Wednesday, June 16, 2010

Q4 Is There Still a Risk of a Double Dip Recession?

"Brain surgery is not rocket science to a brain surgeon".

In recent weeks I have been answering the questions we are lately being asked most often. If you have found value in what you've read from us we would be privileged to have you click the "follow" button.

These questions are regarding issues that are billed by "experts" as complicated or hard to understand for us laymen. Hopefully I have succeeded in proving that these issues are neither complex nor difficult to understand at their most basic levels. I have come to believe that nothing is really all that complicated at its core once some common language, a little education and some basic experience is applied hence my observation "brain surgery is not rocket science to a brain surgeon". Said another way, for those of you old enough to remember these commercials, magician Marshall Brodien (Wizzo on Bozo Circus) always said "Most magic tricks are easy...once you know the secret". It's funny. I never have any trouble answering trivia questions...that I ask!

I admit that one of the phrases I hear most often from my wife and closest colleagues is "Matt, you use a lot of words". So, all of the above reviewed, I'd like to take a stab at the fourth question whose answer many of you will likely consider mercifully short.

Question 4: "Is there still a danger of a double dip recession"?

Short answer: No...and Yes.

Long (ish) answer: Please, read on.

Please begin with the understanding that the following is not political commentary although our skepticism of current and proposed policy is clear. It is not offered to foster optimism or pessimism. It is simply our opinion on the direction of the economy based on internal analysis of objective, publically available data that leads us to conclusions regarding spending decisions and investment strategies.

It can be said that recession is the significant and/or extended absence of meaningful economic growth. If you have been following the earlier stuff you know that two of the most instructive measures of economic health are the Employment Situation Summary ( and the Gross Domestic Product reports ( These, as well as most other indicators, in their detail tell us that there is no momentous recovery out there and Blue World analysts see no catalyst for one to take hold. If we (Blue World) have seemed rather cynical about the U.S. or global "recovery" is it because we do not see any objective evidence of a meaningful one occurring. So, from a really twisted perspective, I have to admit that we CAN'T see a chance for a second dip if we don't think we have emerged from the first one.

So, change the question for me a little bit. Ask "Is there a chance things could get worse?" Now the answer is a resounding and unfortunate "YES." Other posts have given some detail so I'll just offer a quick list here of what we see as ominous threats. In the face of rising deficits, rising unemployment and decreasing federal revenues I'm not sure who first said "Hey, I have an idea. Let's borrow more cash, add massive entitlements, keep interest rates low and...just print a bunch of new money to pay for it all" but it is unsound fiscal policy for reasons too numerous to list here. Taxes are going up. The increase in capital gains tax alone will retard investment. Add to that a looming commercial debt crisis, slowing construction, inflation and interest rates that can only rise from here and we already have a recipe for further economic deceleration. That's not the worst part. The worst part is the effect all this has on jobs.

Pay attention here. This is not difficult material. A full seventy percent of our economy is driven by you and me, the consumer. If we are nervous we don't spend. If we don't spend demand falls. When demand falls production slows. When production slows consumers lose jobs. When consumers lose jobs everybody gets nervous. When we are nervous we don't spend. Simple as that! The employer base, the only entities that can actually create jobs by increasing production and hiring people, reads the same data that I write about. They are powerless to increase production and add jobs if consumers are nervous and failing to spend. With unemployment near ten percent and more mass layoffs being announced every week where do we think this "recovery" is happening? Sure, there are those who point out the government is hiring. The government is no exception to these laws of economics. For the government to be an employer it can only get the money to pay employees from the private sector. If the private sector is not producing then the revenues to the government decline and they, eventually, have to effect mass layoffs just like any other major employing entity.

The private sector depends on demand. The government depends on the private sector. I'm afraid we just don't see fiscal or economic initiatives that will serve either well so we remain, as all who invest and spend real money are, very nervous and defensive for the foreseeable future...and that's exactly why things could get worse.

Short (ish) answer? I tried.

Again, thank you for reading and...stay tuned.

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