It’s now been 16 months since the Great Recession of 2008-9 ended, according to the National Bureau of Economic Research. Yet the majority of Americans remain unconvinced that things are getting better. The problem is that things are getting better – but only for certain people. The good news for investors is that we are among the lucky ones.
To illustrate, we’ve just finished compiling a table of where key economic statistics stood 16 months after each of the last six recessions. By comparing the average post-recession statistics to today’s, we can clearly see that our present situation is highly unusual.
For example, the average unemployment rate 16 months after a recession has been 7%, versus nearly 10% today. What’s more, instead of dropping (as is typical), unemployment has actually increased since the last recession ended. No wonder average Americans are pessimistic.
The recent recession has also created a difficult situation for bond buyers – which include a lot of pension funds and people on fixed incomes. Bond yields have fallen by 32.3% in the past 16 months, whereas on average they have stayed virtually flat after recessions. (Of course, those who bought bonds back in 2007 will have benefited, as bond prices are much higher today. Bond prices always move opposite to yields.) Nonetheless, an investor who needs income and security will find today’s bond market offers meager potential returns.
On the other hand, the end of the last recession marked the start of an extraordinarily good period for commodity investors. Commodity prices rose an average of 10.7% after the last six recessions, a consequence of renewed growth. However, this time around, commodities have gained 36.3% – a striking difference that’s likely the result of higher demand from developing Asian economies.
Gold investors, too, have made excellent profits of late. The yellow metal has risen over 45% since June 2009. As we’ve mentioned before, this is likely due to the fact that gold is not only a commodity, but also a safe harbor from uncertainty and a hard currency. The money supply has risen much faster after this past recession, and that has strengthened gold versus the U.S. dollar.
In addition, the stock market has performed very well since the last recession ended. The S&P 500 is up 26.7% versus an average post-recession gain of 12.9%. Even more surprising, small caps (as measured by the Russell 2000) have outperformed blue chips. Generally, small caps only lead when nominal economic growth (growth plus inflation) is headed for a big rise.
Clearly, whether you see today’s post-recession world as a glass half-full or half-empty depends very much on your perspective. If we look at it through the eyes of an economist or the average blue collar worker, we see a vicious circle emerging. High unemployment bodes ill for the average American’s quality of life and consumer spending in general. Rising commodity prices too are strangling economic growth, making more monetary stimulation (which we’ve dubbed QE2) necessary. That in turn will continue to weaken the U.S. dollar and send commodity prices ever higher.
On the other hand, the growing polarization of wealth has been no problem for smart investors with a fair amount of capital. If you’re in that group, you have probably made good returns from our recommended stocks – especially those tied to commodities. Moreover, these trends offer you the chance to continue racking up gains. Commodity prices look likely to keep rising, and keep generating profits for investors in the resource sector. Additional monetary stimulation will keep adding juice to the stock market.
Eventually, commodity prices will reach a point where they will cause consumer prices to rise, leading to a faster downturn in consumer spending. Inflation will catapult higher, fed also by faster currency debasement resulting from monetary policies so loose they fantail like a split jib in a squall (to paraphrase Herman Melville). Gold and commodities will continue to do all right. But eventually, with the average American feeling the pinch of high inflation, the Fed will feel compelled to start tightening down on monetary policy, resulting in a sharp drop in both commodities and stocks. We will experience another recession similar to 2008.
But that’s many months down the road. Between now and sometime in 2011 at least, you can enjoy the profits to be made in stocks, commodities, and especially gold.
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