How Bad the Recession? Waiting for the Other Shoe to drop!

Someone said it isn't rocket science to believe that the combination of the worst housing meltdown in 30 years, the worst financial crisis since the Great Depression, the bursting of the worst consumer debt bubble and the greatest government debt exposure in history, would result in a worse than usual economic recession.

Are we in a recession? Yes, it is official!
http://abclocal.go.com/ktrk/story?section=news/national_world&id=6460443

So what's next? Well, now there is talk about a severe "global" recession! Beyond that, your guess is as good as mine. However, the stock market is in what is considered to be an "oversold" condition and the value of some stocks is way, way below their norms. Some say this is a good time to go cherry picking.

We may get a nice rally at some point before the end of the year, as people recover from their initial shock and begin purchasing stocks again. But is the worst over? I doubt it, as in, we probably are not yet at the bottom of this bear market. It is typical in bear markets to experience a rally or rallies. These can result in an upswing of 10 to 20%, or more. However, the trend will remain downward until we reach the "market bottom". So we can expect a few more ups and downs and accompanying noise in the media.

If this recession is similar to the recessions of 1973-75 and 1981-82, unemployment will reach a peak of 10.8% and the recession will have a duration of 16 months. The current recession, if it lasts 16 months, would not end until the first quarter of 2010.

The Futurist has some data on past recessions which can be a guide: http://www.singularity2050.com/2008/10/a-history-of-stock-market-bottoms.html

However, some are predicting a long, drawn out decline that will continue until 2020! It is worth considering that substantial mortgage resets will continue into 2012. As for the duration of this recession, what's true? Well, this recession is the result of some "worst ever" events as I described above, so it would be reasonable to expect that it could very easily last longer or, be somewhat drawn out. It could be like the Japanese decline of 13 years (90%!) from 1990 to 2003, or it could be similar to the sideways U.S. market that lasted for 15 years from 1960 to 1975. It should be noted that the Japanese lowered their interest rates all the way to 0% during that country's prolonged recession, and it didn't help.

So here's an interesting chart that demonstrates the effect over several bear markets, and a scatter diagram:
http://dshort.com/charts/bear-markets.html?three-bears

http://dshort.com/charts/bear-markets.html?bear-scatter-chart

Additional note added 10/23/08:
What will it take to get this economy moving and the financial markets back to normal? Possibly time. According to the WSJ, which quoted Moody's, Economy.com: "About 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, with 4.3 million of those losing their homes." That will take some time to sort out. Today Federal Deposit Insurance Corp. Chairman Sheila Bair "suggested the government give banks a financial incentive to turn troubled loans into more-affordable mortgages." In a prepared statement and testimony before the Senate Banking Committee, she cited the experience of the FDIC has had modifying the mortgages it acquired from failed thrift IndyMac Bancorp. Ms. Bair testified that the FDIC program is in its early stages, but that more than 3,500 borrowers have accepted the proposed modifications. There is a thorny problem in all of this. Consider the politics. The government purchases bad mortgages. Fine. But what happens when homeowners go delinquent on these government backed mortgages? Who is going to be the fall guy for ejecting thousand of home owners, those "little guys" and "families" out of their homes when they do default? And it is a sure thing that some of these people will default. The situation is that dire, and as the economy cools, unemployment will increase 3 to 5 percent. Some people will get burned.

Chairman Bair's testimony should be available on the FDIC website:
http://www.fdic.gov/news/news/speeches/chairman/spoct2308.html

Several comments:

1. 3500 out of 7.3 million expected defaults is less than 0.05% of the mortgages which will default. We have a long, long way to go! I would be inclined to apply a margin of error to the foreclosure numbers in Chairman Bair's statement of +/-50% and that means that it is possible that 10 million homeowners could default!
2. A default of 10 million would essentially reverse the housing gains made in the past 10 years. See: http://www.frbsf.org/publications/economics/letter/2006/el2006-30.html