Thursday, March 20, 2008

We Are In A Recession But What Type? A Comparison To Two Recent Recessions

Yes we are in a recession. However, It will be several more months before National Bureau of Economic Research is ready to declare it, so take this time to do a bit of comparison of this recession with two recent recessions.

Data Sources: U.S. Bureau Of Economic Analysis, Federal Reserve, and Wikipedia.
Factors To Think About
The significant factor at play right now in determining where the U.S. economy will go from here is the Consumer. With Consumer purchases making up about 65% of GDP (Investment is 17% and Govt. is 19%), any change in spending will have a direct effect on the economy. Moreover, personal savings is now negative, which means that people are now more dependent on the credit cards to pay for staples and necessities. As of January 2008, the total consumer debt outstanding was $2.5 trillion. If the consumer loan default rate goes up, as I think it will, then we will see some dark months ahead.

Fact tidbits:
1. Average credit card charge off rate is approximately 4.15% and growing.
2. Conference Board Consumer Confidence Index (1985=100) is now 75.0, down from 87.3 in January and 99.5 in September. Even during the 2001 recession, the confidence was above 100. On January 1991, it was as low as 55.1.

Can Anything Be Done To Revive The Economy?
Short of a major and direct government intervention of giving every American family a large check, say $50,000, there really isn’t much that anyone can do to get the consumer back into the market and kick-start the economy. Current administration is using a classic Keynesian and Monetary economic attempt at forestalling a recession by lowering rates and injecting liquidity into the financial institutions. Unfortunately, this is not going to work as the financial institutions themselves are afraid of being short of liquidity and are not lending sufficiently to restart the economy, a classic liquidity trap.

In a grand scheme of things, if one follows the Austrian economic theory of minimal interference in the market and letting the natural course of action take place then, I think, this recession shall too pass in eight to 14 months.

Fact Tidbit: We’ve spent more than $510 billion (or $1,700 for every American) in the Iraq War and are still spending $200 million a day. Economists are projecting that by the time we add up all of the cost of the war, including veteran health care and benefits, the total cost would exceed $1 trillion and perhaps reach $2 trillion. If this money had been instead invested in public works projects to fix our failing highway infrastructure ($1.6 trillion over 5 years required), or even build a coast-to-coast bullet train (according to NYT, China is building an 807-mile high-speed link between Beijing and Shanghai, which could cost $12 billion by 2008), then this economy would have been vastly different. Perhaps, we would be worrying about the end to the era of prosperity.

There are many confusing signs out there, especially from the ‘experts’ who recommend that you buy or sell based on what they ‘think’ the market will do. Filter these noises out and seek your investment path that is looking out longer than the next three months. After all, everything reverts back to the Mean. This means that if the market goes down, then it will trend back up and vice versa. Knowing this, look at the data from reliable, primary sources to help you make your investment decision rather than data that have been filtered through someone else, even if that filter is this one.

May Your Trading Be Profitable

Ed Kim

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