Half Full or Half Empty? : Choosing the Negative or Positive Spin
As someone who is constantly watching the worldwide markets and business news reports, I sometimes feel like a ping pong ball: being hit back and forth between ‘it’s great’ and ‘it’s terrible’ versions of the same story. I thought I’d show a couple examples of how analysts, experts, world leaders etc. conflict in opinions and change their stories over time.
The Lost Decade
With the debt crisis in Europe continuing to plague the worldwide stock markets, there’s much talk of the ‘lost decade’. This refers to the fact that great recession of 2008 caused such a decline in the economy and markets, this new rush of drops is turning the last ten years into a period of zero growth for investments and for the overall US economy.
In this interview from July 7th, 2011, Peter Hall, the VP and Chief Economist of Export Development Canada, said that people calling for a ‘lost decade’ to happen in the US like it did in Japan in 90s was irrational:
http://www.bnn.ca/News/2011/7/7/Predictions-of-US-Lost-Decade-misguided.aspx
Hall cited the healthy balance sheets of the major non-financial corporations as the main reason that a lost decade wouldn’t occur in the US like it did in Japan. He figured that the cash-rich corporations were poised to fuel growth, beginning in 2012.
On the contrary, BNN staff reported on September 29th, 2011 that “a number of economists, the US in particular was heading for its own ‘lost decade’” in this article:
http://www.bnn.ca/News/2011/9/29/Economists-warn-of-Lost-Decade-for-developed-world.aspx
Goldman Sachs economist, José Ursúa, pointed out four characteristics of a ‘lost decade’:
- Low inflation.
- Rising and sticky unemployment.
- Stagnant home prices.
- Lower stock returns.
Those characteristics might be present at this point in time in the US and in other developed nations, Ursúa said it meant that the economies had a 40% chance of stagnating – so not necessarily are the nails going into the coffin.
The Double Dip Recession
Double dip sounds like something you do with chips at a party but when it comes to recessions, it’s just a looming mess. Economists have tracked the recoveries from recessions and the two main ones are: U-shaped and V-shaped. With a U-shaped economic recovery, once things it the bottom it skips along there for a while before eventually emerging from the recession and growth resuming. Whereas a V-shaped recovery, hits the floor and basically bounces right back up into growth – it’s a quick (in economic terms) bounce back from the recession.
However, there’s a third type of recessional recovery that you’ve probably heard about and that’s the double dip or W-shaped recession. With a W-shaped recovery, the economy hits the bottom and then relatively quickly bounces back up but not quite to where it was pre-recession but because the fundamentals of the economy actually haven’t improved enough, the economy plummets back down into another recession until a true recovery can take place. Hence the term double dip: the dip is the recession and it’s a very bumpy ride for the average investor, worker and the corporations and governments as well.
On September 6th, World Bank President Robert Zoellick said: "I don't believe that the United States or the world will go into a double-dip but there's high degrees of uncertainty”, as quoted in the article by Reuters:
http://www.bnn.ca/News/2011/9/6/World-Banks-Zoellick-says-double-dip-recession-unlikely.aspx
Even while saying he didn’t believe a double dip recession would occur, Zoellick still had to warn that there was a risk he was wrong.
Just over a week later Reuters reported that in a survey of 250 economists worldwide, 1 in 3 thought the US, Euro zone, and Britian were likely to fall back into a recession in this article:
http://www.bnn.ca/News/2011/9/14/Risk-of-second-recession-rising-in-developed-economies.aspx
Apparently even the most positive economists were also acknowledging that while they didn’t think another dip was upcoming, we’re in for very slow growth. So no sunshine forecasted here either.
Then on October 4th, 2011, Canada’s Finance Minister, Jim Flaherty, said that despite the TSX hitting a 23-month low that same day, "If we had some sort of world recession, obviously, then that would change the picture dramatically, but you know, I'm relatively confident that what we're going to see in Canada is modest economic growth over the next while.” So the country’s top money guy is ‘relatively confident’ that Canada can weather this latest economic storm and didn’t call for another dip into recession in this article posted on BNN.ca:
http://www.bnn.ca/News/2011/10/4/Flaherty-relatively-confident-of-weathering-economic-storm.aspx
I guess like Flaherty, you can choose to be positive even when it seems like everyone else is run for the hills.
So is it the sunshine or rain?
The lesson to be learned is that if the experts can’t agree on or foresee what is going to happen, then the average investor certainly can’t be expected to do any better. Regardless of the ups and downs of stock markets worldwide and the economies they belong to, you need to work with your advisor and stick to the fundamentals of investing:
- Diversify: geographically and by investment type.
- Stick to your risk tolerance: if ups and downs make you lose sleep, then make sure your advisor takes this into account when putting together your portfolio. Also, consider segregated funds that have guarantees that can take some of the worry out of investing long term.
- Time is on your side: the longer you have till you need to use your investments, the better off you are in periods of uncertainty and wild fluctuations. Conversely, if you need to use the money soon or are using your investments, consider a cash wedge strategy or another more conservative investment model.
- Dollar cost averaging works: by investing consistently, you are able to utilize the dips and drops of the market to add more units to your portfolio, which will lower your average cost over time and thereby making you more money in the long run.
Those are just a few points to consider when everyone is running around like Chicken Little yet no one can agree if the sky is really falling or not.
Tags: investing economy saving planning
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