US Economy in Worst Part of the Recession?

Dear Friends,

There was an Economists Survey which was reported in the Wall Street Journal. video clip below The Survey suggest that the most economists expect the US Economy to be in its worst part of the recession right now, and will improve next year, albeit painful, slow growth.

How you want to interpret the Survey Results is up to you. Some will take it at face value, and thus, this is good news. Others, who believe that most economists are wrong, will take a Contrarian View, and form an opinion to the contrary.

The Fallacy of Statistics in the Current Economic Situation

Most Economists are trained mathematicians, and they use statistics to make informed decisions. This is fine, provided that the Key Assumption of the Statistical Data of Normal Distribution is met.

What is this Key Assumption? It is that the Economy is behaving NORMALLY. However, this is not the case under the present, "Worst Economic Crisis since 1929 Great Depression / 1974 Severe Economic Recession" Situation.

The Current Economic Situation is one of the worst to be experienced in the last 50 to 100 years of US Economic History. How bad it will get, is anyone's guess at present. Under this extremely stressed conditions, Statistics that rely on Normal Distribution will not yield reliable guidance.

So what will yield reliable guidance, if not statistics? It is a Management Technology called Systems Thinking, applied to Scenario Planning.

Scenario Planning Technology as an Alternative Tool to Develop Foresight

My view is that we should not make wild guesses. Rather, we should ask ourselves the important Scenario Planning question: -

"If the US Economy is in its worst part of the recession, what events should be happening right now, to tell us that this is the High probability Scenario?"

Or, rephrased, the question could be: -

"If the US Economy is to recover, what Key Milestone Events have to happen before we can see the Bottom of the Recession?"

It has been said that Asking the Right Questions is the most important thing to getting the right answers. The person that can answer the above questions correctly, will be in a fantastic position to take advantage of the Great Strategic Investment Foresight.

Key Driving Forces that Shape the Future

However, answering this question is not as easy as we think it to be. To complicate matters, we need to ask ourselves a few more important questions regarding the Key Driving Forces that will shape the future of the US Economy, and thus, the World Economy.

"What are the Key Driving Forces Shaping the Future of the US Economy in the next 10 years?"

I would name the following: -

• The Future Price of Oil.
• The Highly Significant Demographic Shift of the Ageing Baby Boomers.
• The Social Security Fund Deficits (both the Income Deficit, and ultimately, the Contribution Deficit).
• The Significant Shortfalls in Medicare and Medicaid Programs.
• The Significant Losses Experienced in the last 1.5 years by Pension & Retirement Funds and Mutual Funds.
• The Significant and Ballooning Effect of the Government Debt, Government Budget Deficit, and Balance of Payments Deficits.
• The Unquantified Amount of Banking Losses that will ultimately flow through the Banking System, from Sub-Prime & CDOs, Normal Housing Mortgages Defaults, to Consumer Loans, Credit Cards, Automobile Loans, Student Loans, to Municipal / State Bonds Defaults, to Commercial Property Loans & Corporate Loans Defaults.
• The Unquantified Losses of the Credit Default Swaps (CDS) Derivatives Market which has freezed in liquidity to a large extent.
• The Growing Unemployment and the Cash Strapped Consumers which may reach double digit levels, if left unchecked.
• The Asset Deflation Environment where Prices of all types of Assets (Properties, Stocks, Commodities) just keep going down, and down, and down.
• The Artificially Low Deposit Interest Rate, compared to the Significantly Much Higher Loans Interest Rate. Here, we are led to believe on the one hand, that there is plenty of liquidity in the banking system, and thus, the low level of deposit interest rate, and yet, on the other hand, the complete freeze in lending due to lack of liquidity in the banking system. The longer term implications of the Central Banks' actions to keep deposit interest rates artificially low, whilst the banking system is struggling with shortage of liquidity should be significant and interesting to analyze.
• The Effectiveness of any US Economic Stimulus Package to create / retain Employment. It has always been assumed that Keynesian Theory works. But Keynesian Theory of Government Spending to stimulate economic growth worked in the Great Depression when it was administered in the later years, i.e. 1934 onwards, after the necessary economic pains and banking & corporate collapses had been experienced. Will it work BEFORE the collapses and the necessary pain? No one knows the answer because we have never experienced such a situation. We know Keynesian Theory Government Spending works for normal recessions, but it may not necessarily work in a Balance Sheet Recession as experienced in Japan and now, the US.
  
• The Effectiveness of the US Authorities' Rescue Plans to minimize Panic in Financial Markets - The US Authorities can't save ALL Financial Institutions, and thus, we can expect that the Panic isn't over. There will be other Panics in the next one year.
• The Sustenance of Foreign Investors' Confidence in the US Dollar and the Potential of a US Dollar Currency Crisis.
• The Inflationary Implications of Excessive Printing of Money by the US Authorities.
  

Increased Possibility of a Primary Long Term Recessionary Cycle

There is an Increased Possibility that this time, the economic situation in the US is a Primary Long Term Recessionary Cycle. If the US has experienced 20 years of unprecedented economic growth due to the Baby Boomers' Demographic Trend, why do we ignore the same Key Driving Force in developing foresight on what may happen for the NEXT 20 years?

If Baby Boomers caused booms in the past 20 years, in consumer goods, automobile market, stock market, property market, etc., what makes us think that the same Ageing Baby Boomers Demographic Trend will not cause Bust after Bust in all kinds of markets as they face retirement and health challenges?

I am still in the process of researching the implications of the Changes in the Baby Boomers' Demographic Trend. When I have completed that research, possibly in the next two weeks, I will be in a much clearer position to finalize the answers / Scenarios to the above mentioned questions.

I urge anyone who is thinking of a "Buy & Hold" Investment Strategy to seriously consider the above questions before they invest.

Best wishes,

Ooi

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