Prudential Panel Assesses Impact of “Great Recession”

New York
There may be signs of an economic recovery but the more lasting impact of the “Great Recession” is how it will shape the behavior of Americans going forward, according to the assessment of a panel of experts on Aug. 18.

The discussion took place in New York during an economic mid-year outlook conducted by Prudential Financial, Newark, N.J.

Characteristics of the severe market downturn included a global nature that impacted countries worldwide, an accompanying financial crisis and the collapse of the housing market, according to Edward Keon, managing director and portfolio manager-quantitative management associates.

Keon said that “I think at some point in the future, we will find out that we were very close to a complete collapse.”

The event will shape Americans’ behavior going forward, he continued. For instance, Keon noted that “the home equity extraction game is over. Cheap home equity credit won’t be there.”

That tightening of home equity will have ripples, reducing home remodeling work which is often funded by home equity dollars and resulting in a less mobile society since people cannot readily sell their homes, Keon noted.

Keon said that consumers’ “new found frugality” will last a year or two before they once again become more comfortable with spending.

But, Quincy Krosby, chief market strategist with Prudential Annuities, advises “Don’t underestimate the U.S. consumer.” Krosby says that “as prices get slashed, you’ll see them come out and spend.” However, she says that the return to spending won’t represent 70% of GDP.

The recession could impact the economy in unexpected ways, she adds. For instance, during a recent REIT meeting, she said that for those ready for nursing home care, the question was asked, “How will you go into an old age home if you can’t sell your house?”

Crosby says that the recovery of the market is based on the stabilization of macroeconomic data and that normal “creative destruction” in which a market tears down in order to rebuild is being replaced by “ersatz creative destruction.” This will be good for equity markets because it will allow for more normal consolidation and will lower the unemployment rate but will also hinder the recovery process, she explains.

The “ersatz” process has been created by fiscal and monetary stimulus which will continue until growth returns, according to Krosby. She explains that Americans won’t stand for extremely high levels of unemployment that might occur if ‘creative destruction’ were allowed to run its course.

Robert Tipp, managing director and chief investment strategist at Prudential, said that there should be a windup in the economy in the next 6-12 months which will impact short to intermediate securities. But because of the tremendous selloff, fixed income securities are in a “sweet spot,” he continues. However, Tipp added that the issues of uncertain liquidity and volatility will likely continue.

Rick Romano, a principal and portfolio manager with PREI, a Prudential unit, says that there are signs of economic recovery. There is a .9 correlation to REIT performance and the economy and REITS are up 72%, he said. The recovery in the real estate market will be in about 18 months, he added.