Recession Talk Gets Serious; Gold Rises

A: When unemployment rises 3 ticks unexpectedly, and surprises economists, traders, and analysts, you must expect recession talk to get more serious. And it has. While bloggers like myself, Barry Ritholtz of The Big Picture, Bill over at Calculated Risk, Naked Capitalism, Professor Nouriel Roubini & Accrued Interest have been working hard to break down the credit crisis and how it may affect the overall economy, it wasn't until last Friday's awful jobs report that some of the big names spoke out. In my opinion, the blogs noted above are the creme-de-la-creme of macro economic analysis in the blogosphere and should be daily reads for anyone interested in understanding what is going on underneath the surface.

Barry Ritholtz has a great post today titled, "Merrill: Recession is already here" where he delves into a chart comparing the unemployment rate (year/year difference) and past recessions:

The caption is: WHENEVER THE UNEMPLOYMENT RATE GOES UP 0.5PPTS OR MORE FROM ITS TROUGH, THE ECONOMY HAS TRANSITIONED INTO AN OFFICIAL RECESSION 100% OF THE TIME (the chart shows you this with the gray bars indicating a recession & it's length)

But Merrill Lynch analyst David Rosenberg isn't the only big name talking recession. Martin Feldstein, the father of the Bush Tax Cuts and famed Harvard economist, has spoken out as well. According to Feldstein (via CNN Money):

Martin Feldstein, the Harvard economist credited with being one of the fathers of the Bush administration tax cuts, says the U.S. economy is now likely to slip into a recession, and that avoiding one will take a new round of tax cuts and interest rate cuts from the Federal Reserve.

But he said he now believes a recession is likely, as he pointed to both a report from the Institute of Supply Management showing manufacturing activity in decline for the first time in almost a year, and Friday's December jobs report that showed a jump in the unemployment rate to a two-year high.

We must understand something. A recession is not the end of the world! We have had 4-5 years of lax lending, no underwriting standards, financial innovations that have generated billions, risk dispersement, global growth, a housing boom, and a credit bubble. Did we really think this would all last forever? The problems we face right now are so complex, that a recession is not only likely, but is probably the only real cure to what ails us! It is necessary to weed out the bad bets, clean up financial balance sheets, deflate the asset bubble, tighten up lending standards, and bring normalcy to a world that was irrational for the past 4-5 years!

In October I wrote a piece titled, "To Mr. Bernanke: BE STRONG" where I stated:

"We have become a society that fears recessions rather than understand them for what they are; healthy and normal disruptions in economic growth necessary to ensure longer term sustainable growth. We need to shake out the bad bets and weak players, let the markets fix themselves, and move on with the lesson learned.

The US economy is slowing and jobs growth is decelerating, no doubt about it, but what happens if the US dollar continues this freefall? What happens to our immediate future if oil prices jump to $120/barrel; which will occur if the fed maintains an easing policy? Won't that hurt us even more down the road? Do we really need to keep cutting rates BEFORE the economic data clearly shows that they are needed at this stage of the game? Is 4.75% fed funds rate really that restrictive?"

The following day I commented and praised American Enterprise Institute's John Makin for stating:

John H. Makin says that a recession "is the most desirable outcome" for deflating the U.S. housing bubble. "Avoiding it would involve so much government intervention and so much reinflation by the Fed that risk-taking would be encouraged even further, resulting in an even larger bubble and a larger subsequent recession..."

He's right! Right now, equities have corrected about 10% over the past 4-5 weeks as an economic slowdown gets priced into stocks. The same uncertainty has helped to fuel GOLD prices higher (see chart on the right), a clear sign investors are seeking a safe haven from a possible recession. The bond market is also predicting a slowdown that will force the fed to lower rates and stimulate our economy. The pieces of the puzzle are connecting, and the picture is starting to emerge: uncertainty! How long may the recession last? Are we already in a recession and just don't know it yet? How severe will it be? These are the unknowns. But what I do know is that this recession is an unfortunate but necessary side effect if we are to get through this housing & credit problem! Do not fear a recession. Acknowledge what is going on and understand it for what it could do to help us proceed on a brighter path in the years to come.

With that said, savvy investors know that opportunities always present themselves in times of distress, and this writer will certainly be keeping his eyes open for my next big investment.

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