Alexander Yoshizuka-Panijel
Professor Creaney
ENGL 110
11/29/2019
Blanketed Recession
The notion of an impending recession has seemingly dissipated among mainstream media over the news of stock markets reaching new records and the bond yield curve not inverted anymore. Though these news have eased the concerns of many, and seemingly put to rest the idea of a recession, this should not disregard alarming facts. The current economy is stimulated by tentative stimuli, such as low interest rates and corporate tax cuts, whilerecessional indicators, such as the bond yield that inverted and slowing global & national growth rates, especially in manufacturing and agriculture, due to the trade war, are ever present.
There is a theory in the world of finance that claims all the biggest moves, changes in stock market prices, have already happened before the ordinary investor, such as I, can act on them. Stocks are driven by supply and demand, as well as bonds but they are also influenced by interest rates and inflation, so the more people demand a certain stock or bond the higher the price rises. Thus, the top 0.1% holders of wealth have an incredible influence on the stock and bond market as they are able to buy in millions opposed to ordinary investors who can afford at most in the 100 thousand range. However, hardly any of the rich know much about investing.
Institutions, such as Goldmansachs, JPMorgan & Chase, and Morgan Stanley, take charge of these enormous amounts of wealth and make sure that they make a return on their investment – that is the core premise of their businesses. These institutions acquire the best equipment, technology, and talent to ensure returns on their clients. These institutions, however, are exclusive to people with a certain amount of wealth already in their hands; essentially, to the ultra-rich.
Recently, the bond yield, the return an investor realizes on a bond, inverted. This means that the yields for long term bonds, 30 years, which are meant to yield more than short term bonds, 3-6 months, because long term investments are considered riskier in finance, yielded less than the 3-6 month short term bonds. This makes no sense and can only be explained by large activity in the long-term bond market. When great amounts of money are poured into the long-term bond market, the yield invariably drops because it no longer needs to have a high yield to attract demand as that has been satiated. The short-term bond market stays more or less constant in price and the result is an inversion. An explanation of why these large institutions have poured lots of money into the bond market is because they perceive the stock market as unsafe, and to protect their client’s money, they reallocate their wealth to the safer, but the much less lucrative bond market. With the plethora of resources and talent that are matched by none, these institutions are able to stay ahead of the curve in predicting the direction of the economy. Goldmansachs was one of the only financial institutions who were able to make a profit by betting that the housing market would crash in 2008.
This inversion of the yield curve, an omen from the largest institutions on earth, are the reason people are so frightened by it; more so, because It has preceded all recessions in history. Though it is no longer inverted, the fact that it even inverted should be enough grounds to prepare for a recession and not indulge over news of the stock market breaking records.
The official definition of a recessions is a fall in GDP, an economy’s output of goods & services, for two consecutive quarters, out of 4 quarters a year. The GDP has to become negative for two consecutive quarters for an economy to be in a recession (Chappelow). A decrease in quarterly percentage growth does not indicate a recession, the economy is growing but at a slower pace. It is when GDP becomes negative, a contraction in output, there is a risk of a recession nearby.
On March 31st of 2017, Trump signed the executive order for tighter tariffs on imported goods & services from China. Subsequently, the customaryretaliatory tariffs were imposed by China on U.S goods & services (“U.S.-China Trade War Timeline: What’s Happened Since May 2019.”). This embarked the long, volatile, detrimental, and still continuing saga of the trade war.
Trade is a highly intricate ‘web’ system of interconnected countries where disruption in one section of the ‘web’ will lead to repercussions throughout the whole ‘web’. This is especially true when the two biggest economies in this system engage in a trade war. The nitty-gritty of the detriments caused by the trade war is a paper on its own, thus, a holistic overview of the detriments of trade wars will be discussed. In particular, the manufacturing and agriculture sector.
