Lately, there's been a lot of chatter in the financial media about the prospects for a "double dip" recession -- the idea that the economic recovery that began in the first quarter of 2009 was just a short interruption in a larger catastrophe and that in the months ahead or in 2011 we will plunge back down into an abyss as deep or deeper than the one before. (The origin of the term "double dip" to describe a recession probably stems from one measure of a recession, which is two consecutive quarters of negative GDP growth -- a "double dip").
We have always disavowed any ability to predict the economic future (and noted that economists are uniquely ill-equipped to do so themselves), but we believe that most of this talk is based upon a misunderstanding of what caused the financial panic in the first place, which leads to a misunderstanding of what is behind the recovery, and an incorrect assessment of what could lead us back into another recession.
We have laid out our view in great detail, and believe that by having the correct view we have been able to interpret events more accurately than those with flawed assumptions about the events of the past three years.
For an example, take a look at our post from March 13, 2009 entitled "Big news on mark-to-market accounting," where we said: "Yesterday was a momentous day. The press chose to focus more on the emotionally-charged story of Bernie Madoff pleading guilty to a Ponzi scheme and being sent (at last) to his new jail cell, but the bigger story was about an accounting rule that few Americans really find interesting or understand completely. This accounting rule has caused far more havoc in their lives than Bernie Madoff, however."
For investors who can now see, with the benefit of hindsight, that March 9 of 2009 was the bottom of the bear market, our assessment that the real story of the week was the accounting rule and not the Madoff guilty plea can be seen to have been right on target. We concluded that blog entry back on March 13, 2009 with the words, "While accounting rules are not very exciting to most members of the general public, this is a significant issue that we would urge everyone to examine and understand. If this problem can be fixed and the banking system allowed to begin to return to healthy operation, we believe the economy -- and the markets -- can recover much faster than most investors realize."
We would argue that history has borne out these predictions, and that this supports the view of the financial crisis and recovery that we have put forth on this blog since 2008. To investors who understand this view, the current talk about soft housing numbers precipitating a double-dip into a new recession becomes somewhat silly.
While the double-dip talk mainly surfaced in conjunction with a disappointing housing construction data point for the month of May, we do not believe this part of the economy is going to derail the economy, particularly at this point in time. Housing construction is already at such ridiculously low levels that any further deterioration would be almost meaningless.
The chart below shows that housing construction (measured by what economists call "housing starts") is at historically rock-bottom levels -- almost as if Americans are never going to buy any new houses again.
The chart shows data for housing starts going back to 1950 and up through May, 2010. Even with new home construction contributing nothing positive to the overall GDP, GDP growth has been close to 4% in real (inflation-adjusted) numbers and above 4% nominally (not inflation-adjusted).
We believe the focus on "double-dip" by the financial media is just another example of their need for attention-grabbing stories to fill up the day, and should not cause investors to panic out of investments in well-run, growing companies.
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- "Glenn Beck is an economic butterbar" 11/04/2010.
