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Five Things You Need to Know: Whom To Believe: Recession by the Numbers, or by the Pain?


We will know a recession when we feel one; the rest is just cocktail party chatter.


Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Whom To Believe: Recession by the Numbers, or by the Pain?

Are we really already in a recession, and why does it even matter? Let's answer the first part of the question, then we'll look at the second, whether it even matters.

While economic data has been doing its part to forestall what has at times seemed to be the inevitability of a looming recession (just last week pundits were trotting out The Goldilocks Economy), this morning we see where both Alan Greenspan (in the Financial Times) and Warren Buffett (to the German news magazine, Der Spiegel) are doing their part to resurrect recession fears. What gives?

Well, on the one hand both Buffett and Greenspan, at least since leaving the Federal Reserve in the latter's case, are savvy enough to understand that the people love a good "straight shooter" about the economy. On the other hand, the economic reality is increasingly not being reflected in the numbers. Why? Pehaps because economic pain given our debt load - both as a country and as individuals - has reduced the threshold for pain tolerance.

Bot look, does it even matter if we are in a recession? Sure, it matters if one is experiencing a recession, but in the aggregate? Not really. None of us are going to make trades or investments around the standard economists' recession naming convention. We will know a recession when we feel one; the rest is just cocktail party chatter.

2. Real Estate: Good News/Bad News/Worse News

First the good news: New Home Sales rose 3.3% in April off the prior month's 17-year low watermark, according to the Commerce Department. That was quite a bit more than most economists had forecast. As well, inventories fell to 10.6 months' worth of homes at the current pace of sales, down from March's 11.1 months' of inventory.

Now, the bad news: The S&P/Case-Shiller index showed home prices fell 14.1% in the first quarter. Nineteen of the 20 cities in the index showed a year-over-year decrease in prices for March, led by a 26 percent slump in Las Vegas and a 25 percent decline in Miami. Eighteen of 20 showed monthly declines in price.

And finally, worse news: Although new home sales upticked between March and April, year-over-year home sales were down 42% from 2007 levels, the largest year-over-year decline since September 1991. Also, keep in mind that new home sales account for just a sliver of the overall real estate market, about 15%. Previously-owned homes account for 85%.

3. Consumer Confidence Continues Decline

Naturally, with housing still under pressure and gasoline and food prices pressuring household budgets, we should have expected Consumer Confidence to show further deterioration. The Conference Board's confidence index declined more than forecast to 57.2, the lowest level since October 1992.

Two other readings from the survey to be concerned with:

  • Consumers' inflation expectations are now at an all-time high, the survey showed.
  • Consumers claiming business conditions are "bad" rose to 30.6% from 26.5%.

4. Why Rising Oil Prices Are Deflationary

Rising oil and gasoline prices deflationary? It seems counterintuitive. But take a look at what's been going on as oil prices have increased:

  • Americans drove 11 billion fewer miles this past March compared to a
    year ago, a 4.3% decline
  • Mastercard (MA) says gasoline sales were down 7% year-over-year last week
  • For the first four months of the year, while driving less remember,
    Americans spent almost double the dollar amount on gas that they did
    over the same period five years ago.

That dollar amount comes directly out of consumer discretionary spending. The irony of rising gasoline prices is that Americans will be forced to re-prioritize and readjust what are deemed "necessities." My contention is that these will prove to be longer-lasting reprioritizations. As people get used to "doing more with less" they may come face-to-face with former spending patterns that now seem trivial. For more, see today's Number 5...

5. Buying Time... Literally

Tangentially related to this is a fascinating article that appeared in the New York Times on Sunday, "A Superhighway to Bliss." The article is about a neuroscientist, Dr. Jill Bolte Taylor, working at Harvard's brain research center who experienced a stroke in 1996.

The results of the stroke were that her left-brain activities were suppressed; her perceptions changed. The left-side of the brain is the source of ego, analysis, judgment and context, or as the Times put it, "the incessant chatter" that normally fills our mind; everyday worries.

Dr. Taylor has just published a book about her experiences, "My Stroke of Insight," and believes people can learn from her experience to live a more peaceful, spiritual life by sidestepping their left brain.

Now, the Times article observes that Dr. Taylor's message "resonates strongly today," but without going into why it resonates strongly. I believe that resonance is bound up in the clutter and empty accumulation that has been amassed over a two-decades' long credit expansion.

Dr. Taylor says she is now committed to "making time for passions - physical and visual - that she believes exercise her right brain, including water-skiing, guitar playing and stained-glass making." The trade-off for those pursuits is economic on its face for most of us; making time involves, literally, purchasing it. Buying time. Over the next decade it will be interesting to see what we collectively "sell" to increase our ability to buy time.

See Dr. Taylor speaking about her experiences here, via the TED website:

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No positions in stocks mentioned.

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