As is the case with many economic indicators, by time you get the official news, its too late. The main question is this. Do we have to wait for the "official" lagging indicators to tell us we are in a recession, or are we smart enough to see it for ourselves.
Energy prices around the globe are soaring, GM and Ford are in trouble, and short term interest rates are killing people with adjustable rate mortgages, lines of credit, and interest only loans. And now that more than a million people are displaced in New Orleans and the Gulf Coast, I would have to be totally brain dead to believe the economy is strong.
Personally, I don't have to wait for the official word before I begin to see the handwriting on the wall. In economic terms, what we are witnessing are "Exogenous Shocks".
Exogenous Shocks: These include natural disasters like hurricanes, floods and earthquakes which are normally short term problems. Another Exogenous Shock include Oil Price Shocks , as well as a War.
What we have economically, is a Perfect Storm scenario. We don't just have one shock to deal with (War), we have three.
1) Natural Disasters: Usually the effects from a natural disaster have very little lasting impact on the economy. The effects from Hurricane Katrina are an entirely different story. In Katrina, you have four disasters in one (hurricane, flood, oil spike, and immediate unemployment).
2) Oil Price Shocks: This type of shock was occurring on its own without Katrina. Oil Price Shocks almost always trigger recessions.
3) War: Granted, the war in Iraq is not like WWII or Korea, but even the Gulf War of 1991 eventually triggered a recession.
With all these "Shocks" hitting at once, we do not have to wait for the GDP numbers to be released to tell us what we already know. 70% of GDP is consumption or the consumer. You can't tell me that the consumer is going to continue propping up the economy and continue spend at their torrid pace given the current circumstances.
Soon, you will begin to see the Consumer Confidence numbers decline. The Fed can help fix Demand-Pull inflation by tightening fiscal and monetary policy, but with Cost-Push inflation, which results from supply shocks like oil, often the only cure is a recession.
I am raising the portfolio weighting in the Rydex Tempest 500 Fund (RYTPX) to 10% in the IA portfolio.
Comments (1)
john - that is a great point you make (lagging indicators) - maybe you can write a little more on becoming defensive on this market. /sergio
Posted by sergio | September 2, 2005 6:14 PM
Posted on September 2, 2005 18:14