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Navigating the Next Recession Part One

Published January 2014

A recession is coming. Are you prepared?

If you follow me, you’ll know how I feel about the U.S. economy. We’re in trouble. But let me review some of the highlights.

First, the economy is still recovering from the recession of 2008 and 2009, with unemployment still at an astounding 7.6 percent. Although that’s down from its high of 10.0 percent in October of 2009, it’s still unusual: Unemployment spent the years prior to the last recession ranging from roughly 4 percent to 6 percent. And, the gradually improving numbers are, in my opinion, deceiving, because each month, a fraction of the unemployed become frustrated and stop searching for a job, which causes the unemployment rate to decrease.

Now, the payroll tax hikes that kicked in at the beginning of 2013—as well as federal spending cuts, additional tax hikes expected to follow the battle over the debt ceiling, and the added costs associated with health-care reforms—are weighing on employers and consumers as well. All told, they’re enough to curtail incomes and that, it turn, will significantly dampen consumer spending.

But that’s not the only problem we have. In an attempt to get the economy back on track, the U.S. Federal Reserve Board (Fed) has significantly increased the U.S. money supply as part of its quantitative easing program, and an increased money supply decreases the value of each dollar out there. So, not only will consumers see their incomes decrease; they’ll be able to buy less with what money they do have. It’s called inflation.

These factors—as well as others that are too complex to go into here—lead me to predict a recession starting in 2014. And my predictions are pretty good: I forecast the housing-market correction of 2008 and 2009, the gold rally of 2008 and 2009, the recession of 2008 and 2009, skyrocketing unemployment in 2009, the Flash Crash in 2010, and the end of the bull market for bonds in 2012, as I detail later in this chapter.

Some of you may not be worried, thinking you’re in the market for the longer term, and markets always recover. But I don’t think you can afford to take the advice of John Bogle, the founder and retired CEO of The Vanguard Group, to ride it out. The S&P 500 Index returned an annualized 4.24 percent over the past 15 years ending June 30, 2013, and that included dividends. With inflation rising, 4.24 percent is barely a return at all. And, markets don’t always come back. The Nasdaq Composite Index hit 5000 in 2000, and now, 13 years later, is only at 3500.

So, what should you do? I have some ideas. But, before I got into more detail about the next recession and how to survive it, let me tell you more about my background. After all, there are a lot of economists and investment professionals who feel differently than I do. Why should you take my word for it? What experience do I have?

Accurate Forecasting

So, what led to this level of success? To start, I believe it was the accuracy of my historical forecasts, particularly leading up to the financial crisis. Here’s just a sample.

The housing-market correction.

I forecast the housing depression of 2007, writing in the March 2006 Navigator newsletters, “In the next five years, house values are going to return to their 1997 levels plus inflation.” In the second quarter of 2006, the S&P/Case-Shiller Home Price Index reached an all-time high of 188.93, and as I had forecast, in the second quarter of 2009, it hit a low of 111.11.

The gold rally.

I forecast the gold rally, writing in the January 2007 Navigator newsletters, “My long-shot prediction of the year is gold (the single worst asset class over the last 10 years) will rally.” In the January 2008 Navigator newsletters, I continued this thought, writing that gold would reach $1000 per ounce, and in the January 2009 Navigator newsletters that gold would reach $1,100 per ounce.” At the time of my initial forecast, gold was selling at $625 per ounce. In May 2008, it reached $1,000 per ounce, and on November 6, 2009, it reached $1,100 per ounce.

The recession of 2008 and 2009.

I forecast the recession months before anyone knew it had started, writing in the December 2007 Navigator newsletters that the “recession risk increased from 60 percent to 70 percent in 2008, and in the January 2008 Navigator newsletters that “a recession begins in the middle of the year.” In December 2007, growth of gross domestic product (GDP) was 2.1 percent. From July 2008 through June 2009, GDP growth was negative for four consecutive quarters. Looking back, we now know that the recession formally began in December of 2007, and lasted 18 months, until June of 2009.

Skyrocketing unemployment.

I forecast skyrocketing unemployment, writing in the January 2009 Navigator newsletters that unemployment would reach 10 percent nationally. The national unemployment rate began 2009 under 7 percent, and on November 6, 2009, in line with my forecast, unemployment broke 10 percent nationally.

The Flash Crash.

I forecast the quick drop in stock prices that occurred on May 6, 2010. In the January 2010 Navigator newsletters, I called for “the first 1,000-point down day in the history of the Dow Jones Industrial Average in 2010”. In the Flash Crash, the Dow plunged approximately 1000 points (around 9 percent) in one day! It was the biggest one-day point decline on an intraday basis in Dow’s history. I refer to this forecast as a “Jackpot”.

The end of the bull market for bonds.

I forecast the end of the great 29-year bond-market, rally, writing in the January 2012 Navigator newsletters, writing, “It’s as simple as this: When you have interest rates this low, eventually inflation starts to come back. And the way you tame inflation is by increasing interest rates. And when interest rates go up, bonds prices go down.” By 2013, it had happened: Bond yields entered the year near all-time lows. “Ouch,” said a June 15, 2013, Barron’s article entitled “What Goes Up Must Come Down.” “Bond investors knew they could be in for pain this year, but maybe not the body blows that have battered them from all directions over the past six weeks.”

This is just a sampling of my forecasts, but I think it’s important to provide more. After all, I’m an economist, and it’s my job to make accurate forecasts. Reviewing my past predictions is the only way to check up on how well I’m doing my job. Too many of talking heads on financial news channels are masters of predicting what just happened.

To build credibility regarding my forecast of the next recession, in the appendix, I provide excerpts from a number of articles I wrote before and after the Great Recession. As you’ll see, if you take the time to read them, I had begun to see the cracks developing in the U.S. economy as early as January 2008. I felt strongly that these cracks would widen as the year progressed, leading up to a recession starting in the middle of 2008. I conclude the appendix with my all-time favorite article, “This is Not Your 2006 Economy,” which I wrote in May of 2009, around the same time the $863 billion economic stimulus package was passed. In it, I used my love of classic muscle cars to illustrate where I thought the economy was heading—and unfortunately, for most Americans, I was correct.  

I hope you’ll read these articles because they were written in real-time, without the benefit of hindsight. They’ll show you that my forecasts about what the so-called Great Recession would look like