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Mark's Market Blog

8-8-09: The Recession is Over!

By Mark Lawrence

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The market has shot up the last four weeks in an historic run-up, reaching its highest value for the year. The bulls among us still have energy to run off. There's talk on Wall Street that this is the beginning of a new bull market and stocks will continue to raise to achieve all-time highs in the next 18 to 24 months. Buy in now or miss the boat. . .


S&P 500, Jan 1 2009 to July 31 2009

The recession is over. I continue to believe this market will experience another profound drop in the reasonably near future. How can this be? We have to define the word "recession." The official definition is "two consecutive quarters with negative growth." By that definition, it seems very likely that the numbers for the current quarter - July, August, September - will show very small positive growth and therefore a technical end to the recession. The popular definition of recession is a bit more vague; it has to do with the end of layoffs, with people re-appearing in malls and shops, with businesses increasing their purchasing, and eventually with job creation. By this definition, things are looking up: layoffs are at half the level of a couple months ago, businesses have sold off most of their stocks and the fire sales are mostly over, people are starting to feel more confident.

However, this has been no ordinary recession. Normally in a bull market, businesses rush to hire people and build up stock, eventually getting a bit excessive and needing a period to correct the excesses. This time the recession was caused by some huge financial problems, something this country has not really experienced since 1929. So we need to ask, have these financial problems been fixed? I believe the answer is a resounding "no," we still have major problems with unemployment, housing prices, upcoming foreclosures, commercial real estate, and a lot of shaky banks. Business depends on finances, and consumers depend on finances. Therefore we can expect that this country and much of the world will fall right back into recession sometime in the next 12 months.

The economy is improving not because we have fixed our financial and real estate markets, but because in the last 10 months the Fed has loaned out a couple trillion dollars, and the Chinese banks have loaned out another $1.2 trillion. Curing a serious debt problem by issuing more debt is like curing a hangover with a couple stiff shots of vodka - you feel better for today, but the problem has not been addressed. Obama has made a big bet on this recession ending now. If / when we start our "double dip," the voting public is going to think of the second dip as Obama's recession, not as a continuation of the previous recession. There will be a large political price to pay for this. Furthermore, when the banks and Wall Street have trouble next year, they're going to find that the public's tolerance for trillion dollar bailouts has been exhausted.

TheStreet.com ranks most every bank in the country each quarter; I just learned my business bank is ranked "D-" and will struggle to survive further economic shocks. This explains why they suddenly have a new CEO, and the depth of their management problems is indicated by the fact that they have kept on the previous CEO in a vague advisory role. My personal bank is rated "B+" and is quite solid - they don't have a new CEO. You can look up your bank by state and name. If you have substantial savings you should consider taking appropriate action, for example by setting the search criteria to your state and banks with rankings of "B" of better, then moving your money to a banker who is likely to still be in business in 2012. There are 7,374 banks in California; 43 of them have an A rating.

China's GDP growth and stock market are the envy of the developed world. But policymakers are pumping money like mad to prevent unemployment and social unrest. China's economy may very well be a bubble set to burst. With $1.2 trillion of new loans made since November, real estate speculation and bad lending are rampant. Because the economy is state-controlled, the ruling Communist Party might be able to avoid a crash but if you make bad economic policy you have to pay for it sometime down the road.

The July 9.5% unemployment rate does not reflect the 4.4 million people who've been unemployed for more than 27 weeks, or the employees who've been forced to work less and make less. As part of the above mentioned cost-cutting efforts, companies cut the hours worked by a record 2.3% to an all-time low 33 hours. The "all-inclusive" unemployment rate published by the Bureau of Labor Statistics is 16.4%. Add in part-time workers who wish to be full time and our effective unemployment rate is roughly 20%, approaching the 25% - 30% rate in the depths of the Great Depression. Suppose you are a company executive. If the economy gains momentum, would you hire new employees or simply increase the hours worked by current employees? There is no light at the end of the tunnel when it comes to better unemployment numbers.

Cash for Clunkers, Washington's newest great-tasting economic cocktail, is being criticized by Edmunds.com. They explain that 200,000 vehicles worth less than $4,500 are traded for new vehicles every three months. There have been about 250,000 CARS transactions so far, which means the auto sector had a net gain of 50,000 new vehicles. With $1 billion budgeted to fund the program, the transaction cost per new vehicle comes to $20,000. We are paying consumers to do something most would do anyway. Furthermore, this will have to be paid back with both future taxes and with lower future sales for the auto companies. Congress liked this wake-up cocktail so much that they just added $2 billion to the pot, buying another 500,000 clunkers.

Homeland Secretary Napolitano predicts severe flu epidemic for fall, saying the pandemic would mirror 1957 when flu killed about 70,000 people in the USA and more than one million people worldwide. That's about twice the death toll of seasonal flu, which annually kills about 36,000 people and results in 200,000 hospitalizations.

For over a decade now I've had my kids memorize the top US universities: Harvard, Princeton, Stanford, Yale, Caltech, MIT, Berkeley. The Chinese started ranking universities world-wide a few years ago, their list is Harvard, Stanford, Berkeley, Cambridge, MIT, Caltech, Columbia, Princeton, Chicago, Oxford, Yale. On both lists, only Berkeley is a public school. Just a notch below is UCLA, UC San Diego, UC Santa Barbara, UC Irvine, UC Davis. That's now projected to change. The University of California system, without question the best public university system in the world, is being gutted by Sacramento. State spending per student has declined by 40% in the last two decades, and there is a projected shortfall of 1 million college graduates by 2025. Young professors are routinely being poached by other universities with offers of more pay and better facilities. In my mind this is a bigger crime against our youth than even the massive national debt we're stupidly building up and dumping on them.

25 years ago I started announcing a new theory of mine: "In a couple generations there will be a huge surge in population, and it will be blamed on the pill." My idea was that people who didn't really want kids stopped having them sometime in the 70's through 90's, and a day would come when most children were the product of parents who really wanted kids, instead of just parents who really wanted sex. It appears that day is here. In the most developed nations, the birthrate has increased from a low of about 1.2 children per mother a decade or so ago to nearly 2.0 children per mother now and is raising.

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