Posted on 10/04/2011 9:34:16 PM PDT by blam
This Economist Is Forecasting A Recession, And He's Never Been Wrong
Economics / Double Dip Recession
Oct 04, 2011 - 07:03 AM
By: Money Morning
David Zeiler writes: The U.S. economy is "tipping into a new recession" and there's nothing President Barack Obama or the U.S. Federal Reserve can do to prevent it, according to Lakshman Achuthan, co-founder of the Economic Cycle Research Institute (ECRI).
Now, if you're wondering why you should believe this prediction ahead of others then there's something you should know: According to The Economist, Achuthan's predictions on the direction of economy - either toward recession or recovery - have never been wrong.
"We don't make false alarms," Achuthan said, noting that ECRI did not forecast a recession last year when other prognosticators were.
A new recession could topple the stock markets into another deep funk like the one caused by the 2008-2009 downturn when the markets plummeted more than 50%.
The ECRI uses dozens of leading indexes to make its forecasts, and as of last week, Achuthan said those indicators were all pointing to a recession.
"We're seeing the weakness spread widely," Achuthan told MarketWatch. "There's a contagion...that's not going to be snuffed out. The nature of a recession is not a statistic. It's a vicious feedback loop. Sales fall, production falls, income falls and that depresses sales. We're in that and it's going to run its course."
Worse still, he doesn't think any governmental policy changes can prevent it.
"It is not reversible," Achuthan told Bloomberg Radio. "There is virtually nothing that can be done to avert what is going to happen."
The ECRI recession forecast landed last week amid some mildly positive economic news - the nation's gross domestic product for the second quarter was revised up from 1% to 1.3%, and initial jobless claims fell below 400,000 for the first time since early August, to 391,000.
But Achuthan dismissed such data along with sentiment from chief executives who have cited improving revenue and earnings.
"These leading indicators are objective," Achuthan said on CNBC. "They don't listen to all the hubbub. They have a certain pattern they present in front of a recession and that is in right now."
That sentiment mirrors what Money Morning Chief Investment Strategist Keith Fitz-Gerald has been telling investors for weeks. Fitz-Gerald has been warned that the weakening economy will eventually result in a bear market that sends stocks hurling back towards March 2009 lows.
"There's nothing President Obama or Bernanke can do at this point," Fitz-Gerald said. "Our debt is once again a problem, our jobs situation stinks, our government is dysfunctional, and then, of course, there's Europe."
Prepare for More Recessions
Although it would seem too soon for a recession so quick on the heels of the last one, ECRI pointed out that shorter cycles are actually closer to the historic norm. In the 1799 to 1929 period, ECRI said almost 90% of U.S. economic expansions lasted three years or less.
Based on that, as well as a decades-long pattern of slowing growth and evidence of increasing economic volatility, ECRI predicts recessions will continue to hit more frequently in the years ahead.
When asked how severe this next recession is likely to be, Achuthan said that was "unknowable," although a major financial shock - such as a Greek default on its sovereign debt - would make things significantly worse.
"Back in the last recession in August of '08, prior to the Lehman debacle, these indicators were pointing to the worst global recession in 30 years," Achuthan said. "Then you had Lehman."
The collapse of Lehman Brothers triggered a global financial crisis that not only intensified that recession, it set the conditions for the weak recovery that followed.
Even absent such a shock, Achuthan predicted this recession will have dire consequences.
"It means the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar," Achuthan said. "If you think this is a bad economy, you haven't seen anything yet."
Don't Bail on the Market
Given the economy's bleak prognosis, it might be tempting to bail on stocks entirely. But Money Morning's Fitz-Gerald says there are five steps investors can take to protect their portfolios and eke out some gains, as well:
1. Sell Strategically:Sell into strength and capture profits using trailing stops that are gradually ratcheted up as the bounce begins. This will help you raise cash (that can be used to buy into the rebound when it eventually happens)
2. Hedge Your Bets: Usespecialized inverse funds to hedge downside risk that will accompany the rollover to the downside and rack up significant gains at the same time.
