Recession Risks? Inconceivable!

You know that scene in The Princess Bride, after the Man in Black has evaded a number of Vizzini's traps? Each time Vizzini claims his escape was "inconceivable," so Inigo Montoya finally says "You keep using that word. I do not think it means what you think it means." We know exactly how he felt every time we hear the media invoke the Dread Pirate "Recession." We do not think it means what they think it means.

Lately, we've heard increasing media cries that "risk of recession" is high and getting higher. Example:

Risk of Recession Rises as Consumers, Business Feel Pain of Tighter Credit
By Joe Richter and Rich Miller, Bloomberg

The article claims recession looms because of a credit crunch, the "worst housing recession in 16 years," and falling consumer confidence. But are any of these legitimate recession risks? We've detailed in this space multiple times why this is a fake credit crunch. (For our latest, read "Best Credit Crunch Ever!") But a quick, easy way to see this is no credit crunch is watching long-term rates. US Treasuries, BBB, and high yield rates are all lower now than in July. Borrowing is cheaper today than this summer! By definition, cheaper borrowing is the very antithesis of a credit crunch.

Consumer confidence has simply no bearing on future economic or market performance (see "Sentimental Silliness"), and if we haven't seen a "housing recession" this bad since the record-breaking economic and market growth of the 1990s was just kicking off, then we don't have much to fear from housing recessions on their own.

How quickly everyone forgets the "housing bubble" was supposed to tank the economy this year, yet after a sluggish Q1, Q2 GDP growth got revised up to 4.1%. Hardly surprising, since residential construction is only about 4.5% of our GDP. Inflation has been very tame, unemployment near record-lows, and personal income growth blew away expectations for August. And despite constant droning from the media that American consumers are imperiled, consumer spending is healthy and Americans' net worth at record highs.

More evidence our economy is healthy?

U.S. Workers Are World's Most Productive
Associated Press, MSNBC.com

Yes, we work far more hours than our friends the French, but fewer than the Chinese or Malaysians. But because of our free, open, competitive economy and technological innovations, we blow the world away on per capita productivity. It's hard to imagine softness in one narrow sector of our dynamic economy must reverse all that. And don't forget, the US is only 35% of the global economy. If the global economy is growing, it's tough for us to move very far in the opposite direction.

We think this recent headline fairly sums up the immediate risk of recession:

US Recession Risk Highest Since 9/11
By AFP, Yahoo!News

This article details Former Treasury Secretary Larry Summers' proclamation that we face as great a risk of recession as we faced on 9/11. It's a touch odd he phrased it thusly, because the wording makes it seem as though there's a high risk of recession. We are certain Mr. Summers (by all accounts, a smart gentleman and a Harvard professor) understands the previous recession ended November 2001. So basically, what he said was, "The threat of recession hasn't been this great since right before we saw record economic growth for a number of years." Which isn't scary in the least!

We're not sure we agree with Professor Summers' exceedingly rosy outlook, but we do agree the economy looks healthy and recession in the immediate future is unlikely. What's more, benign interest rates and attractive valuations are leading to CEOs to once again engage in debt offerings to fuel M&A activity:

Banks to Test Debt Market This Week
By Michael J. de la Merced and Eric Dash, The New York Times
https://www.nytimes.com/2007/09/04/business/04data.html?ref=business

Record Takeover Fees Buoyed by Companies Unaffected by Subprime
By Justin Baer, Bloomberg

In Asia, Private Equity Is Still Bullish
By Donald Greenlees, The New York Times
https://www.nytimes.com/2007/09/04/business/worldbusiness/04equity.html?ref=business

Next time someone tries to scare you with talk of recession risks, ask them how they define recession. If they mean benign interest rates, attractive valuations, growing earnings, and a galloping global economy, then heck, we're all for "recession." Now, if we could just find that six-fingered man . . .