U.S. Slip-sliding into Recession
By: Mike Whitney
Apr 16, 2011
In June, the Fed’s bond buying binge (QE2) will end and the economy will have to muddle through on its own. And, that’s going to be tough-sledding, because QE2 provided a $600 billion drip-feed to ailing markets which helped to lift the S&P 500 12% from the time the program kicked off in November 2010. Absent the additional monetary easing, the big banks and brokerages will have to rely on low interest rates alone while facing a chilly investment climate where belt-tightening and hairshirts are all-the-rage and where consumers are still licking their wounds from the Great Recession. None of this bodes well for the markets or for the millions of jobless workers who continue to fall off the unemployment rolls only to find that the social safety net has been sold to pay off the mushrooming budget deficits.
So, what are the odds that the economy will tumble back into recession?
First, let’s look at the stock market and an article by Marketwatch’s Mark Hulbert:
“There have been only four other occasions over the last century when equity valuations were as high as they are now, according to a variant of the price-earnings ratio that has a wide following in academic circles. Stocks on each of those four occasions would soon suffer big declines….
The four previous occasions over the last 100 years that saw the CAPE as high as they are now:
The late 1920s, right before the 1929 stock market crash
The mid-1960s, prior to the 16-year period in which the Dow went nowhere in nominal terms and was decimated in inflation-adjusted terms
The late 1990s, just prior to the popping of the internet bubble
The period leading up to the October 2007 stock market high, just prior to the Great Recession and associated credit crunch