3. Consider Alternatives: Buy commodities - most notably gold and oil - on pullbacks. These alternative assets will help preserve the value of your portfolio as the markets roll over. Their value will accelerate dramatically when the world economy recovers - as it eventually will.
4. Think Globally: Put new money to work in so-called"glocal" stockswith fortress-like balance sheets, diversified revenue and experienced management. Not only will they help hedge the value of your portfolio, but by concentrating your focus on them you are building in upside potential even if we haven't hit a bottom. Those offering big dividends are best because that will help you keep pace with the inflation the government debt will ultimately induce.
5. Stay in the game:It's tempting to bail out given my prognosis for more downside, but attempting to time the markets is a fool's errand -- and never works. You just wind up getting skinned twice -- once on the way down and again because you were standing on the sidelines and got left behind when the markets ultimately reverse -- which they will.
“Worse still, he doesn’t think any governmental policy changes can prevent it.”
Yes there is. Reduce taxes and reduce government regulations and bureaucrats by putting our morbidly obese government on a diet (get back to a more limited government) or put a fat tax on it.
Buy oil? He expects the economy to slowdown which normally resutls in the price of oil dropping due to lower consumption, I don’t get the oil recommendation.
He says stocks are headed back to March 2009 lows...but says you should stay in?
"5. Stay in the game:It's tempting to bail out given my prognosis for more downside, but attempting to time the markets is a fool's errand -- and never works. You just wind up getting skinned twice -- once on the way down and again because you were standing on the sidelines and got left behind when the markets ultimately reverse -- which they will. "
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Just sell and get back in when the conditions are better.
But that’s hard to figure out. I recall hearing dow 5000 after the Lehman collapse and the subsequent recession, well, while I waited for dow 5000, the market took off on me somewhere around the 6,000 plus level. As Buffett says, you have to be right twice, knowing when to get out, and knowing when to get back in.
[Buy oil? He expects the economy to slowdown which normally resutls in the price of oil dropping due to lower consumption, I don’t get the oil recommendation.[
Oil is never going to zero, probably won’t go below $60.All in all that’s a pretty good hedge compared to losing everything.
Over the long term, oil consumption will continue to rise, on average, in developing countries.
I got out in 08. Even missing the ‘recovery’ I kept what I had. I took no losses.
To make money, yes, you simply have to get in at a point lower than when you got out.
To break even and avoid losing money, you get back in at the same level you got out.
Whereas, if I had held all the way down, and held onto my investments I’d still be 20 percent down today (12000), down to (10000), whereas by selling I am still ahead of the game.
Depends on how long term you go.
Population + demand in China is actually dropping at present.
Overall world population growth is only 2.4, at best, growth in demand is going to be pretty static.
What about the 800 billion dollar stimulus? How about checks for $25,000 to 32,000,000 people!!! How many people are unemployed? Think about that for just a second...
I wonder what the return on investment for donating to the Obama campaign is? It seems pretty astronomical.
Mark
all I know is I hate these people....
You see what happened today, after the markets were wandering down the last few months (just after QE 2 ended) or so, Bernie stepped in and said he is going to pump (print more bonds, QE 3?) and the markets recovered and took off to the upside. Does it mean the economy will grow now, no, it means the markets expect inflation to make all prices rise so they buy and expect stocks to rise with that inflation along with commodities and everything else.
Can you make money, doubt it unless you can outpace inflation but not losing any money (value/buying power) would be a big plus so dividends paying stocks are a good idea along with commodities but I prefer precious metals since if China does hit the brakes then commodities will also, food stuffs should be okay.
Nothing travels in a straight line and most markets are edgy and panicky so it is a good time to sell the highs and buy the lows on these insane moves.
So if they are going to pump more electronic money into the system to bailout Euroland and the US then the markets will move up but not because everything is fine and dandy, it is just kicking the can down the road to get past the next elections.
followup btt
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