- January 1980 -- stocks ripped by nearly 8% that month just as the economy was entering recession; and
- June 1990 -- stocks ramped by 3.5% that month as we also entered recession then.
This blog post originally appeared on RealMoney Silver on Oct. 3 at 8:31 a.m. EDT. Last night, I appeared on CNBC's "Kudlow & Company" and went face to face with Larry Kudlow and Dr. Arthur Laffer, but this time, I had Herb Greenberg in my corner. Larry and Dr. Laffer argued that the all-time high in personal net worth and the surge in equity prices are safeguards against a recession in the U.S. Herb and I disagreed. What follows are the arguments I used. I said that the stock market is now assuming a more critical role in the domestic economy than ever and that relying on such an asset to sustain economic growth was a slippery slope for both the economy and for investors. Far too much could go wrong. I asserted that economic bears (such as myself) contend that a record high in consumer debt service as a percentage of disposable income, combined with two years of massive mortgage resets, pose a considerable headwind to personal consumption expenditures in 2007-2008. When pressed again with the all-time high in personal net worth argument, I told my opponents that there are three parts to net worth: individually owned businesses; stocks and equities; and housing. And housing is being taken out from underneath the consumer, which in turn has resulted in an economic over-reliance on share prices. In support of my argument, I illustrated the expectation for 2007-2011 home prices, according to market participants in the Case-Shiller futures market. That market, which is predicting mid-single-digit home price declines in 2007, anticipates that by 2011 there will be as much as a 25% cumulative price drop in several key housing markets, with most markets seeing 15% to 20% cumulative declines in the five-year period.
Already, the two states at the epicenter of home speculation (Florida and California) are entering (or are in) a recession. (In my home state, Florida, retail sales have been negative for several months, and Dr. Laffer agreed that the same fate may face California.) I then told Larry and Dr. Laffer that ample academic evidence suggests that changes in home prices have an outsized impact of wealth vis-à-vis stock price changes. I cited a Fed study performed by Drs. Christoper Carroll, Misuzu Otsuka and Jirka Slacalek -- highlighted in The Economist magazine a year ago -- that concluded a $100 increase in housing wealth in the U.S. eventually boosts spending by $9 but that a similar increase in stock market wealth would produce only about a $4 increase in spending. In the second segment, former Treasury Secretary and Harvard President Larry Summers seemed to support my case that it was only a matter of time until the real economy is affected by the depression in housing. Moreover, he alluded to a political sea change that could result in the politics of trade protectionism and higher corporate and individual tax rates -- headwinds that I have addressed recently. Larry Kudlow continued to use the record level of stock prices as an argument against a recession, but I pointed out that there was ample evidence that a recession can and will start coincident with high stock prices. I cited the recessions that began: