Is The Recession Over? My Gut-Check Impressions on the Future of Our Economy.

by Millionaire Mommy Next Door on August 12, 2009

in Economy,Investing,Mailbag,Real Estate

I’ve been receiving emails lately from people asking questions like:

“Is the stock market experiencing a true recovery or is this just a bear market rally?”
“Do you think we’ll see a V, W, U or L shaped recovery?”
“Should we expect deflation or inflation?”
“When will my house be worth as much as I paid for it?”
“How should I invest my money? Stocks, bonds, cash, real estate, gold, or foreign currencies?”
“Is the recession really over?”

Some are saying that I’m prescient (have knowledge of events before they take place). As much as I wish this were true, it isn’t, I promise. I got out of real estate and stocks before many others simply because I stopped listening to mainstream and acknowledged the writing that was already plastered on the proverbial wall.

Like many of you, I hear and read convincing forecasts made by a variety of so called experts who support opposing arguments and recommendations. And each time, I try like hell to take a step back and take a gut check. What seems to make the most sense to me? Is there evidence to support it and if so, who or what is the source? What emotion am I feeling and what does this emotion “want” me to think? What is the worst thing that can happen if a particular forecast comes true? How can I reduce the risks associated with various outcomes? And last but not least, what decisions will allow me to sleep well at night?

I’m hesitant to share my recession outcome opinions with others for a few reasons: 1) I don’t want anyone to make decisions based on my guesses, 2) Discussion of possible outcomes often turns to politics — and political discussion tends to get overheated, 3) Some might take perverse joy from pointing to this post in the future, with a wagging finger, telling me how wrong my guesses ended up.

But I’ve decided that I’m as entitled to guesstimate forecasts as anyone else, so here it goes, for nothing more than entertainment value and for exposing my potential bias. Normally I provide hyperlinks to information, statistics and educated opinions that support my writing, but not today. If you want to read the news or hear what the “experts” are saying about this stuff, use Google, turn on the boob tube, crank the radio or grab any newspaper. There is no shortage of opinions thrown about. Please come to your own conclusions.

Here are my gut-check guesstimates on the future of the economy:

I think the stock market will climb a bit more, then retest the March lows. Minus some funky blips, I think we’re in for a long “L” shaped recovery; or really, one that looks more like a long bathtub:

(March ’09)    /\_____________/    (several years later)

Note: The bottom of my tub diagram should have an overall slow gradual curve to it plus a few wicked and jagged up-down points but I don’t know how to illustrate this with my keyboard. My bathtub edges should look taller, too. If it wasn’t so close to my bedtime, I’d draw you a picture instead…

I think we’ll continue to experience deflationary pressure. I think the Fed will continue to “stimulate” the economy but will face an upward battle trying to make it stick. If and when deflation is curbed, measures will be needed to tighten the money supply to prevent hyperinflation. I think these measures will be taken. From what I understand, it is easier to curb inflation than it is to stop a deflationary spiral.

I think housing prices have further to fall in most areas. Besides the probability of an overcorrection, Baby Boomers are beginning to hit retirement age and because much of their net worth in real estate and stocks has been wiped out, they will be downsizing en masse. McMansions will languish on the market or they’ll be repurposed into multi-family or extended-family units. Commercial property will be hit with a sledgehammer.

I think I will continue to stash most of my cash because with deflation, cash is king. When I do buy ETFs (only the ones that are experiencing upward momentum), I will keep tight stop losses in place. I will take a look at the currency market (certainly not my area of expertise) to see whether or not it’s a good fit for me. Overall, during this extremely volatile market, my main focus is capital preservation. This keeps me sleeping as snug as a bug in a rug.

In this economy, I think one of the best places to invest is in one’s own skills and education. I think vocational schools will see an increase in enrollment while universities see a marked decrease.

Entrepreneurs most likely to succeed will be the ones who bootstrap, sell low-priced necessity items, entertainment or services and keep overhead extremely low. Most of them will operate from in-home offices.

Because I think prices will continue to fall, I will continue to put off large purchases.

And finally, as painful as the process is likely to be, I think the Great Recession will ultimately be the Great Shake Up our society and planet needs to get on the financially and ecologically sustainable track. (Wow, that’s a mouthful.)

Okay, now it’s your turn. What do YOU see in your magic crystal ball? Please share your opinions and guesstimates in the comments. Have fun and play nice.

