Wednesday, December 16, 2009

Forecast 2010 Will there be a recession?

Still with the practical purpose of making one million Euros in less than five years and surrounded with the white Finnish winter in Helsinki, my objective seems clearer than ever.

However as I have been deeply attached to all the positive thinking that requires this objective, some of my new acquaintances and advisors believe that my objective is useless and almost impossible, some others gave me some great insights and interesting ideas which I really appreciated and some of them wonder How I will make it in the middle of a recession? I have to say that we all know that the so called "recession" began: December 2007, according to the official arbiter of business cycles, the National Bureau of Economic Research (NBER), which made the announcement. So now the question is: when will it end, and how deep will it get?

There are good reasons to be worried about both of these measurements, as the headwinds facing the economy are powerful indeed. But it's best to resist the temptation to give in to predictions of unconditional gloom and take a cool-headed look at how this recession compares so far to the many other downturns we and our previous generations have survived in the past.

On the likely depth of the recession, it has been often said that this may be the most severe recession "in decades." This statement is almost certainly true but not particularly informative, as the two most recent recessions, in 1990-91 and 2001, turned out to be famously mild and short-lived by historical standards that is almost forgotten . So the real question remains: "the deepest recession" in exactly how many decades?

The most intuitive, and legitimate, reference is the 1981-82 recession, which lasted a longer-than-average 16 months and led to a peak of 10.8% in the unemployment rate - by all standards, a pretty serious affair. Still, it would take an extraordinary amount of additional severe damage to today's economy over a fairly long period to drive the unemployment rate from its current 6.5% to double-digit territory.

It is also important to remember that the 1981-82 recession was almost deliberately caused by sky-high interest rates, in the titanic fight of Fed chairman Paul Volcker to drive inflation out of the system. In contrast, the Fed's response now has been to pull out all the stops in the other direction, including the precipitous lowering of short-term interest rates and a barrage of other actions. A somewhat more plausible comparison to the current downturn is the 1973-75 recession, commonly attributed to the surge in oil prices at the time. That one lasted a longer-than-average 16 months and led to a 9% peak in the unemployment rate.

Direct comparisons to the Great Depression have become more common in recent months, given the collapse of the stock market and consumer spending. But those comparisons overlook many key facts. During the Great Depression, the unemployment rate surged to 25% and GDP contracted by 28% between 1930 and 1932, an unthinkable prospect in today's environment, thanks to a long list of underlying differences between then and now.

For example, the banking system collapsed in its entirety during the Great Depression and the absence of bank deposit insurance at the time caused catastrophic erosion to household wealth and consumption. Today, FDIC insurance (and its recently elevated limit to $250,000) and (100,000€ in Europe) provides a significant cushion; the response of economic policymakers is immeasurably faster and more aggressive now; and the coordinated actions among the major economies today to address the root causes of the current episode are both impressive and totally unprecedented.

How long will this one last? The prevailing view: probably through the end of 2009. Two points to highlight here:

First, such a prediction is not based on any particularly refined insight that economic forecasters have into the current recessionary dynamic. After all, economic forecasting has a well-deserved reputation for being a notoriously imperfect art (most definitely not a science).

The predictions about this recession lasting through the end of 2009 are mostly based on the following simple calculation: Until the NBER's announcement, the prevailing view was that the recession probably started at some point during 2007 and it was likely to be about average in length, by historical standards. Given that the average length of the ten recessions since World War II has been 10.4 months, with a range of 6 months in the 1980 recession to 16 months in the 1981-82 one, the natural "placeholder" time frame for the end of this recession would appear to be the end of 2009. (if we consider that this recession has been far more damaging than all the previous which I personally don't)

However, the fact that the recession is now already more than 2 years old, and clearly not approaching its trough yet, raises the distinct prospect that it will exceed the length of the 1973-75 and 1981-82 recessions (both at 16 months), making it the longest since the Great Depression (43 months, from August 1929 to March 1933). The crowd fond of making comparisons to the Great Depression will be quick to declare some kind of victory on this one.

The great depression:

Second, the prediction that this recession may end around the middle of 2009 is not unreasonable, but even if accurate it disguises the critical question: What kind of a recovery is likely to follow? The answer is: probably a gradual one, unlike the more typical (but not universal) pattern of the economy coming out of most past recessions roaring ahead, propelled by pent-up consumer demand.

The healing process of a deeply wounded banking system, that has already led to nearly $1 trillion of write-downs, will act as a weight around the neck of any economic recovery in the beggining of 2010. Banks will likely continue the slow process of recapitalization and cleaning up the mountains of toxic assets on their balance sheets for a period longer than just the next few quarters.

That task will become even more challenging in the months ahead, as the recession itself will tend to generate an additional amount of toxic assets in their portfolios, impairing their ability to resume a more normal pace of lending. So, even though the economy may technically emerge from the recession in the new 2010, the recovery may initially become more of an issue of semantics rather than a robust turnaround in economic activity.

To be sure, this is a major recession and its downside risks in the midst of a highly volatile financial market environment shouldn't be underestimated. There are reasons, though, to believe that its severity and length will ultimately be contained by an unprecedented array of economic policy measures, some already in place, others in the pipeline, but here comes my objective in hand, to make out of the worst moments... the best ones at least in the Investment sector.

And after a couple of the stormiest years in anyone’s memory, who can deny that a dose of even partial sunshine sounds pretty good?

Maybe 2009 was tough, but as a business survivor, you can congratulate yourself on your hardiness and take steps to capitalize on a rebound. “The weak have given up and the biggest have been humbled,” says Bob Phibbs a consultant in Coxsackie, New York. “It’s a new game for everyone.”

The best news is that some key economic data now signal a broad move to positive territory. I trully believe that the recession has ended and we are looking at a modest recovery in 2010.

So how can entrepeneurs position themselves for the rebound? Keep an eagle eye on your stockpile of merchandise, take a fresh look at your market and introduce new programs that excite the customer. More than ever, the tightening up of consumers and businesses have caused everyone to look at value. What we need to do more than anything is break out of the commodity trap stay positive keep networking. Be a partner to your customers and be more concerned with their success than making a quick Euro in a transaction.

Take steps to become more visible. That can mean providing content customers don’t have to buy. “Keep asking yourself, ‘What can I give away to get noticed?’ That may be a newsletter with helpful tips (you can get one if writing me an email), or a webinar with voice on your web site.” (Project), or some crazy ideas that work if working toguether.

In the next two or three months, we will be getting a more solid feel for how 2010 will shape up. I think we’ll know by no later than March the trajectory of the recovery, I think people will be surprised by how fast the recovery comes in 2010. Until then enjoy the Holliday
season with your loved ones and keep writting me your positive feedback and ideas. As always so far this journey has already been a pleassure.


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