The manufacturing and agriculture are integral sectors to the health of an economy. The retaliatory tariffs imposed by China ultimately affect the primary sectors in the supply chain – agriculture and manufacturing. Though manufacturing is considered to be less important to the economy as before, a decline in manufacturing is still considered an important indicator of a recession as it reflects changes in business sentiments (Gibson). A decline in manufacturing is indicative of weaker business confidence, which translates to lowers investments and subsequently less output for the economy. This is the beginning of a downward spiral in an economy. Unemployment rises due to less output needed, finding jobs become difficult, welfare among the people decline leading to depression. This is all output that is lost forever and not able to be regained.
The reason I named the following stimuli, low interest rates and tax cuts, tentative is because they are not sustainable. They will eventually need to be compensated by the opposite policy, such as an increase in interest rates and taxes. The latter can be compensated differently through cuts in other sections of the government budget, such as social security, student aid, and public infrastructure (“Policy Tools”).
Interest rate control is one of two monetary policy, policy used by the FED, used to direct the U.S economy to either expand or contract. Over concerns of slowing global growth and the trade war, the FED has lowered interest rates three times this year (DeCambre). This encourages people to save less and consume more and makes business investments more appealing as the cost of loans, interest rates, decrease.
Tentative stimuli are scarce and maintaining a stable national debt should be prioritized over delaying the inevitable recession. Using up monetary policy will put the economy in an awkward position like Japan is in. Japan kept lowering interest rates to boost lackluster consumer expenditure to stimulate growth. The staggering growth pressured the central bank in Japan to keep lowering interest rates to eventually negative interest rates which turned out to have an adverse effect on the economy. The following highly developed countries have also experienced what Japan has experienced: Sweden, Switzerland, Denmark, and the EU (Ross). The FED should let the U.S economy go into a light recession and as holding it off could be worse and end up putting the U.S in the same position as japan is in, out of monetary policy to stimulate growth and in a constant state of staggering growth.
The stock market is climbing towards new records, not by irrational exuberance, but by strong concrete earnings from firms. These quarterly reports are due to the tax cuts the Trump administration implemented last year and is not ‘real’ growth. It is short term growth that has come at the worse time. It has completely dismissed the notion of a recession and has convinced everyone that this will keep going forever, the exact same sentiment that prevailed leading up to the 2008 financial crisis. The stock market also does not indicate where the economy stands, only in the long term when all emotional exuberance has subsided does the stock market faithfully represent where each firm is standing in terms of stock price and market capitalization (How much the firm is worth). The greatest concern is currently the trade war between U.S and China. This has spread detrimental ramifications not just in the U.S, but also globally. So far, nationally, the manufacturing sector has gone into a decline, which reflects weakening business confidence. This will ultimately slow growth to a point where a recession is imminent without preparation by all parties: consumers, firms, and the government. These kinds of recession, ones that come with no anticipation, are the most detrimental as seen in 2008. As nice it is to indulge in wishful thinking, to think that the recessionary talks that plagued every media outlet stemmed purely from irrational fear and panic, as the media is currently doing right now with news of new stock market records, is quite simply erroneous.
Rhetorical Analysis: “Policy Tools.” Board of Governors of the Federal Reserve System, 31 Oct. 2019, https://www.federalreserve.gov/monetarypolicy/openmarket.htm.
Author:
A specific author is not given for any of its publications. The best generalization is that it is the United States Government, more specifically, the Board of Governors of the Federal Reserve System.
Audience:
The general public with internet access as it is accessed through a website. More specifically, the American people as it is about an American institution that wields enormous influences on their lives. However, the influence is as much present in the U.S as it is globally, thus it attracts a very wide range of audiences. The information presented and its
Purpose:
It is to inform people of the purpose, role, structure, and goals of the FED. It can also be interpreted as to gain trust and reliability from the people. This informative website increases transparency, thus, increasing trust throughout.
Stance:
Though there should be no stance for an informative, it generally regards the FED as a trustable and transparent institution working for the favor of the economy and not for any politician.
