The Patient is Back to ICUSubmitted by Guidant Planning on August 9th, 2011
By Allen G. Yee
The patient I’m referring to is the US Economy. Over the last couple of years I have paralleled the US Economy to a hospital patient that is so ill; it was in the intensive care unit. In my analogy, the attending physicians (The Fed and Ben Bernake), reminiscent of an episode of House, have been scrambling to diagnose and prescribe (almost) everything in their repertoire to keep this patient alive. The most recent of which is an IV bag we call QE2. After administering this stimulant, the patient looked well enough to take off life support, and we were anxious to see if it could continue unassisted.
Apparently, the patient wasn’t as stable as once perceived and the true health issues have not been addressed. In fact, many indicators are pointing the conclusion that the recession never truly ended. I bet the folks that have been unemployment for the last two years could’ve have told our “attending physicians” how sick the patient really was. Recently the Bureau of Economic Analysis (BEA) highlighted the fact that our recession ran deeper and, in my opinion, continues to impact us now. The BEA recently released:
“For 2007-2010, real GDP decreased at an average annual rate of 0.3 percent; in the previously published estimates, real GDP had increased at an average annual rate of less than 0.1 percent. From the fourth quarter 0f 2007 to the first quarter of 2011, real GDP decreased at an average annual rate of 0.2 percent; in the previously published estimates, real GDP had increased at an average annual rate of 0.2 percent.“
My interpretation of this information is that we never truly emerged from the recession, despite what Uncle Sam, Ben, Tim and their friends may say.
The article below by Richard Davis of Consumer Metrics Institutes casts a much clearer light the Great Recession.
Now that the Washington has taken center stage with the debate and negotiations over the US Debt Ceiling, the circus will continue. Much of the political chicken has been played believing the theatrics will not harm our economy. Well the theatrics have hurt. US Debt just lost its AAA credit rating from Standard and Poors. Uncertainty breeds risk aversion and economies (US and others) need participants (consumers and business) to take risks. The politicians believed a bipartisan agreement would mean business as usual and the economy would continue on its current state. Unfortunately this is not the case.
The real question should be “what now?”
At my most recent Quarterly Workshop held on July 20th, I discussed the current status of our economy as seen from both an optimistic and pessimistic view. After, I described my belief that the economic patient will fall ill again in 6-12 months. In the short-term, I would not be surprised if the Fed (Bernanke) prescribes another round of stimulus in an effort to support the economy. This dosage of medication (stimulus) will have limited effect and in 6-12 months or when the Fed withdraws again, the patient will once again fall ill. And at that point, despite what the attending physicians may prescribe, it may not effectively avoid another (continued) recession.
In my belief, continued volatility can be expected to persist. The equity markets (domestic and international) will have wide swings both positive and negative on a daily basis. Asset classes (stocks, bonds, commodities and real estate) will continue to increase in correlation and diversification in different asset classes will have less and less effect in reducing portfolio volatility. Bubbles will form in commodities and bonds.
It is imperative to review your risk tolerance, time horizon and most importantly your investment strategy. There is certainly hope- there’s still quite a bit the attending physicians can prescribe and this patient has quite a bit of fight. Only time will reveal the direction of our economic health both in the short and long term.