Recessions Could Be More Frequent in the Future

By on September 20, 2010

The Economist magazine speculates that recessions could revert to their previous frequency due to the unwinding of the giant credit bubble. There will be serious implications for popular asset classes.

Another very important factor is the length of economic cycles. If you go back to 1854, the average US cycle has lasted 56 months. After 1982, in the “great moderation” the average cycle lengthened to 106 months, almost twice as long. This seems to be down to credit availability; in the absence of a gold standard, the authorities could ease policy and stave off recessions.

But if we have reached the end-game of the debt super-cycle, then recessions will be more frequent. The last recession started in December 2007; if the cycle is 56 months, the next one is thus due in August 2012, less than two years away. Such short, sharp shocks make high-yield bonds look a very bad investment. The asset category changed in character during the great moderation; junk bonds used to be investment grade bonds gone bad, but after the mid-1980s, companies issued primary debt at junk yields. An economic cycle that lasts almost nine years gives investors a chance to earn their yield and get out before the bust; a cycle that lasts less than five years makes that much more difficult. The same principle applies to private equity.

Source: The Economist
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