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Is This the Double Dip?

Things are not looking so good. This morning the Labor Department reported that 484,000 people filed new claims for unemployment insurance last week, an increase of 2,000 over the previous week. A day earlier came the news that lenders foreclosed on 92,585 properties in July, a 9 percent increase over June. Foreclosures are running 6 percent above last year, and may not peak until 2011, says Realtytrac, the company that keeps those statistics.

Bankers, meanwhile, wrote off $7.9 billion in home equity lines and loans in the first quarter of 2010, and report that there are now more delinquencies in home equity debt than there are in any other kind of debt, including credit cards and auto loans.

Other indicators posting negative reports in recent weeks include manufacturing levels, factory orders, business orders, productivity, the U.S. trade deficit, and the confidence levels of homebuilders, consumers, and small business owners. Oh, and the stock market, with the Dow Jones Industrial Average opening this morning several hundred points below where it was on Tuesday afternoon.

Even the Federal Reserve, which usually aims to reassure, conceded on Tuesday that the recovery had lost momentum. It will buy bonds to put more cash into circulation.

So, even though most of us have been hunkering for quite a while, it appears that "hunker down" is the advice of the day. Here's a bit more:

  • Forget about deficit reduction. There's scant political will to cut spending or raise taxes, and if the economy is weak, nobody wants to do either. Keynes 101 holds that if the government tightens, that will make the economy contract. If anyone in Washington attempts to rein in that debt, they'll write legislation that doesn't kick in until far into the future. If, indeed, this is a second dip of recession, that makes it more likely the Bush tax cuts will be extended at the end of this year.
  • Reconsider your "buy and hold and hold forever" philosophy. The stock market is far more volatile than it used to be, and it only takes a couple of clicks to trade a stock. Furthermore, with online commissions often under $10 each, transaction costs are no longer a big factor. I am not telling you to become a day trader; a retirement plan in particular should be set up as a long-term portfolio. And you can cause yourself a lot of damage by selling on bad days (like today) or buying at peaks. BUT... the times no longer call for just sitting on fat profits or deep (tax-deductible) losses. If you own individual stocks, you should be prepared to sell them in a timely manner after big runups or when sell-offs give you usable losses.
  • Don't assume bonds are always safe. The Fed's actions pushed long-term Treasury rates to fresh lows, with 10-year yields at 2.71 percent. That's fine, if you want to buy a low-yielding bond and hold it for 10 years. But once those indicators starts looking more positive, yields can rise rapidly, and that would make your bond holdings worth less. If you had to sell, you'd lose money.
  • Keep the faith, and hold the line. Not all the economic news is bad. GM and Macy's reported surprisingly good profits. New foreclosure notices have declined, and more companies expect to hire in the next few month. The bipolar stock market shifted from pessimistic to optimistic while I was writing this blog post (though it could shift back before you read this.) So stick with your own recession plan: Hold the line on your spending, be happy if you have a job, and use as much of your earnings as you can to pay down debt and invest more for the happy day when the U.S. economy resumes a solid growth trajectory. That day will come some day; we just don't know how much trouble we have to ride through before we get there.
Photo by Stéfan on Flickr.
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