Independent Investor: The Recession Is Over
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The National Bureau of Economic Research is the final arbiter of exactly when recessions begin and end in this country and it will be quite a while before that august institution declares the exact date of the recession's demise. Going into this recession, I recall that the Bush administration refused to let anyone in the government utter the "R" word until the fall of 2008. By then, the recession was in its eighth or ninth month but it was almost a year before the NBER made it official.
Given that I work for a money management firm and Allen Harris, the owner, is an economist by trade, I asked his forecast on the economy. He agrees, the recession "has nearly ended and the recovery is beginning."
However, Harris' forecast is not all wine and roses.
"We expect a saucer-shaped recovery where economic output stops contracting and remains very weak (below trend, at about 1 percent to 2.5 percent) for nearly a year (mid-2010) before U.S. GDP growth gets to a point where it can sustain something closer to 3 percent."
Now much of that weakness can be blamed on a variety of factors. Employment for one, which is still falling sharply and will continue to do so since it is one of those economic indicators that lag the economy. Another factor is the massive losses suffered by financial institutions. Those bad loans have not disappeared. They still exist on the government's books. It will take a long time for the government to unwind these toxic assets and while they do, this deleveraging process will limit the ability of banks to lend, companies to invest and households to borrow and spend.
Speaking of households, the consumer will not fulfill his/her usual function of spending the economy out of recession. Faced with a mountain of debt, falling home prices, a loss of wealth via the stock market and worries about shrinking income and job loss, consumers need to cut spending and save more than they have in decades.
Then there is the financial system as a whole. Fed Chairman Ben Bernanke has made it clear that the financial sector is not yet out of the woods and that it will take more time than we suspect for it to rebuild.
Nouriel Roubini, an economist at my old alma mater, the Stern School of Business at New York University, believes there is a rising risk of a double-dip, W-shaped recession. A noted Bear, who correctly warned investors of both the recession and decline in the stock market last year, worries that all the fiscal and monetary stimulus that the government used to pull us from the brink of collapse now threatens our economic recovery. I understand his fears and he could be right.
By now, just about every American understands that the government has piled up massive debt (called the deficit) to bail out Wall Street and the economy. This year, the deficit will swell to $1.6 trillion, which is over three times last year's record deficit of $455 billion. Between 2010-2019, the cumulative deficit forecasts range from $7.14 trillion to over $9 trillion depending upon one's assumptions.
Our national debt is so large that going into more debt (even for a good cause like healthcare) makes our stomachs flip flop. The Obama Administration understands this and so does the Congressional Budget Office (CBO). Both have warned that down the road something will need to be done to contain our rising deficits. The usual tools to accomplish this are raising taxes, cutting spending and jacking up interest rates. However, in a weak economy, there is a risk that taking those actions will send us into stagflation.
"We face perils in acting and perils in not acting," acknowledged CBO Director Douglas Elmendorf this week.
If the government does nothing while spending and deficits continue to increase and easy money policies proliferate then the bond market will act on its own. Buyers of bonds will go on strike until interest rates rise across the board in order to compensate them for what they will perceive as runaway inflation. That will make it increasingly difficult for corporations and consumers alike to borrow at a reasonable rate. In the end we would get the same thing — a stagnating economy and high inflation.
Harris acknowledges that a double-dip recession could happen but gives it a small probability. He argues that government spending always fills in the demand gap coming out of a recession and that there is nothing unusual this time around.
"W-shaped recessions are extremely rare but one did happen during the 1980-82 time frame," he says, "As a result, I think people are over-emphasizing that possibility."
Bill Schmick is a registered investment adviser and portfolio manager with Berkshire Money Management (BMM), managing over $180 million for Americans in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at
1-888-232-6072
(toll free) or at wschmick@berkshiremm.com. Visit www.afewdollarsmore.com for more of Bill’s insights.Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM.
