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Thursday, July 27, 2006

IMHO


“I think we ought always to entertain our opinions with some measure of doubt. I shouldn't wish people dogmatically to believe any philosophy, not even mine”.

-Bertrand Russell (1872 - 1970)
British author, mathematician, & philosopher

Mild-Stagflation? Growth Recession? Real Recession? Where is the US economy headed in the next 6-12 months? This is the hot topic among investment strategists and economic forecasters today. The opinions vary, ranging from Growth Recession to Greater Depression. There is a growing number of investment gurus who believe an economic slowdown is inevitable. Some think it's already here. Even Ben Bernanke acknowledged an anticipated US economic slowdown in his recent testimony to the US Congress. Assuming the consensus is correct, the question now goes from “where do we go?” to “how LOW do we go?”. To determine where we stand, a definition of economic terms is in order:

Growth Recession:
A form of recession in which economic output continues to grow, but at a much slower pace than normal. “Normal” is meant to describe an economy growing above 2%.

Stagflation:
A condition of slow economic growth and relatively high unemployment. It is a time of economic stagnation accompanied by rising inflation. Economic growth of less than 2% is considered stagnation.

Recession:
A significant decline in economic activity spread across most sectors, lasting longer than a few months. It is visible in industrial production, employment, real income, and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by GDP.

Depression:
A severe and prolonged recession characterized by inefficient economic productivity, high unemployment, and falling price levels. In times of depression, consumer's confidence and investments decrease, causing the economy to shut down.

Based on those definitions, the US economy still does not fall under any of these environments. So will the US economy suffer recession or stagflation? Truth is nobody knows yet. Only after the fact can economists accurately describe an economic event. It's that simple.

I'm not discounting any of the economic risks repeatedly outlined by the experts in their newsletters and blogs. People who trade for a living cannot afford to ignore these warnings. The bear arguments are valid and well thought-off but they are what they are – just opinions. Without more data to confirm their outlooks, no self-respecting strategist should declare with certainty that the US will suffer real recession or stagflation. So doomsayers relax. There are still too many unknown variables to accurately forecast the future. Ultimately, only when the smoke clears can we really answer the question: How low can we go?

Packy

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