Tone:
The tone in this informative is solemn, serious, and informative. It is evident in this quote: “The changing nature of risks and fluctuations in financial markets and the broader economy require timely monitoring of the effects of conditions in domestic and foreign financial markets on financial institutions and even in the nonfinancial sector in order to identify the buildup of vulnerabilities that might require further study or policy action.” That it is purely informative. This sets the tone of solemnness and a strong sense of importance regarding the objectives of the federal reserve.
Language:
The language used is formal, non-biased, specific, and concise. It is evident in this quote: “The Federal Reserve monitors leverage in the banking sector with the help of an extensive data collection program.” the website does not spare any words and gets right to the point. It is impartial and direct to the point.
Medium:
The medium is a website page. This allows access from virtually everywhere in the world as long as there is internet access and no censorship from the state they live in. This makes it the most ubiquitous medium of today.
Shareholder Letter
To our Shareholders:
YP corporation has overcome many obstacles and triumphed in a time of economic downturn. Despite dampening consumer expenditure and confidence, we have increased subscription of our service by 30% this year, 20.3 million users to 26.39 million and generated revenue of $80 million, up 20 percent from last year. We, most importantly, have been able to maintain market share of 40% despite new competitors in the market. We have allocated much of the company’s capital to research and development to remain as the market leader with new innovative services.
YP corporation is here for the long term, our performance during the current economic turmoil has shown we are robust, resilient, and strongly rooted as the market leader. Being the market leader in this nascent economy of e-commerce is one that we strive for over all else. It is what will ultimately bring us higher revenue, profits, and return on capital.
To conclude this letter, I present our vision for expansion. We wish to acquire foreign e-commerce business Rakuten. This Japanese e-commerce business is the current market leader in Japan with Amazon trailing behind it. Talks of acquisition have so far been successful as Rakuten themselves are interested in the American consumer market. The main worry here is the great disparity in cultures, this potential issue has been brought up countless times during negotiations and we must move diligently and vigilantly as the disparity of cultures are often the downfall of corporations wishing to expand to foreign countries.
My second genre is a shareholder letter; a letter written by a top executive to the shareholders. It is a letter that garners much attention as it includes basic statistical achievements, but more importantly, the vision the top executive has for the company. This genre, I believe, is the most appropriate in relation to my topic of Economics as I speak a lot about the influences and roles of firms during recessions. This genre encapsulates the importance of business and consumer sentiment during recessions.
Works Cited:
Chappelow, Jim. “Recession Definition.” Investopedia, Investopedia, 18 Nov. 2019, https://www.investopedia.com/terms/r/recession.asp.
DeCambre, Mark. “Why Would the Fed Cut Interest Rates a 3rd Time in a Row Even as Stocks near Records? Investors May Soon Find Out.” MarketWatch, 30 Oct. 2019, https://www.marketwatch.com/story/why-would-the-fed-cut-interest-rates-a-3rd-time-in-a-row-even-as-stocks-near-records-investors-may-soon-find-out-2019-10-27.
Gibson, Kate. “U.S. Manufacturing Is in a Recession. What Does That Mean for the Rest of the Country?” CBS News, CBS Interactive, https://www.cbsnews.com/news/u-s-manufacturing-is-in-a-recession-what-about-the-rest-of-the-country/.
“Policy Tools.” Board of Governors of the Federal Reserve System, 31 Oct. 2019, https://www.federalreserve.gov/monetarypolicy/openmarket.htm.
Ross, Sean. “Negative Interest Rates Are Not Working in Japan.” Investopedia, Investopedia, 18 Nov. 2019, https://www.investopedia.com/articles/markets/080716/why-negative-interest-rates-are-still-not-working-japan.asp.
“U.S.-China Trade War Timeline: What’s Happened Since May 2019.” Bloomberg.com, Bloomberg, 28 Aug. 2019, https://www.bloomberg.com/news/articles/2019-08-28/u-s-china-trade-war-timeline-what-s-happened-since-may-2019.
