It’s coming… next recession. (not us but then again will affect us)

It’s not a prediction for Malaysia but then again, if it does happen to the largest economy in the world, it will affect us yeah. It’s only by how much. Article in TheStar here. Another recession is looming.  The article says that the reasons for this prediction is because the high level of asset prices today already looks like the earlier trend in house prices that preceded the 2008 crash. Somehow the prices were incorrectly inflated because the Federal Reserve policy of low interest rates went on for too long. This time however, expectations are that interest rates are rising and this will cause equity prices to fall and dragging down household wealth, consumer spending and economic activity.  When that happened, banks that held mortgages and mortgage-backed bonds saw their net worths decline sharply. In fact, a total of 140 US banks failed in 2009!

The article however says that properties are not as overvalued as they were in 2006 but the major risk of recession comes from a stock-market slowdown will shrink consumer spending and push the economy into a recession. The only reason for high stock prices today is because long-term interest rates are extremely low. Today the interest rate on 10-year Treasury notes is less than 3%, meaning the inflation-adjusted yield on those bonds is close to zero. Due to this, investors hunt for higher yields elsewhere and this is usually equities. (stocks) It does say that most recessions are short and shallow because Fed usually responds to recessions by cutting the federal-funds rate substantially. However, for this upcoming ones, the Fed will not have enough room to cut rates. It meant that if the recession do come, the recession will likely be deeper and longer than the usual recession. The final conclusion is quite alarming. The writer says this, “Unfortunately, there’s nothing at this point that the Federal Reserve or any other government actor can do to prevent that from happening.” Full article in TheStar here. 

Investments always carry with it some risks. However, look at it this way. If we bought stocks of a good company and the recession comes, the sales revenue of this company will usually go down. However, during the recession, all the other companies selling the same thing will also be affected. The not-so-good ones will usually wither. Then, when the economy recovers, guess what, much fewer companies are now operating. Suddenly, the stock price will appreciate. For property investments, if we are not having a long term view of 5 years or higher, I think it’s best not to go into the property market. It’s not usually that profitable for the property market unless it’s during a booming period. As for the booming period, it’s always a dangerous time too. Just look at buyers who bought in 2010 versus buyers who bought in 2012. The difference is pretty huge… So, news of a recession is just another thing that we will have to face when it comes to investments. Happy investing.

written on 29 Sept 2018

Next suggested article:  Earlier: Recession in Malaysia for 2018,most sectors down.


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