Recession or Depression: More from Guy Geldworth

From the Desk of Guy Geldworth:

As you will recall, when I posed the thought of a Recession to Mr. Geldworth , who holds his CFA badge of authority, he responded with the word "uncertainty."

Uncertainty may still the word according to "lagging measures," but to many, it feels like a recession. You know the saying: When your neighbor is out of work, he's unemployed, when you are out of work, it's a recession.

While I'm still employed, I'm saying saying at least we're in a narrow recession. The CEO of Wells Fargo, a three-star bank has said: "We have not seen a nationwide decline in housing like this since the Great Depression." And from other experts: "It is now clear that the U.S. and global financial markets are experiencing their worst financial crisis since the Great Depression," according to economist Nouriel Roubini.

Jack Sands: So, have we skipped the Recession? Indeed, are we headed for a Depression?

Guy Geldworth: (laughing) A Recession? No, not strictly. A Depression, certainly not. In the Depression over 24% of the workforce was unemployed; in the United States in April, we had 4.8% unemployment. GDP registered a 0.6% gain--industrial production has been slightly up. There's still a debate whether the stock market is in a correction or a heavy bear market.

Jack: What about the housing recession. What about the banks still tight with credit. Fed Chairman Ben Bernanke's efforts haven't seemed to help.

Guy: It takes time for those economic stimulus checks to find their way into the economy.

Sands: I'm told the people who need them most will simply pay off debts.

(Pause)

Geldworth: I repeat, you can determine what a recession looks like by measuring real GDP, real income, employment, industrial production, and wholesale-retail sales. Employment is not bad, industrial production is slightly up, real income is uncertain at this point, and yes, wholesale-retail sales are down, housing market, down. Just too spotty.

Sands: So, we're on the downside of a cycle that smells like either a Recession or a Bear Market, bad sentiment, high volatility...

Geldworth: I believe so. We just have to let things run their course. The bank failures are a necessary, sloppy characteristic of capitalism. Call it dirty if you like, but in the long run, these excesses will be cleansed, and equilibrium will be back. A new cycle.

Sands: How do you know when the new cycle is on the way?

Geldworth: Contrarian signals is one way. According the the ISE index an increasing number of puts are being purchased indicating too much negative sentiment, a classic reversal signal.

Sands: I'll tell my out-of-work neighbor to get out his happy money.

Geldworth: If he has the inclination. Remember to tell him, Asset Allocation using non correlated measures. (see posting of 11 March 2008, "The Semantics of Recession")