Relevant Post: Hyperinflation or Prolonged Deflation? Coping and Investing Strategies For Either Scenario

{ 11 comments… read them below or add one }

MoneyEnergy August 13, 2009 at 1:01 am

Nicely written…. for the first time, today, in listening to some commentary, I was able to see the strength of the argument for continued deflationary pressure. For me, it’s much easier to connect the high inflationary dots than it is to imagine deflation. Of course it has nothing to do with anyone’s imagination, it’s about basic cause and effect and only several months later can we say which may have been happening.

I’ve tried to focus on what investments and what other measures I can take that will help me out regardless of whether the scenario is inflation or deflation. While gold provides no cashflow, it seems it would be great to have for inflationary times, but would just be “ok” for deflation (at least it will always preserve your capital). Cash as you say is great for deflation but can have horrible downside if high inflation sets in, even gradually. But if you can find stocks of really high-quality companies with “essential” products whose markets would still experience “growth” in either scenario *and* they pay a growing dividend, I think that might be the best. Even if inflation soars, the dividends will likely also rise – and you can take that cash and either spend it right away or invest it in something like gold to further protect your cashflow. At least dividends give you options. In a deflationary environment, or just a recession, they can be cut, though. So they can’t be your main source of income.

As for stop losses, that’s something I need to learn how to do – I’ve been putting it off. But it does sound like a smart idea, especially when you’ve got really large sums invested that you are depending on for retirement, etc.

Sorry for the long comment! But I think it’s really important to be thinking about this topic! Great post, thanks.

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Heather August 13, 2009 at 8:01 am

Thank you for sharing your conclusions. I 100% agree with you. We are staying put in our 100 year old farm house on 3 acres and continuing to simplify our life. We are working hard to become 100% debt free. My husband is self employed in construction so we live as frugally as possible. Cash is king. Our nation does need a real wake up call…. real change in our spending/management habits. I appreciate your input.

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Chad @ Sentient Money August 13, 2009 at 8:23 am

I couldn’t agree more with your analysis. It is very similar to what I have been thinking and backing up with real numbers. From my vantage point the poor performance of the market and the economy over an extended period of time (it will be years) is easy to see. Unfortunately, it seems like we are heading towards a Japanese style dead economy.

I am about 90% cash at this time. My investment strategy is to stay away from the majority of U.S. and European stocks, and begin looking for a good entry point in the BRIC countries and a few other developing markets. I do not see a good entry point for any stock market at this time. Though, September and October, historically the two worst months in the stock market, are fast approaching. It is possible the BRIC markets might be a good buy then with a select few U.S. companies.

I will also be looking for a good entry point into commodities, which will probably be the largest portion of my portfolio. The continued shrinking or stagnate natural resources will be asked to provide for an increasingly more Westernized world population. Thus, it is almost inconceivable commodities won’t continue to rise over an extended period of time. However, I will wait for a pull back in commodities before I do put any money to work.

Both, unfortunately and fortunately, I think we are alive at one of those times that will be featured in history books. This event will be large enough and long enough to significantly change our society and culture, just like the Great Depression and WWII.

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IdleMindOfBeth August 13, 2009 at 10:51 am

yes. yes, yes and YES!

I’ll go one (very unpopular) step further though, and say that this “market correction” will force us all back into those recently unpopular notions of living within our means, saving for big ticket items, becoming more and more self-sufficient, and hopefully even a return to home-centered single income families.

We’ve lived through an era of unprecedented growth, which created a society built upon unprecedented greed. It’s time we all take a step back and re-evaluate our priorities.

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Randy August 13, 2009 at 10:55 am

Hey I just was referred to your blog by a friend. I really like it!

I continue to be in the “W” camp as far as markets go, which the last two posts on my blog (www.randygoldring.com) talk about.

I was a Wall Streeter for many years, and then I had alot of forshadowing about the Great Recession when my recruitment/publishing company saw hiring freeze up in Jan 2008. My take is that although the market has reasons to have lifted itself from it’s Oct 2008 to July 2009 trading range of 8,000-9,0000……just because large corporations were able to reduce costs drastically enough so they could still prosper with far lower revenues…without the consumer feeling the job market improve, markets will come back down with fear (the third leg of a “W”).

