The Economic Recovery of 2009: When do you know an economy is coming out of a Recession?

Wed, 08 Apr 2009 15:09:05 EST

When do you know an economy is coming out of a recession? Watch the banks and commodities.

Hey, I don't want to turn you into an "economics professor." Youwould need your own beanie hat with a propeller to do that. But let'scover the cocktail party "economics" conversation, so you can hold yourown at a party.

There really is no "textbook" formula "how recessions end," but patterns tend to emerge.

First, understand why recessions start in the first place. Banks stop lending. Money supply shrinks.
Like it or not, the world runs on credit. When credit dries up, business evaporates.
How do you get the machine moving again? Lending. And all the lenders have "gotten religion" recently, and are sticking to traditional lending yardsticks.

Often, two completely opposite ends of the market tend to move firstwhen recessions end. They give "clues" things are starting to loosenup: banks and commodities... especially precious metals like gold andsilver.

See, the rising price of precious metals can sometimes signal thatwe're starting to see money back in circulation. This would be a verystrong indicator that the recession is coming to an end sooner thanmost people expect. A rise in commodity prices tends to signal a pickup in economic activity. And when you get enough economic activity,you get inflation.

A little inflation is a good thing. Over the past year-plus, we have had no economic activity to speak of.

Now, there are plenty of people in the market today speculating that we will have massive inflation. That's because the government has been printing money like crazy. Andwhen you stuff this much cash in one end of the pipeline, at the otherend of the pipeline, you should expect runaway inflation.

However (compared to other times), we have witnessed some massive price deflation in many areas of the economy: the price of your house, your stockportfolio and the job market. So this massive "print job" thegovernment has been doing (printing dollars) might actually just"offset" the price deflation we've seen.Or not.
I suppose all of the pundits could be right!
When was the last time that happened?

See, the issue is not whether we MIGHT see runaway inflation or not.
The real question is: what are we going to do about it?

Over 23 years, I've learned the hard way. Worrying about the future is really a waste of time.

We have to focus on what's happening right now.

As strange as it seems, we need to set aside what might - or might not - happen a year, two years or even three years from now.
So what is happening right now?

We have seen a massive bounce back in the financial sector. Banksare far from being healthy, or even back on their feet. But theselling was completely overdone. So they are bouncing. On the otherhand, commodities: energy, natural resources (and the countries thatare rich in natural resources) are really starting to move.

When do you know an economy is coming out of a recession?

Watch the banks and commodities.
Here we go.

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The Economic Recovery of 2009: When do you know an economy is coming out of a Recession?

We have to focus on what's happening right now.