October 11, 2011

All the talk of a Recession: 

We are now into the last quarter of 2011 and uncertainty has reared its head with issues that just won’t go away. Questions regarding our economy, tax policy and Europe are weighing heavily on us all. There is a plethora of negative commentary in the news which is clearly over shadowing any good news. Quite frankly people are more interested in issues that scare them, than in issues that might make them feel good. That’s human nature. I remember a speaker once telling the story of an entrepreneur that started a print newspaper that only reported good news stories, it failed after a few issues. When was the last time you did a Google search for a good news publication? I just did. I found Happynews.com in Austin, Texas. I also went to twitter and found they had 101 followers as of September 9, 2011 and 14,161 "Likes" on Facebook . Not exactly a large following. I also found the goodnewsnetwork.org webpage, apparently they don’t tweet, the mission is to provide a "Daily Dose of News to Enthuse". The Facebook page has 16,242 likes, that’s encouraging but considering the size of the Facebook community, not really that large. Fox News has 2,270,359 and CNN has 3,029,010 "Likes".

Now let’s get to the facts. We are definitely in a period of time when discernment and acting prudent is extremely important. Cut through the "noise" and focus on the facts at hand. A good rule of thumb is to ask why something is true, economic data can be impacted by factors that can spike the numbers to the good, as well as to the bad. A look at history can tell us a lot, as long as we also consider what is different.

Since when is a recession a new thing? Our economy has troughs, expansions, peaks and contractions, we always have. Contractions come at us with varying degrees of magnitude. I am not predicting the magnitude of the next recession, but I am pretty sure we will have another one. That is the American business cycle, Econ 101. It has been widely quoted that more millionaires were made in the "Great Depression" than in any time period of American History. I haven’t done a study on "when" in the depression most of the millionaires started, but my guess is that the majority started their endeavors late in the 1930s in the trough or early into an expansion. Colonel Sanders of KFC fame started serving fried chicken at his gas station in the 1930s. He probably started serving chicken just to increase traffic for gasoline sales. Bill Hewlett and Dave Packard became business partners in 1939, resulting in Hewlett Packard. Had these depression era millionaires started their endeavors at the peak before the great depression the outcome could have been significantly different. Contractions create opportunities by bringing down valuations that have been inflated during the peak of the cycle, exposing weaknesses in business models and management, providing opportunities at lower costs to entry for entrepreneurs and well managed companies to innovate and build better mousetraps. That’s good news.

Our economy is coming off a "credit high". Basically, the credit bubble burst and we are in a period of "deleveraging" that could continue for some time. The "Baby Boomers," those of us born between 1946 and 1964 are not the same consumer today that drove the credit build up with help from accommodating tax policies ( look to May, 1997, for the first time you could sell your home and exclude $500,000 of gain if you were married, every two years and not have to wait until you were age 55 and pay taxes on any gain over $125,000) and credit availability (that one was obvious), consumer spending was in vogue, now it is consumer frugality, except for things we want. According to the US Census Bureau there are about 78 million in the Baby Boomer age group. Quite simply spending and saving trends are changing for this large segment that represents a little more than 25% of our population. This is a fact that we can not change with monetary and fiscal policy. While reports on consumer spending may show improvement, it is important to look at where the spending is occurring. A rising tide in this environment may not raise all ships. But some ships will be raised, so look into the horizon for those masts. That is good news.

What is working for our economy now? Recent prices at the gasoline pump are lower, interest rates are at extreme lows due to an accommodating Federal Reserve, there is liquidity, the dollar is weak (helps with the exporting of our goods), assets prices (especially real estate) have been lowered and Corporate profit margins are good.

What is not working for our economy? Risks of Geopolitical events and terrorism, the appearance of protectionism in our legislative process, uncertainty of inflation, Congress and the administration, our country’s fiscal issues, our demographics, slow economic growth, uncertain tax policy, slow moving implementation of newly enacted and proposed regulations creating extreme uncertainty for businesses and the consumer, consumer and business negative sentiment resulting in caution, causing a lack of demand for many of the usual goods and services.

Yes, there are more on the "not working lists" than on the "working lists". But these lists are fluid and can change before you wake up tomorrow or just stay on the page until the paper yellows. Its usually when the paper yellows that significant changes begin to happen. What worked yesterday may not work tomorrow, but opportunities exists in all environments. That’s good news.
Martin James, CPA/PFS
October 11, 2011
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