History is repeating itself.
People/investors hear a lot about the last recession in 2009. Some say that it was the worst recession that the USA have had since the Great Depression. Certainly the depth of that recession was among the worst and the length of it was one of the worst as well. GDP stayed negative for 1 ½ years. It wasn’t pretty. But the one that is coming in 2012 is going to be very rough too. Here’s why.
At the start of the last recession, unemployment was arguably in the 4.5 - 5.5 percent range. Today it stands at more than 10%[ Gallup survey]…not a great starting point for the next recession.
In fact, if you look at most of the countries that have riots in the streets right now, one of the things they have in common is 11-13 percent unemployment rates.
Well if USA start the next recession at 10%, it wouldn’t take much for it to climb above the 11 percent mark. It could cause rioting in the streets like the world have seen in so many places in the world. USA is certainly not immune to it.
But it’s not just the unemployment issue that’s bad (although that’s got to be the worst part of it.) It’s also the fact that the Federal Reserve shot all of its “interest rate bullets” in the last recession to no avail. Helicopter Ben is running out of his ammunition. As the last recession was about to begin, U.S. interest rates were just above 5 percent. Today they stand within a range of 0 percent to 0.25 percent since Dec-2008. So it is essentially out of ammo in their most common recession fighting tool.
This means that they’ll have to invent a new “recession fighting gun”. Will that come through another round of ineffective Quantitative Easing? It may. But surely everyone realizes by now if the last two rounds didn’t turn things around that a third round is going to be just as futile.
Here’s another tough spot for the Federal Reserve.
The last time USA were in a global recession and it led the world downward. However, this time, Europe is leading the charge downward. Many of the smaller countries have sputtered out already really but the big one is coming…Germany. Europe is going down the drain and it will drag the USA further down.
The German economy is slowing down considerably and their exports are slowing down all the more lately too. (The German economy grew at 0.1 percent in the 2nd quarter). This is a recipe for disaster. It won’t take long before that is fully realized. Additionally, last week it got further confirmation that the Eurozone’s manufacturing has now had two negative readings. I believe that all of this is one reason why European stocks have already been hit harder than U.S. stocks. In fact, I believe they are showing where U.S. stocks are heading. First week of August-2011 saw $3.1 trillion wiped off the equity market globally. Oouch, it hurts the wealthy investor.
However, here’s the deal with all of that. The Fed has more of a direct influence when the U.S. is catalyst for the global recession. However, with Europe leading the charge downward, they are a bit more “held hostage” to what the ECB and European governmental officials decide to do about all of it. Oh but there’s China right? They can save the day, surely right? Their growth rate is slowing down too. Chinese leadership is trying to control inflation and have raised interest rates 6 times during the last one year.
Chinese are buying lot of natural resources from Australia. In the last global recession their economy was still clicking along enough to keep themselves out of a recession and the country they buy from so much (Australia) out of a recession too.
However, this time Australia might join in on the global recession as China slows down considerably and fails to generate enough growth to make up for the lack of growth in the rest of the world.
The good news in all of this? The currency market is the answer to every recession. Why? It is one of the only markets that have the financial assets that still do well through a recession. It’s also the market that tends to have sufficient liquidity during those times too. Canadian dollar, yen and Swiss franc are some of the few financial assets in the world that “hold their own” or increase in value during recessions. If you analyse, in “good times” there are literally thousands of stocks, commodities, bonds, real estate investments, etc. that can be invested in. In economic downturns, most all of these markets struggle to have the needed liquidity and have the financial instruments that go up when everything else heads south.
This is why I advice clients who don’t lose sleep at night even though I know a recession is coming. It’s because I know that my clients have instruments that they can invest in that will help them to fend off the effects of the recession and their families. And it can be that way for other investors too. Make sure investors have exposure to currencies in their portfolio and understand the currency market dynamics. Investors will be glad that they protected themselves when the recession does get here.
Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK.