Should You Prepare For A Double Dip Recession?
The prospect of a double dip recession in the U.S. and the world is spooking investors and economists alike. We haven't really recovered from the deep recession which started at the end of 2007; now there are signs that we could be heading back into another before we ever get the growth in jobs, home prices, and production that would signal a real recovery.
The signs of a double dip recession are statistical, and they are emotional, too. Stock market prices -- a leading indicator of economic activity -- have dropped 11 percent in a little more than a month. The M2 money supply, which also heralds economic activity, is down 0.3 percent from its January level. Bank lending remains slow, and consumers still seem reluctant to buy anything big like a house or a car without a fat government credit bringing them to the table. Oh, and all those new jobs that were created in May? A head fake, says MoneyWatch's Jill Schlesinger. Almost all of them were temporary government-created Census jobs.
There are all of those worries out there, too: the possible collapse of the Eurozone and the end of the euro; that horrendous oil spill and the resulting economic hit to the Gulf (and possibly Atlantic?) coastal communities; the prospects of more war in the Middle East; and the giant debts of individual consumers and sovereign nations, including the U.S. Ugh.
But before you head to the basement with your gold coins and canned goods, consider this: Most economists still do not believe we are headed for a double dip. Some, like Templeton Asset Management's Singapore-based chairman, Mark Mobius, see the current global struggles as a bargain-hunting opportunity. The optimists point to Fed Chairman Ben Bernanke and say he will continue to make credit as cheap and easy as he has to, to keep everything chugging along. And that stock market slide? Remember that it comes on the heels of a 71 percent rally between March 2009 and April 2010. A recovery takes time, and there are reasons why it's better to have a slow recovery than a runaway one.
Bottom line? There are risks here that we could dip back into recession mode, but it is not a certain, or even probable path. Here's what you can do about it now:
- Take the gift. The slow and scary nature of this recovery is a gift for anyone with debts, because it is keeping interest rates near historically low levels for a long, long, time. Use this opportunity to refinance any variable rate debts that you can lock in at today's low rates, and also to pay off those loans as aggressively as possible. The less debt you have, the better off you'll be regardless of where the economy takes us next.
- Hedge your bets. I'm not talking about investing in crazy, hard-to-understand derivatives, I'm just saying that you don't know what's coming, so keep your portfolio very diversified. It's good to have some stocks, some bonds, a house, and some money in safe, safe certificates of deposit and money market mutual funds. Diversify further with some foreign holdings and perhaps a few shares in a commodity fund. Whatever happens, you'll be spreading your risks and be poised for some profits.
- Keep reading the tea leaves. There will be more signs of economic progress (or lack thereof) this week. On Wednesday, the Fed will release its beige book review of economic conditions and Bernanke will talk about the economy. On Friday, we'll get a sense of retail sales, consumer sentiment and business inventories. Europe will keep churning out daily economic developments. The stock market will keep going down, or up, or both. Hold on to your hats.
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