So we’re going into a recession. There are few out there who have not yet accepted this, and the only thing left to debate is whether we’re already in a recession, and how deep the pain will be.

There are several periods in time when, as investors, we’ve been backed into a similar corner. Perhaps like many of you, I’ve never personally been through a recession with a highly vested interest in the outcome, but there are a vast majority that have.

Recession, the ’90s Version

If you were around in the recession during 1990 and into 1991, you might be feeling a bit of deja vu. You might be catching a familiar whiff of a declining housing market, with stimulation from a rash of mortgage problems. The Fed circa the early 90’s is making some of the same decisions as the Fed of ‘07-’08, declining interest rates in hopes to knock the sharp edges off what was a fairly well developed death spiral in the economy. Or so it seemed at the time, especially if you had some skin in the game.

The market at that time didn’t fair too poorly, and if you were liquid enough to ride out the decline, you probably ended up OK when all was said and done, and it really wasn’t much of a bear market.

Recession: 2001 and 70’s

The same can’t be said for the recession in the 1970’s and in 2001. Both were prodded along by traditional bear markets, and investors tried desperately to rationalize abnormally high valuations for individual companies (mainly tech in the 2001 go-round). Housing was also irrationally inflated, and much like today, it was easier to see the forest through the trees if weren’t living on either of the coasts.

The common denominator in both these time periods was sky high energy costs. More prominent in the 70’s, energy costs started to weigh on the economy, and more so than price, supply drove driving habits more so than cost.

Corner Office Thoughts

You have to understand that the markets themselves are the truest of all economic indicators. If you wait for the official numbers to be crunched by the National Bureau of Economic Research to tell you we’re in a recession, the market has a three month head start on you.

Typically the stock market will show the most volatility during the early days of a recession, regardless of whether the term “recession” is being thrown around yet or not. If you’re in a position to ride that wave, capitalize on the overzealous selloff of good companies with fundamentally sound and stoic business plans.

As my good buddy Winston once told me, don’t try to rationalize the direction of the markets, just go with it.

So how do you apply history to all of this? Well, the bottom line is that “this too shall pass”, and if you’re in your just completing your first economic cycle from the viewpoint of an investor, as I am, it’s just as important to watch and learn right now as it is to try and pick the next best stock.

And if you’re in this for the long haul, sitting on your hands while you watch your portfolio bleed may in fact be the best course of action.

What do you think? Which traits from past recessions can we apply to todays economic state?

Economics, Investing, Market Trends Economics, finance history, Market Trends, recession

President Bush is dreaming up ways to “stimulate the economy” as you read this. He will present his grand ideas on January 28th at the annual State of the Union speech.

This desire to stimulate the economy goes beyond the Oval Office, however. On Friday, Nancy Pelosi and Harry Reid wrote a letter to the President seeking cooperation in developing an economic stimulus plan.

As many of you know, I’m a big fan of letting a free market and free economy work. The last thing we want to do is watch the government try to stimulate the economy. Let the economy forces work and they will “stimulate” themselves.

Along these lines, it’s very interesting to read message boards in times like these. Typically I don’t dabble in stock forums, but its interesting to see the maturity level of many individual investors (or lack thereof) when a long duration bull market starts to moderate to the downside.

Case in point: Check out any of your favorite stock boards and count how many people are calling for company management to “Do Something” about the falling stock price. It’s incredible. In many investors minds, the stock market can do nothing but go up, and when it doesn’t, it’s someone’s fault that their portfolio is losing money.

Example: “Management has been too quiet during the last two weeks. They need to come out and reinforce sales numbers over the holidays. Tell big money why they shouldn’t be running from the stock. They have to do something to alleviate all this red from my portfolio, and now!”

I digress.

In a free market, any external influence will do nothing but exacerbate the problems, and potentially make a seemingly bad situation even worse. This is what bothers me about this latest push from President Bush (and the rest of Congress) to do something.

Excerpts from Pelosi and Reid’s letter, along with my comments:

Millions of Americans share our growing concern about the deteriorating state of the economy and are looking to their elected representatives to quickly provide assistance. Federal Reserve Board Chairman Bernanke warned yesterday that the economy is weakening and that the Federal Reserve Board would take appropriate action.

OK, so Bernanke warned that the Federal Reserve Board would take appropriate action. That’s his job. Why does the President and Congress need to provide further assistance?

Prominent economists associated with Republican and Democratic Administrations have called on us to supplement monetary policy with an immediate fiscal stimulus. These same economists have stated that the most effective and responsible stimulus policies adhere to three simple principles: they must be timely, targeted and temporary.

So we should artificially inflate the economy to bail out those that made poor investment decisions? That’s a bit like freezing interest rates, right? Freeze the rates of those who took a variable rate mortgage when rates were at all time lows, but those of us who were smart enough to realize that rates had nowhere to go but up…

We want to work with you and the Republican leadership of the Congress to immediately develop a legislative plan based upon these principles so it can be passed and implemented into law without delay.

If that isn’t a “feel good” statement that we’ve heard over and over again…

We look forward to working together to develop a sound plan that injects demand into the economy, restores consumer confidence and purchasing power, and addresses the severe strains being felt by millions of our fellow Americans.

Again, there is absolutely no way to inject long lasting demand into an economy and restore consumer confidence without creating more drastic problems down the road.

The term “recession” has been tossed around a lot lately, and it seems that many people are getting “recession” confused with “depression”.

A recession is good for an economy. A depression is what happens to an economy when the government steps in to help.

Economics, Politics artificial economic stimulation, Economics, Finance, Politics, recession

Today an employment report revealed that seasonally adjusted nonfarm payrolls rose by 18,000 in December, the weakest job growth since August 2003. On top of that, private-sector payrolls fell by 13,000, the first decline in more than four years.

Most economists, as well as the market, were expecting payrolls to increase about 58,000 in December.

I view this as a sign that the economy is starting to falter. Housing is in toilets, unemployment is rising, consumer spending is in limbo, gas prices are high and going higher, and to cap it all off, our credit cards are maxed out (and by “we” I mean Americans in general).

It doesn’t help that the Fed is lowering interest rates either.

Welcome to a recession!

To be clear, I don’t think this is a bad thing at all. Let’s face it, the cyclical stock market can only go up for so long before the economic cycle comes full circle.

I think the economy is at the top of the roller coaster, and the first couple cars have gone over the crest of the hill.

View this as a great buying opportunity for stocks that have been dragged down by the overall market, but are overall very healthy and well run. Now is the time to be in cash, and to be very picky about the stocks you buy.

Economics, Investing, Market Trends Economics, jobs report, markets, recession