Double Dip Recession?

Every media device or platform you turn or turn to questions are asked, which way is the stock going? Which way are bonds going? Gold? Real estate? Where should I invest?

There is optimism that the market is going up and there are more recommendations that one should buy stocks as now is the time to buy. Out of curiosity a cat might ask: “Does that mean the market has bottomed out. But as the saying goes, it may seem cheap but it can even get cheaper. At school we were told that each cycle has different types of good investment opportunities. In secular bull markets investors should look for stocks and funds that will perform better than market averages. In bearish market I was told that one should look for absolute returns where the benchmark would be money market funds.

During this time of threatening double dip recession given the slow economic recovery one starts to doubt what was once taught at school.  One was hypnotized by the theory that house prices always appreciate – the complex mystery of the economy. My old man used to say that the world is not coming to an end; it is merely changing as it always has. And one might reasonably perceive that in that change, there would, of course be winners and loosers. Currently the economy is not doing well and the stock market is volatile as the gains earned are lesser than the losses incurred. The state of the market has everything to do with the expectation for earnings and the value investors put on those future earnings. John Mauldin clearly pointed out that bear markets (or 20 percent plus corrections) can happen in bull markets (thins 1987 or 1998), just as bull markets (think 2000, 2001, 2002, 2003). P/E ratio goes from very to quite low. And then, in period of low valuation, investors can once again put money into stocks.

I strongly hold the view that our predictions about the future depends a great deal on assumptions we use especially upon the subject of economy. The question that I ask myself more often is: “Are investors more worried about future losses than expectant of potential gains? Turning economic history pages, getting a sense of how harsh life was back then (oil shocks, Vietnam, stagflation, Watergate and so forth), I thought of visiting the joker to calm my anxiety. The market will always come back to trend and serious if not painful corrections have to take place. Overly optimistic assumptions are and still remain a continual source of misplaced future problems.

Many theories can claim to predict the economic cycles, for example Kondratieff Wave theory says the economy and the markets repeat every 56 to 60 years, with discernable periods marking the changing cycles. The deficiency with this theory is that it tells one where s/he has been and where s/he is going but does not tell with certainty when one will get there and more importantly where you are at the moment.  Apropos economic recovery, there is a lot of brouhaha on where we are and where we are tending but one thing which is very important and is painfully lacking is certainty. So fur confidence appears harmful to the investment community. Upon the possibility of facing a double dip recession, I shall resign myself to the concept of economic gravity lest I prattle. Trees don’t grow to the sky, so is the economy – it has limits. When it grows to levels where valuations are unrealistic, gravity has to take its course even it means the bubble has to blast. The market is nothing but a lean, mean reversion machine. If to revert to the mean demands a double dip recession then it would happen somehow. As for when one cannot fairly say but it can only be delayed via monetary and fiscal policy interventions which won’t solve the problem but just postpone the difficulties it brings.

It therefore, appears to me fit and proper to conclude by quoting Jeremy Grantham who said all this more than five years ago. The recovery may be “the greatest sucker rally in history, with a black hole awaiting markets in 2005…. By the end of this year, we will have battened down the hatches as tightly as we can. With any luck, 2005 and 2006 will be such a bloodbath we’ll get it all out of the way quickly…. The market loves comfort, stable growth, stable low information, strong profit margins. All these things mean revert. Things are pretty good now. There is plenty of room for all these variables to move against you. If you want to make money, you buy when things are bad.”