Many economists, prognosticators, financial pundits, stock brokers and financial planners have committed a big blunder or a big hoax by proclaiming this recession different from the rest and the worst since the great depression. The fact is I believe this recession is no different from the previous post war recessions. Those who share my belief have made a lot of money in the stock market during this recession. In the first quarter of this year, the majority of financial pundits I watched on TV advised investors, some of whom have already lost 50% of their savings at that time, “to stay out of the market” unless they have 10 or more years to go before retirement. Who knows how many took their advice and got out of the market, thereby missing the bull market that started in March and is still going strong as of this minute. In January and February, many financial experts were predicting the Dow Jones Averages to go down to 5,000. In “DIDOSPIN-11,000 DOW, August 7, 2009” when DJIA was 9,370, I predicted the Dow to climb to 10,000 before the end of the year and to 11,000 before the end of next year. It already reached 10,000 last week. Most of the financial experts I watched on the Lou Dobbs and Larry Kudlow shows collectively stated that “it may take 10 years to recover losses in retirement plans…” Shame on them for being so incompetent or for perpetrating a hoax! Those investors who stayed put have already gained back most of what they have lost and I believe this bull market still has legs before the next significant market correction.
In “DIDOSPIN- Obama’s Recession, March 8, 2009”, I said “Recessions are part of a normal economic cycle. Soon consumers will come back and resume buying necessities such as refrigerators, TVs, computers, furniture, cars…” How true! A lower than expected contraction in GDP at 1% in the 2nd quarter is believed to have been followed by a small positive increase in GDP in the 3rd quarter, although official stats have not yet been released. I predicted a much bigger increase in GDP the 4th quarter. The increase in GDP is an indication of an increase in consumer spending. One thing to remember is that GDP stats do no even take into consideration business to business consumption, only the consumption of the ultimate consumer or end-user. This is something that many people are not aware of.
I secretly scoffed at my boss in January when he told me in a panic that we must dig in our heels in this “worst ever recession”. I told him, “We’ve seen this before, the last one in 2001….” “No, no, no”, he adamantly replied, “this is different”. How wrong he was! The only difference between this recession and the previous ones is its nickname. This one will probably be known by several nicknames such as “Sub prime Mortgage Crisis, aka Housing Bubble Burst, aka Auto Industry Crisis Recession”. The various nicknames of the 3 previous recessions according to Bloomberg News were: Dot-Com Bubble Burst – 2000 to 2001; S&L Crisis, 1990 to 1991 and the Energy Crisis Recession, 1981 to 1982.
I concede that this will prove to be the longest recession since the Great Depression. But its severity and misery index pales in comparison to the Carter-Reagan recession. According to Bloomberg News, during the 1981-1982 recession, the national unemployment rate was 10.8% at its highest; inflation was 14% and the prime rate went up to 20.5%. In this current recession, inflation is almost non-existent and the prime rate is the lowest it has been in 50 years (source: http://www.wsjprimerate.us/wall_street_journal_prime_rate_history.htm).
Obama predicted the unemployment rate will continue to increase and will exceed 10% before the year is over but I will go with my prediction in “DIDOSPIN- Recession Over, June 27, 2009” that it would peak at 9.8%. This means that more than 90% of the working population is employed and is poised to go back into the “buying mode”. It is a cycle and consumers eventually buy what they need or want. The stock market rally is a big factor in consumer spending. If a consumer sees his portfolio going up in value, he will have more confidence spending his discretionary income as opposed to saving it for a rainy day. Fortunately, the behavior of the stock market follows a free market pattern that is predictable. The stock market does not like government intervention in the free market economy. It does not like redistribution of wealth; tax increases; government take over of health care, the banking system and other private industries; cap and trade; interest hikes and increase in deficits. One of the reasons the market is doing so well is that Obamacare and Cap and Trade appear to be in trouble. There are different versions of Obamacare bills that are still under discussion in the congressional committees, and although Cap and Trade bill passed the house, it is not expected to pass the senate. If these two bills regain traction, it is almost guaranteed that the market will take a plunge, perhaps causing a double dip recession.
This article is not intended to provide financial advice. Please consult your financial advisor before acting on any advice provided herein.
Any opinions and views expressed herein are the sole responsibility of the writer.