Francine initiated a good topic with a good
post since technology sector concerns and
investment concerns are on many people's
minds.
The reason I'm jumping into this is because
I've been on an economic clarification
mission for a while - especially relative
to the word RECESSION. (I've been teaching
finance and economics at the University of
Phoenix for 11 years).
People use economic terms like 'recession'
in many creative ways these days. It seems
that it is very individualized. It also
appears that people use recession when they
may mean 'downturn' or 'correction' or just a
decrease in growth from the recent trend.
Many times it is unclear if they are using a term
to apply it to an industry sector, the stock
market or the economy as a whole.
The economic term for recession is not in
the eye of the beholder - there is a specific textbook
definition; which is:
"two consecutive negative quarters of GDP data."
We haven't had one (a recession) since 91-92.
In fact, Q3-00 GDP came in at 2.4%. This SEEMS
like a slowdown, because Q2-00 GDP was a brisk
5.6%. If you look at the long term GDP average, the
norm is a little under 3% annually. We've been
spoiled over the last several years!
What Francine is talking about, and it is valid,
is that there are leading economic variables
which may suggest a recession. But that
brings up the issue of forecasting ....
The problem of forecasting recessions is another
matter! I'm not an economist, so I can happily
report that they accurately forecast 5 out of
every 3 actual recessions!
Francine mentions "A recession is a spiritual event:
a communal loss of faith." The indicator economists
use to quantify this is 'consumer confidence'
(The University of Michigan survey). The indicator
investors use to quantify this is 'market psychology.'
The Consumer Confidence index used to be a reliable
predictor in the 1950s and 60s, but has been far
less so recently.
A reliable indicator I look at to forecast
recessions is - short term interest
rates, like the FEDERAL FUNDS RATE. Studies show
that that the 'fed funds' rate would have to jump
by at least 3 full percentage points to CAUSE a
recession. (Anything less is just a slowdown).
What would drive such an increase? Inflation
or an oil shock. Inflation is still very stable
at 2.4%.
When student reports come my way, I often write
down comments like 'define terms' and 'show data
support.' I wouldn't dare grade Francine's economic
posting, or else she might ask me to write something
about marketing and public relations!
If everyone on the azipa list went out and spent
a couple of hundred dollars at their favorite mall
this weekend, thereby doing their fair-share for the
macro-economy, we could help mitigate any downturn
in consumer spending!!!
Cheers to all who have read down here! Happy Holidays!
Lawrence Jakows
azLearning.com
http://www.azlearning.com
-----Original Message-----
From: francine hardaway <francine@stealthmode.com>
To: azipa@egroups.com <azipa@egroups.com>
Date: Thursday, December 07, 2000 7:09 AM
Subject: [azipa] Why it seems as if there's no money around all of a sudden
>Don't run your credit cards up this Christmas, because you'll never get
>them paid off next year. When historians look back on the Millennium,
>they will probably find that the recession started in the year 2000. It
>began mysteriously, in the middle of an economy growing wildly, with
>more than full employment and low inflation. It will continue for a
>couple of years, long enough to destroy many young millionaires, and
>then slowly reverse itself, ending just as mysteriously as it began.
>This will happen despite the tremendous advances in technology to which
>we've all become accustomed--the instant access to information, the
>online trading, the global economy. In many ways, the New Economy is
>acting just like the old economy: not very different from the stock
>market recession of the 70's, in during which I owned a single mutual
>fund for ten years without gaining a dime, or the real estate recession
>of the 80's, in which land lost sixty to eighty per cent of its value
>within a six month period, wiping out many of my clients and friends.
>
>Last year, when the stock market was soaring for the second year in a
>row, all the Red Herring-type magazines announced that there could never
>be a recession. But having seen several recessions before, I was
>skeptical. It isn't a surplus of microprocessors that makes a recession,
>or a shortage of oil. What makes a recession?
>
>We do. A recession is a spiritual event: a communal loss of faith. I've
>learned to be an early adopter of recessions.
>
>About three months ago, I took all my short-term money out of the stock
>market. Why? Because I was no longer getting the astronomical returns I
>had grown accustomed to, and because someone offered me a better
>investment alternative. I wasn't *losing* money; I just wasn't doubling
>my money every couple of weeks.
>
>I had just come from George Gilder's Telecosm conference, at which
>everyone talked glowingly of the emergence of the all-optical network. I
>felt comfortable that I understood the technology. I work with companies
>in this space every day. In my mind, I knew that telcos would have to
>upgrade their equipment and the Internet was only beginning as a
>commerce channel -- that broadband was coming and bandwidth would be a
>commodity.
>
>I also knew, although with less first-hand experience, that the
>sequencing of the human genome would lead to breakthrough medical
>advances in both pharmaceuticals and medical devices.
>
>And yet, I decided to switch my money to first deeds of trust: mortgages
>on people's homes. This is the oldest economy investment I could have
>found, short of investing in Phelps Dodge or Archer Daniels Midland.
>It's 'cuz I lost faith in the market to give me the kind of return to
>which I had grown accustomed.
>
>Just as I was taking money out of the market, a few other early adopters
>did as well. The market fell a little. Then the media jumped on the
>market's "correction," and it fell a little more. Then the non-election
>came, and it fell a little more. The crisis of faith is upon us. We have
>crossed the chasm. All of a sudden, the same magazines that told us we
>would never have another recession are proclaiming its imminence. If you
>look at them, they're thinner (this is not a bad thing for the reader).
> The advertisers, too, have leapt off the bandwagon.
>
>And so the dominoes fall, assisted by the media. And soon we get to the
>most terrifying part of a recession: the trickle down effect. You think
>it could never affect you, and then suddenly you are laid off, or your
>company goes bankrupt, or your orders slow dramatically. The worst of
>the recession is when the economy starts to rebound, but you're a
>lagging indicator and you're still broke when the other guys are coming
>back. That's humiliating, but it's the most common occurrence.
>
>So a technology-induced recession hits the technology sector first. But
>sooner or later it will hit the luxury car dealers, the cosmetic
>surgeons, the cruise lines, and the divorce lawyers. From experience,
>I've learned that to be an early adopter of recessions, you should go
>to cash right away. You then sit there, without a ton of credit card
>debt and business leverage, and wait. Sooner or later, it "finds the
>bottom," and bounces. You catch it going up because you have the cash
>to invest.
>
>Five years later, a new group of young tycoons has come of age without
>ever having experienced a recession. The guys who got killed in
>2000-2001 are now wizened and wiser, even though they may only be thirty
>years old. You have invested wisely this time, and take your money off
>the table.
>
>And the whole thing begins again.
>
>
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