Economic Cycle: Boom and Bust

Hello again. How about the Big 3! Currently the deal is dead in Congress, but the TARP funds might still be pulled by G’Dubya in order to prevent an economic meltdown and pull the US and probably everyone else with us into a Depression of epic proportions. I think not. Everyone talks about the Big 3 “failing” as if the companies won’t exist anymore. Bankruptcy is their option, except it seems that Ford may be able to avoid that without the bailout money. They may actually benefit more without the money, if the other two lose consumer confidence and market share by reorganizing. Anyway, enough about those numbskulls. Now back to what I promised to write about; The Economic Cycle!!

Yes, I know it sounds soooo exciting!! This will not be the text book version; this is my version of the Economic Cycle. (Also, don’t confuse this will the business lifecycle, expansion, trough, etc.). I consider there to be only two phases Expansion (a.k.a Boom) and Recession/Depression (a.k.a. Bust). I group recession and depression together, since no economist can agree on the exact difference between the two. Perhaps any contraction of the economy should be considered a recession and a depression can be characterized what we have been hearing a lot lately as a “deep recession”. I feel as though the economists of today are reluctant to use the word “Depression” to describe the current trend of the economy for fear that it may make things worse, because the public is terribly influenced by silly jargon.

Back on track. When the economy is expanding, there are several characteristics. Job growth, inflation is under control, credit is reasonably easy to obtain, the market is optimistic (stocks up, bonds down), the dollar is strong, and the Fed and Prime interest rates are up, but not too high. This all translates into an increase in the GDP.

In contrast, when the economy is contracting, unemployment is typically up, inflation is either extremely high or even worse, deflation occurs. With inflation, the dollar tends to be weak, which increases the cost of imports, which in turn increases the cost of goods for US consumers. When deflation occurs, demand has decreased so much that the cost of goods freefall. It is a little more complicated than that, but that is the basic idea. Other characteristics are the Fed and Prime rates fall, which decreases interest rate yields on deposit accounts and money market accounts. Credit is not easily available or in bad cases almost non-existent. All this translates to less consumer spending and a decrease in GDP. To sum it up, it is just like now, except now is much worse.

Now to scare you all! We are in a Depression currently. We left Recession a long time ago. I declared the country in a Recession just over a year ago, even though it didn’t meet the 2 or more consecutive quarters of declining GDP. If you insist on calling it a “Deep Recession”, be sure to qualify it by stating it is as deep as the Marianas Trench. Others argue that the unemployment rate is only about 7% currently and during the Great Depression it peaked at 26%. Yes, that is true, but as I always say, statistics are just statistics. Stats can be manipulated if you change the parameters. This is what happened when Wild Bill (Clinton) took office. He changed the way the unemployment stats are calculated. It went from a census of the number of people looking for full-time employment to a census of the number of unemployment filings. The difference is that the current way the numbers are run has the people whose benefits expire are no longer counted, which in turn drastically reduces the rate. If we went with the old calculation, it is estimated the rate would have been in the 16%-18% range. Oh yeah, and guess what else? Think about the number of full-time college students today as opposed to the 1930’s. If the ratio of college students in the 1930’s were the same today, the rate would be very different. In the 1930’s approximately 40% of high school graduates attended college. The current rate is roughly 90%. There are currently approximately 2.5 million students. If we take the difference (56% less) you get an additional 1.1 million eligible workers that you would have to factor into the unemployment equation. There are currently about 4.5 million out of work, either collecting or not collecting unemployment. If you add 1.1 million to the mix, that would increase the rate about 25%, which would put the rate at 20%-22%.

So, let’s wrap this puppy up. We are in it up to our eyeballs right now. Ironically, the national mortgage debt has decreased 2.4% this past quarter for the first decrease in over 50 years. We are spending less and saving more, but that is a double edged sword. Spending makes the world go ‘round. Reallocate your expenses appropriately and ride this thing out. Don’t go run and hide like everyone else. Be smart with your cash and remember to keep building up your investment cash. This thing is long from over and I may have to reassess my Spring 2009 time table to get back in the game. It could be longer. Keep your eye on your stocks and don’t pay attention to the DOW, S&P 500 or the NASDAQ. There are still some winners out there, but even they are still getting beat up. If you find yourself wanting to buy in, do it incrementally. That is how to stay in and build your positions even during the perfect storm. If you get crazy and go all in, then you’ll end up being angry enough to punch a baby and no one wants to see that. Next time, we’ll talk about a scary trend in the cycle. Peace and I’m out!!