So, Is The Recession Over Or Not?

August 13th, 2009

Get out your crystal ball and let’s see what’s going on in the global recession. Some say its over and some say we haven’t hit bottom yet.

I know a guy who gets it right every time. A year and a half ago he correctly predicted that the markets were in for a hammering. He got that right. Then 11 months later, at the height of the crisis, he chirpily predicted that investors could make a killing in stocks. Yet again he had it right – equities promptly staged a remarkable rally.

I called him yesterday. His cheer has evaporated. He’s predicting a violent pullback because the gains of the last few months weren’t based on economic facts, he says. They were fueled by nothing at all.

Only time will tell if he is right, but to judge the wisdom of his instincts, I took another look at his earlier forecasts.

Back in January 2008, he predicted that “things are on the way down. The U.S. is trying to stimulate private consumption artificially, but it won’t help. Even in Russia there are plenty of risks because a huge proportion of its GDP is associated with oil.”

In November 2008, my man became optimistic. The crisis was raging in world markets but by and large, he was predicting an upturn – acute crises have to peak at some point, he explained. The acute stage doesn’t last more than a year or two. He didn’t think this crisis was very much different from any other, though he acknowledged that the entire world economy would fall sick, including India, China, Brazil and Russia, all having been infected by America.

“Things will get worse, but not much worse,” he predicted. His conclusion was that it was time to buy stocks, because the potential for gains was greater than the potential for more losses.

Today in August 2009 he’s downbeat again. “The gains this year aren’t based on any real economic developments. Even if the economy was showing clear signs of recovery, even then I’d say stock market prices are too high. Share prices have become bloated, and back in the broad economy, the signs of recovery are weak.”

He predicts that the market is going to screech to a halt because its recovery wasn’t based on solid economic foundations. At these levels, share prices present more risk than potential reward.

The downturn will start with the institutional investors and snowball. “The big players, the institutions, are afraid that the market will get away from them. Their nightmare is to miss the rally. They’d only get out when they were sure a bubble had developed, and that’s exactly what happening. Economists are saying that the recession is over. The problem is that people are captive to their own concepts, because they’d rather get it wrong together with everybody else. Nobody buys a sweater in the summer, even though they know that winter will come.”

You figure it out and if its good, let me know!

This entry was posted on Thursday, August 13th, 2009 at 6:01 am and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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