 years. For this to happen, 1.75 million houses need to be constructed every year.

However, in December last year, construction of only 550.000 new houses (annualized rate) was started. Yes, we came off a boom, and there is a large inventory of houses, but this will clear itself out sooner or later. Important is also that the US population, contrary to many European countries and Japan, is growing, and building permits are a lot easier to get in the US.

The same logic can be applied to the car market, which, on average, turns over each 13 years or so, but in December last year, sales implied a turn-over rate of 23.4 years, a figure far off from the deepest post-war rate in the 1980-1 recession (16.3 years) .

Combined with the earnings boost from lower inflation, oil prices and mortgage rates, these markets cold actually turn in the near future. Of course, timing is very difficult, it could be within months, or within a year, which makes quite a difference for investors. It will come though.

Our previous article on bank lending was too harsh, it turns out that bank lending hasn’t imploded anywhere near like in previous recessions, evidence that the bail-out, however botched they were, are doing good.

So, no matter how bleak it looks now, seeds are being sown for a stabilization, and perhaps even some recovery. And financial markets will feast on the first sign of that.

Tags: Credit Crisis · The Markets

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