You Can’t Know Until You Know, You Know?

The New York times reports the market’s getting crushed on “fears that a recession may be imminent.” Maybe so. The dilemma is, a recession is defined by two or more quarters of negative growth. So you have to have the recession for six months before you can say you have it, by which time you’re likely headed out of it.
The last recession was in 2001, it was short and shallow. The average length of past recessions has been 11 months, counting the six months you were in it but didn’t know it.
I saw the following headline in Slate,

The "R" Word
Are we heading into a recession?
By Daniel Gross
Posted Monday, July 31, 2006

Note the date. That recession never happened.
The ‘what is’ of the situation, however, is that investors get panicky, pull a ton of money out of stocks, resulting in these slides. Then even more investors get panicky and keep the cycle going while everyone hyperventilates, then it quits. The ‘quits’ isn’t predictable. When the market does turn around, these same investors will buy back much of what they sold, likely at prices near what they sold it for in the first place. The only people who net made money are brokers and floor traders.
It’s one of the reasons Wall St. likes recession predictions. They know you’re going to panic. They get to rearrange your portfolio to something else. It won’t be any better than you had in the first place, you’ll spend a lot on commissions or fees and you’ll thank them for doing it. At Christmas, they send you a card.
If we are in a recession, well, that’s what happens. Things expand and contract. they get too fat, then they get too lean. Except in America, we only get fat.
We seem determined to jawbone ourselves into recession. It gives talking heads something to keep you tuned in for the next commercial, it gives politicians “issues,” it gives financial reporters a chance to do columns about the last recession, historical averages, blah, blah, to fill up the space between advertisements in the newspaper or magazine.
We need a recession, it helps sell stuff so we don’t go into a recession.

It Isn't What Happens, It's What You Think About What Happens

Today is February 26, 2008. Today the business headlines are:
-new data show rising inflation and declining home values
-foreclosures at record levels
-consumer confidence at its lowest level in 5 years
-worries that if the Fed lowers interest rates, it will pour gasoline on the fire of inflation, and if it doesn’t, nobody will ever buy anything ever again, ever.
-Serbs attack US consulate
-Taliban interferes with NATO
-virus on cruise ship sickens dozens (are you starting to wonder why people get on the damn boats in the first place? “Honey, for our vacation, let’s get on a huge floating Petri dish packed with people with less brainpower than a fruit fly and the manners of a slug, eat outrageous amounts of food and catch a virus. Maybe it’ll even be a deadly virus!”)
Where was I?.....Oh, yeah, so in the light of no good news whatsoever, death in the buffet line, and perhaps the beginning of the end of the world economy, the Dow Jones Industrials are up 100 or so points.
If your fund manager had read today’s headlines yesterday, he would have sold out all his equity positions, and you would have thanked him for doing it. Don’t waste my time telling me you or he knew the news wouldn't hurt the market, and that the markets earlier corrections had already “predicted” this news. He didn't, you didn’t and the market didn't. There's an old saying, 'the market has predicted 7 out of the last 4 recessions.' The tea leaves only tell you what you want to hear.
Economies shift, all day everyday. Companies make good decisions and bad ones. Things wear out and get replaced, the population grows. More things get bought. Companies make money. Over time, this plays out in higher stock prices. In between, there are the zigs and zags of human behavior. Which is why the thing doesn’t go up in a straight line, and why you get a higher return for accepting the volatility.
The point is the same as it always is. There are no accurate predictions of future prices. Don't pay for what you can't get.