"The Greater The Economic Weakness, The Stronger The Recovery"

Recently there has been a thought circulating that the worse the recession (or economic weakness) the stronger the following economic rebound. This refrain has been heard from various quarters.

This belief does appear to be historically accurate, at least to some degree.

However, there are three aspects of this belief that I want to elaborate upon. The first is that even if one believes "the deeper the recession, the stronger the recovery" theory, there is a question of timing. If the period of economic weakness is long, mistaking the timing and making investments or other financial commitments too early in the cycle, before the recovery has begun, can be a costly and painful mistake.

Second, even if one has complete faith in this belief, this has to be viewed as a historical fact. Is this time "different?" It certainly appears to be, as I have extensively commented upon. Perhaps the operative phrase should be "Past performance is no guarantee of future results."

Third, this belief seems related to one that I commented on in a June 5 blog post - with the same implications.

SPX at 1061.05 as this post is written

False Signs of Recovery in Recessions

On July 16, I wrote the following:

"During periods of economic decline, it is relatively common to have periods of "relief" from decline - then a resumption of further decline. This is what I believe we are experiencing now, both in the economy as well as the stock market rally (which I have previously referred to as a "bear market rally.")

Subsequent to that post, I ran across the following in the August 3 issue (p. 102) of Forbes. In a column, A. Gary Shilling makes this comment:

"False signs of a recovery are common in recessions. Since World War II there have been 11 recessions, and in 8 of them real GDP rose in at least one quarter well before the recession was over. Recessions don't start at the top and go straight to the bottom."

SPX at 940.38 as this post is written

Some Latest Thoughts from Economists

The latest Wall Street Journal economist forecast survey says "the median forecast sees the end of the recession next month."

http://online.wsj.com/article/SB124708099206913393.html

Meanwhile, I would like to point out this quote from Christina Romer, from a June 28 article, as she mentions the prospects of a "V" recovery:

“I still hold out hope it will be a V-shaped recovery. It might not be the most likely scenario but it is not as unlikely as many people think."

http://www.ft.com/cms/s/0/2cb7a6a8-641a-11de-a818-00144feabdc0.html

SPX at 879.75 as this post is written



Copyright 2009 by Ted Kavadas