The twist I add is that I think the final leg up of the “W” occurs next summer as the American habit of “throwing the current bums out of office” leads to confidence that a divided govenernment (ie Republicans retake the House of Representatives) will force fiscal discipline….and add some actual bi-partisianship for the first time in over a decade.

I appreciate you making a prediction on market outcomes. Personally, I justed started doing that with some of my more recent posts. I like the idea that the opinion is there in lasting “cyber-print”. One issue I always felt about “talking heads” is that they never own up to when they’re wildly wrong…and there’s nobody who keeps old newspapers/TV clips to remind them of their poor projections.?
Thanks,
Randy Goldring

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funkright August 13, 2009 at 1:54 pm

Your comment ‘In this economy, I think one of the best places to invest is in one’s own skills and education.. (and entrepreneurship)’ is one I have been espousing for quite some time, to any and all who will listen. There is no better time than the present, as society is and will continue to change, and you can lead through example.

And, good Lord, we are in need of strong leadership, one man cannot change humanity or a country, it is only through the conscious will and efforts of millions that a new and better world can be created.

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Trent Hamm August 13, 2009 at 4:07 pm

The recession is over when the panic peaks, which was roughly last November.

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funkright August 13, 2009 at 5:16 pm

“The recession is over when the panic peaks, which was roughly last November….?”

Hmmm… maybe you want to inform the millions of people who’ve been ‘displaced’ through layoffs and the like since that point…?

The Forbes 500 alone, Layoff Tracker, Number of layoffs since Nov. 1, 2008, at America’s 500 largest public companies: 595,355

Looking at the USA as a whole, since last November, you’re up around 3.5 Million..

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ElizabethG August 14, 2009 at 9:04 am

Interesting post. Here are my 2 cents (now worth about 1.993) I think there are two fundamental trends going on, one cyclical and the other secular. From a cyclical standpoint, things seem to have improved, the ultimate panic and potential real banking crisis and credit dead-lock seems to have abated. This will continue to be volatile and the stock market tends to lead, rather than lag, cyclical moves.

The second trend is secular where the US economy is shifting from manufacturing toward something else, and the painful transition in the labor markets continues. For the median worker, I do not see real wages going up in this long-term secular decline. I hope you are right that things remake themselves into a much more sustainable economy, but frankly I think we will need more of a sense of crisis.

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Little House August 19, 2009 at 6:52 pm

I agree with your outlook on our future economy. I do think it will be a while before we see any real improvements in the stock market or employment or the economy as a whole. I think that some people will begin to live within their means and stick with it.

However, I’m not 100% convinced that when the goods times roll again, that those who had to tighten their belts, will continue on that path. The media and advertisers would need to begin promoting self-sustainability, and I don’t see that yet. So many people are highly influenced through television and until commercials begin reducing the idea of consumption, I don’t see this being a long-term trend. Hopefully I’m dead wrong on this last comment. :)

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Quentin Lewis August 26, 2009 at 12:09 pm

I like your commentary….and think you might just be right.

I think a lot of the future change that happens in the US economy will depend on what we bring to the table in terms of our value to the world.

Currently, our value is that we are consumers….we USE all the stuff THEY make….so China is happy to fund our addiction in order to bootstrap their productive capability….but don’t for a minute think they will FORGET the money we owe them when they replace our consumption with internal consumption of their own.

So all this will affect the value of the dollar and so the cost of goods in the USA……so I have a bit of money in foreign currencies as a hedge against dollar loss of value. I think this is a long term problem, not one for the next year….but people seem to think that if it happens, it will happen quickly!

China will replace us as the largest consumer nation within 20 years….maybe sooner if they continue to grow at 8% and we are stagnant. Again….once they replace us, they have no need to lend to us…and will ask for their money back!

Let’s NOT let the government run all our infrastructure, because it will be that same government (that’s us) that will owe the money….and that will mean not only high taxes (which are just going to happen once the bills need to be paid) but if they say run Healthcare, it will mean a major crimp on their budgets for this and other stuff.

Deflation / Inflation….guessing inflation because of above….on the other hand, if we are still in the money borrowing mode, it will just KILL us because we will be paying high rates on money we borrow.

But people in the USA like spending “other people’s money”, so I expect the votes to expand government spending to “support us” will keep going on and on…..so if you are a saver….watch your wallet….it will be picked. (heck, debtors have no money….so we savers will have to be separated from our savings!)

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