Editor’s note: The following is a guest commentary from one of WND’s sponsors, Kevin DeMeritt, president of Lear Financial. If you would like to learn more about investing in precious metals, take advantage of the free information Lear Financial is making available to WND readers.
Now that we’re a quarter of the way through 2002, now that we have a better vantage point for seeing what’s up ahead, what does the coming economic landscape look like? Does it climb smoothly up, up and away? Are there green fields and bubbling brooks … or is there a jagged cliff not far from here?
The first surprise feature of the 2002 terrain is a recession that no longer seems to be receding. Amazingly, a recovery of sorts now surrounds us. That’s made all the more amazing because the relatively reliable rule-of-thumb is that recessions last at least half as long as the preceding boom. Obviously, that didn’t happen here. Which leads us to the question, did the recession even happen at all?
Was it more of an economic speed bump than a bona fide downturn? Or did it happen and we’re now in store for some nasty “double-dipping”?
If it was an official recession, it was the mildest since World War II. The classic definition of a recession is two quarters of a reduction in Gross Domestic Product. The looser definition is a “significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and wholesale-retail trade.”
While some of these conditions did occur to end the uninterrupted 10-year expansion, all of them didn’t happen. At least not for “more than a few months.” In fact, Treasury Secretary Paul O’Neil has just said, “It seems quite clear now that our economy maybe never suffered a recession.” Nevertheless, the final authority for calling a recession “a recession” resides at the National Bureau of Economic Research, and the learned people there insist we had one.
Either way, it seems we’ve managed to crawl our way out of downturn territory. And “crawl” is the right term to use. The recovery is anemic at best. The last quarter of 2001 saw GDP growth at 0.2 percent. GDP growth for this quarter just ending is projected by the Fed to be somewhere on the order of 1 percent. Clearly, it’s a recovery without a great deal of enthusiasm.
So, what’s in store? Are we ready to continue with the boom now that we’ve “taken our medicine”? Will the recovery stall? Is it here in the shape of a “V”? Or a nasty “W”? Or is this, in fact, a recovery at all?
The double-dip scenario
Many economists believe that we haven’t seen the worst yet.
A “double-dip” has happened five out of the last six recessions. In a double-dip recession, the first economic downturn leg produces a feeble recovery, which leads to a further, sometimes steeper downturn. Could this be happening now?
Business Week painted this scenario:
“The double-dip scenario goes like this: After dropping in the final two quarters of 2001, real gross domestic product will manage a gain this quarter. But further weakness in consumer spending will cause the economy to relapse. Consumers will be cowed for several reasons. First, last year’s incentives stole car sales from 2002. Second, labor markets and wage growth will weaken further. Third, two recent supports for consumer spending will fall away: mortgage refinancings and cheaper energy. And last, with savings low, consumers will be crushed by their debt loads.”
Citing many of these same reasons, Stephen Roach, the chief economist at Morgan Stanley, recently predicted a double-dip just ahead. He believes that too many economists, money managers and TV talking heads are “overly exuberant” about the economy and are actually in denial about its true state. “The denial is deepest when it comes to assessing both the behavior and the perceptions of the U.S. economy,” he stated.
Comparing the present recession to the last five double-dips, he believes that many of the same factors are now present. Last quarter’s consumer spending was up because of extraordinary, one-time incentives such as zero-interest car loans and aggressive discounting by retailers. That caused something unheard of during a recession – consumer spending at the robust rate of 4.5 percent a year, while the rate averaged only 0.4 percent over the 28 recessionary quarters since 1960.
“The spending burst of late 2001 was literally 10 times as rapid as the recession norm,” he said. “Never before have consumers stretched this far in the depths of a recession. If that’s not denial, I don’t know what is.”
Roach also believes that a genuine economic shakeout is necessary before stocks can fully recover. “Tech stocks are still priced for a five-year earnings growth of 34 percent – an outcome never achieved in history,” says Roach. “Recovery will be hard to come by until the denial finally cracks.”
Roach isn’t alone in this double-dip uncertainty. 250 analysts from the National Association for Business Economics just polled believe that the prospects for a double-dip recession was somewhere just under an unsettling 50-50. And Barron’s Magazine’s Michael Shotter gave this fascinating contrarian opinion on March 18th: “Given current high valuations, the consensus view that the recession is behind us and increasing investor optimism, we believe that a continuation of the market decline will be the eventual outcome.”
The opinion of America’s most successful investor
Warren Buffet is to the investment world what Michael Jordan is to basketball. He’s a superstar with the uncanny aptitude of bucking popular investment opinion and calling economic trends before there’s even a hint they’ll happen. And, right now, he’s not too keen on the prospects of either the economy or the stock market.
In his recent letter to shareholders, he wrote this about the stock portfolio of his company, Berkshire Hathaway: “Our restrained enthusiasm for these securities is matched by decidedly lukewarm feelings about the prospects for stocks in general over the next decade or so.”
Going further, he wrote that “today’s equity prices foretell only moderate returns for investors.” He admitted that it was even hard for him to consistently generate good gains in this market, writing that “… my results were poor, just as they have been for several years.”
Put in other words, the boom years, when so many of today’s antsy stock investors were born and bred, may only be a thing of the past. Perhaps, like Roach, Buffet realizes that the economy actually needs a full-blown, honest to gosh shakeout – not some debatable recession – before things can be set right.
Whether we’re heading for a double-dip or not, whether the stock market finally resigns itself to a true earnings picture or not, gold continues to be a good play amidst all the uncertainty. In another March 18th Barron’s Magazine article, Paul Stuka wrote, “I believe gold works in any environment going forward. There is a very favorable supply/demand outlook. If the world keeps growing, there is going to be more jewelry. India and China believe gold is money. The Chinese Central Bank could be buying a lot of gold. Gold is only about 3 percent of their reserves. The average of other countries is 10 percent.”
Add to that the gold rush in troubled Japan, the fact that Merrill Lynch has just bought 3 million ounces of gold in the last Bank of England sale, the mounting predictions for $340 to $600 gold in 2002 by such worldwide analysts as Fidelity, Forbes, and Barron’s Magazine, the statement by a leading Fidelity analyst that gold may be the finest “double-play” investment out there, able to prosper in both a double-dip recession and an expansion, and, finally, a continued record gold supply/gold demand deficit, and gold may well be the antidote for uncertainty in 2002.
No matter what lies ahead.
Special for WND readers, Lear Financial is making available free information on investing in precious metals.
With more than 20 years of industry experience, Kevin DeMeritt is president of Lear Financial, one of today’s fastest growing and most successful precious metals investment firms.