Jim'sMoneyBlog

Financial Opinion and Insights

Are We in Depression, Recession, or Recovery?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

 

Hope you had a great 4th of July!  It’s one of my favorite holidays and I always enjoy seeing the ‘Capitol Fourth’ celebration on tv; I lived in the Washington DC area for eight years – back before the barricades, when you could park your car almost anywhere and walk into virtually any building.  I used to drive past the Pentagon, cross the Lincoln Memorial Bridge, and pass by many of those monuments on my way to work every day.  Good memories. 

Unfortunately, the jobs report on Friday was disappointing – again.   And, all the Keynesian[i] economists that usually populate Washington and never having made a payroll see still more stimulus spending as the answer.  

As the divide widens between the parties and Obama feels pinched between the economy on one side and oil spills on the other, you can expect his attention will likely turn to immigration as the November elections draw closer. 

Double-Dip? 

If your neighbor is out of work, that’s a recession.  If YOU are out of work, that’s a depression. 

–       Ronald Reagan 

Someone asked me just last week if we were really in a depression.  When I asked him what made him think we might be, his answer didn’t surprise me:   His wife had been laid-off from her staff position at a major drug company five months ago and she can’t find work in her field anywhere.  In the meantime, his income isn’t enough to support the beautiful home they purchased a little over two years ago when no one expected the economic melt-down that ensued.   Since they don’t have any equity in the house, they’re on the verge of losing everything and wondering where they’re going to go. 

Not an unusual story. 

Lourdes and I know of another who’s been out of work for two years with still no prospects; and another couple who are being forced to leave their second house (this time as renters) because their landlord is being foreclosed on by the bank!  I could go on – and you no doubt know people yourself. 

Businesses aren’t hiring because of a number of negatives, as well as unknowns all related to the inability to project and forecast the cost of doing business over the next three to five years, i.e., health care, taxes, regulatory issues, etc., all have attendant costs that reduce profit, narrow margins, and take expansion capital off the table. 

Strange as it may seem, all of this news – while sounding bad for the markets – may just be ‘par for the course’ as recoveries out of recessions go. 

Doug Short’s analysis[ii] of the first 500 days of sixteen recoveries in the Dow Jones Industrial Average (DJIA) since it’s creation in 1896.  He analyzed all the Dow rallies following a 30% or greater decline[iii]  At any rate, as of the Dow’s close on June 29th, the current recovery places 9th compared to the other 15.  The volatile recovery after the Crash of 1929 leads the pack by a wide margin.    Some of the historic 500-day rallies went on to substantially higher gains – the Roaring Twenties, the Boomer Era that stated in 1982.  However, some of the earlier rallies (1903, 1907, 1914) would soon falter, as did 

the rallies of 1962, 1970, and 1974.  When the recoveries are adjusted for inflation, the picture becomes even more obvious. 

What’s Next? 

Mr. Short didn’t say; but, let’s give him a break, who does?  I watched the ‘financial block’ on FoxNews this past Saturday morning and heard just as many people say the market was terrible and they didn’t like anything about it as there were people saying this was a great buying opportunity.   It only confirms that’s what makes a market:  Bulls and Bears.    After all the dust has settled, I think those that kept their eyes on the lighthouse – stuck to their plan – will be the ones that best weather the storm. 

Some Inside Baseball 

There are a couple of new additions to the IFG website:  

–       Jim’s Blog has been added.  This will contain most of my memo content and will have additional posts not contained in memos; however, ‘Clients Only’ memos will not be posted. 

–       A new initial data gathering tool has been added.   This is primarily for new clients, but current clients are able to use it, too[iv].    I’ve been looking for some time to find a quality, credible third-party vendor in the industry that  could integrate with our MoneyGuide Pro platform and we now have them in place.  There’s a ‘generic’ demo on the site, as well as the tool itself.  Clients will find the tool in the Clients Only section. 

In addition, we now have an online  ‘meeting room’, which is just what it sounds like.  It allows me to conduct introductory meetings for new prospective clients, as well as online meetings with existing clients.  If you can be on the phone and the internet at the same time, you can do it.  These days, most everyone is on internet through cable, DSL, or some other broadband platform.  The only question is whether you have access to a nine-year-old – they’re the only ones who REALLY understand all this stuff.  It’s a Webex-hosted meeting room, some of you may be familiar with Webex, already.  


[i] John Maynard Keynes (1883-1946) was a British economist and government advisor who came into prominence in 1935 when he took issue with classical economists like Adam Smith, who believed economies worked best when left alone.  Keynes believed in active government intervention.  His approach could be called ‘demand-side’ economics.  He believed that government manipulation of government taxation and spending could pump money into the economy, creating spending by consumers.  This approach remained popular in America from the Great Depression until the 1980’s when, after repeated recessions, high interest rates, and high unemployment, ‘supply-siders’ began to promote the idea that government was the problem, not the solution. [Barron’s Finance & Investments]. 

[ii] Advisor Perspectives, June 30, 2010 

[iii] Bear markets usually are defined by a 20% or greater decline, but the charts would have been so busy as to lose any meaningful analysis. 

[iv] Please note that planning fees, which are separate from advisory management fees, will apply.

Written by Jim Lorenzen, CFP®, AIF®

July 9, 2010 at 8:45 am