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Maybe The Recession Isn't Over

Last Updated Oct 6, 2009 8:20 AM EDT

Over the last six weeks, economists have been racing to declare that the recession is over and then describe what the recovery will look like. But economics doesn't lend itself to that much precision. Take these predictions with the appropriate skepticism and get prepared for a range of outcomes.

Murky Numbers. Given that most economists didn't see the size and scope of this near depression meltdown coming, I don't have a great deal of confidence that they can clearly see the end of this cycle either. Remember how many economists thought the sub-prime crisis would be contained?
  • Consider that last Friday there was a Bloomberg article indicating that because of the speed and severity of the downturn, the Department of Labor may not be accurately assessing the unemployment numbers.
  • If that's off, what else might economists be looking at that isn't providing an accurate read on the economy given the unique nature of this recession?
  • The common theme in this crisis has been that most economists have underestimated the depth of the problems.
Shape of the Recovery. In addition to predicting the end of the recession, economists are also trying to predict how the recovery will play out. We have seen a full range of economic recovery scenarios from a "V" shaped recovery, to a "W" shaped recovery, and now the more fashionable "square root" recovery.
  • If you're an economist, it's your job to try to predict these things; but just because it's your job, doesn't mean you can do it.
  • Economics is an important profession, but sometimes the conclusions are oversold.
Apollo 13 Economy. Because I'm not so sure we're in a recovery, I'm going to throw a new term into the hat. I'm saying that we're in an Apollo 13 economy.

If you remember the movie Apollo 13, the astronauts had basically lost control of the command module but still had to execute a perfect re-entry into the earth's atmosphere.
  • If they came in too high, they would careen off into outer space never to be seen again.
  • If they came in too steep, they would burn up in a blaze of glory.
  • To survive, they had to come in at just the right angle.
Well, I think Ben Bernanke is approaching the economic equivalent of the earth's atmosphere. If Bernanke withdraws the stimulus too fast, the economy may crash and burn again. If he keeps his foot on the gas too long, he may unleash massive inflation and higher rates. So he needs to thread the needle. And the economic levers he's used to pulling aren't working too well. That means the jury is still out on the recovery. But hey, it's just a theory.

What To Do. While economic analysis is important, when it comes to managing your money, don't get wrapped up in trying to figure out who is correct. That's a game for people who think they can trade their way to profits. If they can get a jump on the competition, then maybe they'll make the right bet and hit it big. And if they're wrong, they'll probably lose a lot.

But that's not the game you should be playing with your life's savings. You need to be as rational as possible and accept that you don't know what the future holds. So, get your portfolio prepared for a range of probable outcomes.

Ask yourself the following questions:
  • If we have a recovery, what in your portfolio is positioned to benefit from that?
  • If we don't get a recovery, what in your portfolio will provide protection?
  • If we get inflation, do you have something that will help offset the effects?
  • If we stagnate, is there something that will provide a return even if stock prices don't increase?
The answers to these questions will help you manage risk, which is the key to your long term success. Those who get wiped-out in the markets usually fail to properly manage risk. They get distracted by trying to predict the future, and leave themselves wide-open to a bad outcome if the world doesn't move in the direction they had hoped for (either good or bad).

Bottom line. There are multiple paths that we could take from here. But since you can't be sure which one the economy will follow, get a little something positioned for each.

As with all financial matters, consult your individual financial advisor prior to making any decisions.