Economic crisis? What crisis?

The term W recession is often used these days by the mainstream media. It stands for double dip recession, which occurs when the economy has a recession, then emerges with a short period of growth and quickly falls back into recession.

Since analysts tend to observe economic movements through charts, economic downturns are usually described by the letter they resemble. Hence they use W term. There are other similar expressions such as V, L or U recessions. No one can predict with certainty what will eventually unfold, all we can do is to prepare ourselves for the worst case scenario and hope for the best.

For investors, major players, hedge funds, companies and everybody else deeply involved in the stock market it represents an expectation of price movement. Most of the ordinary people wonder upon the direct effect the possible crisis will have on the economy.

Closing the eyes when faced with facts
A lot of questions have been raised lately, for example, will there be a second part of the crisis, how will it affect employment numbers, will the stock markets crash again, how will the the real estate prices react, where to invest your savings in order to protect it, will the credit markets freeze, and so on. It reminds me on one of my favourite songs "The Logical song" by the british band Supertramp. Except for the optimistic yet brilliant intro, some parts could easily relate to the current situation. There are times when all the world's asleep, the questions run too deep for such a simple man. A quote that describes the current situation quite well.

The global financial crisis has been deep and nasty. Politicians would seem to watch the economy state deteriorate as if it was a dream, acting just when the situation reached critical magnitude. Some investors profited, most of them lost entire fortunes. But Wall Street follows the same pattern since the beginning, with fear and greed trading places. The various fiscal and monetary policy decisions to inject money into the United States economy blurred naturally occurring economic signals, even though they were made in good faith. The billions of dollars that came into the money supply bought the economy time to stabilize.

In fact, the whole world stabilized for a while, after the lessons learned from the Great Depression were applied in real economy. But the resulting inflated stock prices had little effect on business conditions in terms of consumer demand. Therefore, the rise in the stock market correlation with economic growth is to be doubted at best.

Stock market issues and a need for reforms
Therefore, the rise in the stock market correlation with economic growth is to be doubted at best. Federal Reserve has decided to keep interest rates near zero for additional two years, amplifying the fears that the recovery has not truly begun. The stock market reacted with huge volatility, with Dow mostly falling for the last month. Since the indebted borrowers need to rebuild their balance sheets and general financial systems need repair, growth is considered weak and could easily be derailed.

From that aspect, the decision of the Federal Reserve is justified. However, at one point it won't be possible to continue further without serious reforms. Another sign of fear is the rising price of gold and the value of Swiss franc, where investors try to seek safety. In addition the technical analysis patterns signal a large H&S price pattern, which usually precedes a downfall.

On the bright side, emerging economies have been revived the fastest, with several expanding at annualized rates of more than 10%. China, Brazil, India are being among the leaders of course. A few big rich economies also returned to growth, such as Japan, Germany and France. In emerging Asia, the unfreezing of trade finance, a turnaround in stocks and hefty fiscal stimulus are powering a rebound. In the United States the housing market has shown signs of stabilizing, the pace of job losses is slowing and the vast majority of forecasts are positive. To be perfectly honest, most economies are still a lot smaller than they were few years ago.

Given a weak state of recovery, a double dip recession could be devastating for several years or more. Even though it would be wise to prepare for potential W crisis, remember that as the balance is restored, some will prosper while others will fail. A wise saying defines success as falling nine times and getting up ten. There is no doubt in my mind that if we should fall again, the recovery will be just as strong. And in the meantime, try to use all the opportunities that come your way.

Written by:
Bojan Baretic, MA in Economics

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