Thursday, June 3, 2010

Very Dippy Thoughts

Today’s topic is the “double-dip”. Some double-dips are good. My favorite double-dip is a German Chocolate Cake/Jamoca Almond Fudge combination at Baskin Robbins. Likewise, double-dip roller coasters can be fun. Riding these is very similar to investing in the stock market. The major difference is that you are guaranteed to get off of the roller coaster with the same amount of money you started with, very different with stocks.

Most double-dips have negative connotations. The charlatan who unethically or illegally gains financially from drawing income from two sources, George Constanza double dipping his potato chip, and of course the dreaded double-dip recession.

Some analysts appear obsessed with the possibility that we will have a double-dip recession. Every week there are new articles on the subject, but double-dip recessions are rare. Economists are concerned that global credit problems, a Spanish banking crisis, a new Korean War, a second housing slump, money supply tightening and a disruption in Chinese trade, will plunge the U.S. economy back into recession. It is possible for this economy to fall back into recession, but to dwell on the subject is sort of morose and potentially self-defeating. There will be plenty of time to analyze it after it happens, so shut up already.

The Model T is not predicting a double-dip recession. The current graph of The Model T is shown below. It still says we are in the beginning of a “UL” shaped recovery. Note though that according to the graph, the economy will take an extended time to recover.

GDP Forecasts
My panel of economic experts forecasted a 2.8% growth rate for Q1 and the last revision was 3.0%. The panel is forecasting 3.5% for Q2, 3.1% for Q3 and 3.2% for Q4. So not even close to a double-dip predicted here. Although it should be noted that the panel members did not predict the first recession. (For what it’s worth, I personally think the forecasts for Q3 and Q4 are high).

The Stock Market

June is a key month for the market. The May drop was more pronounced than normal for the start of a bull market. If there is more correction in June, this market has no legs. Almost all the “data driven” models are predicting some type of market correction of 10-40% or even more. Most analysts predicting market increases are basing their forecasts on emotional based factors. They argue that the data models are not valid due to the indicators being unreliable due to the bizarre financial circumstances. This argument is self-defeating. If the economic indicators remain messed up, it is because the economy remains messed up. The unreliability of the indicators is a bad thing, not a good thing.

Yes We Could Double-DipThere is a way that a double dip recession could happen. If the stock market drops 20% or more in a short time period, panic will reenter the economy. Remember that all recessions have some psychological factors and if panic causes consumers and businesses to stop spending, you will get more layoffs and possibly another recession. This would indeed be a strange occurrence. The stock market could drop to where the data models say it should be and this causes the recession. It hurts my head to even think about this one. My suggestion is for everyone to head to Baskin-Robbins and chill out.

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