Is This a Recession or What?

These trends start with decent business value propositions but eventually morph into the equivalent of a pyramid scheme as they gain too much momentum. And like pyramid schemes, they work for a while but end up badly, especially if you are holding the cards at the end. We always recover, but it takes several years. This bubble will be no different.

So again, are we or are we not in a recession and why can’t the experts agree on one or the other? The answer lies in the way our economy works. Just like a car, it is made of many parts, some functioning, some not. This economy feels like a car that works well for the most part, with the exception of the gear box which is frozen in third gear. It is moving but cannot accelerate, and at the same time it is not coming to a screeching halt. The gear box is of course the banking system, virtually frozen for six months, since the sub-prime crisis hit full course. The fed keeps greasing it, lowering interest rates and adding money into the financial system, hoping it will eventually crank itself out and work smoothly again. But the bankers, just now emerging from huge mud piles after taking very large write-offs’s, are still a bit gun shy about jumping right back in.

Smart money is betting we are not in a recession, but that it will take some time for the financial system to clean itself and work smoothly again. A good barometer is Warren Buffet. He recently took sizeable positions into basic American industry, railroads, manufacturing and consumer staples. But he is staying clear of the financial sector, thinking there will be better opportunities ahead. If he thought we were heading into a recession, he would hold on to his cash and wait for a better time.

My Predictions for 2008:

1. Economy recovers slowly in the second half of the year.
2. Banking system returns to normal by summer, as lending is simply too large a source of income for banks to ignore.
3. Fed reduces rates to 2.5%, mortgages decline below 5%.
4. Dollar peaks at €1.50 and gradually goes down to €1.25 by year end.
5. Oil ends 2008 in the $60’s. While demand for oil doubled in the past five years, the price quintupled. The slowdown in the economy will help synchronize supply and demand to a more rational level.
6. Residential housing continues to depreciate; reaches bottom some time during 2009, flat lines for a few years, and starts appreciating significantly in 2013.
7. Countrywide CEO Angelo Mozilo replaces Donald Trump on The Apprentice, who resigns when he announces his candidacy for President of the United States.
8. Stock market recovers from mid year lows with the S&P500 reaching the 1600’s by end of year.
9. Google reaches $900.
10. Large cap stocks outperform.
11. Consumer staples, property and casualty insurance, energy and utilities, pharmaceutical and healthcare, selected growth large cap technology, and Japan outperform the market.
12. Financial services, home builders, small caps, and China underperform.