1/18/2008

Welcome to the 2008 Recession!

The real art of conversation is not only to say the right thing at the right place but to leave unsaid the wrong thing at the tempting moment. - Dorothy Nevill

Economic wisdom's rule of thumb for a recession is two consecutive quarters of negative economic growth. Problem is, by the time the data finally gets in so those pencil-head economists can draw the grey shaded area on the charts, its six months too late. The stock market is a better indicator - a 20% decline from the high being an indicator we're in a bear market, and a bear market being a pretty good indicator that we've entered a recession.

We haven't quite reached the 20% mark yet, but it could be here in another week or so. In a Yahoo Finance poll I saw today, 67% of respondents felt the market would continue to go lower. That's not bearish enough for a bottom - you need to have something like 90% of the respondents throwing in the towel, and we are far from there yet. I don't want to sound alarmist, but the Dow has already broken long term technical support to the downside, and the next long term support level is around the 10000 range.

But the best indicator of a recession is "hard times". If you work for a bank, mortgage lender, or financial services company, I don't need to explain that one to you.

In Japan, where consumer spending only accounts for about 50% of the economy vs. 70% here in the States, they are in a pretty deep recession. The consumer in the U.S. of A. is tapped out, man. Not only does he not have any more credit, he's got a mortgage he cannot afford to pay whose outstanding balance is more than his house is worth.

Of course, the question that most people are now asking is: "How do we stop things from getting worse?" Well, we should probably just listen to the politicians! After all, combining an impending recession with an upcoming election means that every candidate is also now an award-winning economist.

The Fed really only has two tools to manipulate the economy - monetary policy (raising or lowering the discount rate), and fiscal policy ( government intervention via injection of funds, tax dollars, tax policy, or by shifting monies from one group of people to another).

Unfortunately, the Fed has been so psychotically preoccupied with fighting inflation that they failed to hear the recession ballad that the economy has been trumpeting since the subprime mortgage debacle materialized last year. Consequently, it is too late.

The politician "economists" all seem to believe that government intervention is the answer -- everything from tax rebates to rescue funds to extra state aid, it seems that every politician believes that handouts will trigger prosperity. Not!

Handouts, tax rebates, home heating oil payment schemes, and all the rest are just like giving cardiac defibrillation to a man who's already been dead for six hours. Oh sure, his heart may start up and beat a few times, but you've basically thrown the effort down the toilet. Like taking buckets of water from the deep end of the pool and pouring them into the shallow end. Nada!

There have been 10 recessions in the last 63 years. The average length has been about 10 months. The average decline in economic activity from peak to trough was about 2.5 percent. No decline has been worse than 3.7 percent.

In the past 25 years, there have only been 2 recessions. The two recessions, in the early 1990s and the 2000-2001 correction, have been brief.

When the Fed is fighting to promote expansion recessions tend to be brief. Real consumption doesn't fall for more than a few months in such cycles. It would be almost unheard of for there to be a year-on-year fall in retail sales from 2007-2008 if the Fed is actively pumping liquidity into the economy.

Unemployment always rises in recessions; usually about 2 percentage points. The average length of involuntary unemployment during recessions is about six weeks.

The real problem is to understand the long - term approach to fixing what's wrong. We are grossly overdependent on foreign oil, and our government is way too big and inefficient. Twenty years ago, the Saudis could open a few spigots and ease a global economic crisis. But with the kind of demand we have today for oil, that simply doesn't work any longer.

Corporate governance is racked by greed and lack of oversight. When supposedly big, smart companies like Citigroup and Merrill Lynch can have losses in the $10 - $20 Billion range from overinvestment in shaky, dubious sub-prime backed securities, some dumbass CEO and his staff are asleep at the switch, no?

We need to have a long-term, government mandated focus on true energy independence, new technologies, and a more efficient, leaner government.

To quote from a post of my own some time ago:

"Brazil today has ZERO dependence on foreign oil. If oil goes to $100 a barrel, it will hardly affect Brazil's economy at all. Now the U.S. of A., supposedly a superior country with more technical resources, could have done what Brazil started to implement 15 years ago, but it didn't. How come we "just don't get it" over here?"

So far, I haven't seen any indication that the candidates in any of the parties have the slightest clue what to do along these lines. With real leadership, this country could be 100% energy independent in 10 or 15 years. Do you see the plans? Leadership? I don't.

Enjoy the recession. It probably won't last more than a year or so. And we'll continue to forget the lessons of history until the next debacle.

N.B. I posted this on April 18th, two days before what will become known as "Black Monday". US markets were closed for the MLK holiday, but markets around the world were down 5, 6, and even 7 percent. US Stock futures traded down 550 points on the Dow Mini Index, so it looks like my predictions are OK.