Sunday, August 17, 2014

When the recession will end

This is the biggest question doing round at the moment that when the economy will recover. There are all kind of estimates doing round that it will recover in next two hours to next two to three years. Even there are wide opinions on the kind of recovery that will happen. Some are expecting V shape recovery. Other think it will more U shaped. In fact all the letters of the alphabet has a model in its shape and logic put behind those shapes. The only take, I like to take from these discussions is that economy will eventually recover. I am a die hard optimist.
Now let's come to the more important question of how the recession is going to over. I think it's impossible to predict the timing of end of recession. One big problem is itself that there is no clean definitions of recession so we will never know when recession will over. Also another important thing is that recession is very individual in nature. Recession for me may not be a recession for you. But still we can broadly say that when the media stops talking about recession, the recession will over.
There are many theories going around that recession will be over by growth in emerging market, which I think with all humbleness that is not going to happen. The growth of emerging markets on other way round has a lot depended on the growth in the developed countries. The emerging markets are providing resources to the need of developed countries. So if there is no need, there will be no need of resources provided by the emerging market. There has been a lot of discussion that the internal consumption in emerging markets especially Indian and China will help in bringing the demand. A closer look in the Indian economy will show that everything is hunky dory. The government is running a huge deficit and still has to deal with political compulsions. Also the internal demand might sustain local industries but they will no where bring the demand to take the world out of recession. People still bye Tata's cheap car. Forget that they are going to go in herds and start buying Mercedes or Audi. Also one of the major drivers of the growth were IT professionals, whose sky rocketing salaries has resulted in a bull run for everything in the market. With reduced IT budgets and a big workforce without work, will result in restricted wages and may not see the kind of demand that is anticipated. Government of china can be an exception and they have declared massive spending programs. But China is still opaque in terms of many thing so to rely on it would be foolhardy till more reliable signal appear on the radar. Also China is a big export dependent economy so whatever spending government might declare, will be good enough to create the demand as a replacement for exports. So it looks like the economy will never come out of recession.
The economy will eventually recover but it will be long drawn process. The time will depend on many factors all around the world. So it will be difficult to point out what big five things will drive the economy out of recession. Before we understand how the economy will recover let's first understand the demand supply mismatch, in which lies the key to recession and key to recovery. Why recession happened at first place? It will starts with something which fancies the whole market. In 2000 it was Internet and in 2008 it is housing market. Let's call that thing zing. A momentum starts building about owning that zing and it results in a herd mentality. Due to pent up demand, the supply starts getting exhausted which results in spike in prices. As the price starts moving up, more and more people want to join the race so that they can also be part of the zing. The first set of people are those who actually need that thing but later on in the crowd the bigger proportion is of the people who are more speculative (call them investors) in nature. Looking the huge demand supply mismatch, on one hand the price keeps on increasing and on the other hand people start creating infrastructures to create more and more supply. So both the things start going parallel, the price driven by demand increases and the future potential of supply increases. Than one day the huge quantity of supply starts coming into the market. Remember that in this process the speculators have increased in a big proportion and most of them are holding the zing at the moment. (In 2008, it was houses). With huge supply, everyone now scrambles to sell it. From a Seller suddenly it turns into a buyer market. And prices started crashing and many times they crash without real deal happening. Companies realize that they cannot sell their product so they start shutting down. Other companies around them start shutting down and it leads to a complete cascading effect. Lehman phenomena is the result of recession and not the cause of recession itself.
Now to come out of recession that supply demand mismatch has to go away. With time, more of speculators will start going out of the market selling it to the people who actually need it. This will start to bring down the supply. Also most of the new supply stops by this time as again the speculators on the side of supply business start winding their operations. This again brings the demand and supply to match and the demand starts its normal growth path. This will again start opening up the demand and than for the supplier to increase their capacity. The increase in capacity will look for more people to be employed who will pent up the demand of other things and economy starts functioning normally till the next zing thing is found. So brace for that to happen and it's actually already happening. If you see more people have started visiting the Cake shop or Coffee shop at the corner than the recovery is happening. And it's better not to worry about when it will happen but rather to worry about what you should do. Remember recession is very individual in nature, so look for opportunities.

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