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Double Dip or Double Speak?
09/01/2010 12:00 pm EST
Gordon Pape, editor of The Canada Report, dissects the Fed’s response to economic weakness and tells how investors can prepare themselves for a downturn.
So, are we or are we not going to experience a double-dip recession—referred to as a "W" in economists' shorthand?
I don't know. Neither does Federal Reserve Board Chairman Ben Bernanke, although he and his fellow governors are worried about the possibility. The statement accompanying the August 10th decision by the Federal Open Market Committee (FOMC) to hold the line on interest rates was a classic example of "on the one hand, on the other hand".
On the one hand: "Household spending is increasing gradually."
On the other hand: "(It) remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit."
On the one hand: "Business spending on equipment and software is rising."
On the other hand: "Investment in non-residential structures continues to be weak and employers remain reluctant to add to payrolls."
The Fed acknowledged that the pace of economic recovery has slowed in recent months with housing starts at a "depressed level," while bank lending "continued to contract".
But despite this, the FOMC reached a positive, albeit woolly, conclusion: "The committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated."
In the meantime, American interest rates will remain at historic lows for "an extended period" and the Fed will support US government bonds by continuing to invest in longer-term Treasuries as current holdings mature.
Not that US Treasuries need a lot of help; as they do every time W-fever raises its head, investors were selling stocks and piling into bonds at a frenzied pace.
Of course, this isn't the first time this has happened. We're going through a period of extreme volatility in both stock and bond markets as investors react emotionally to the news of the day.
And we're likely to see more of the same until [the] fog bank obscuring the economic future begins to lift.
None of our editors believes a double-dip recession is likely. We weren't going to emerge from the worst financial meltdown since the Great Depression overnight, and anyone who thought otherwise was dreaming. But we will come out of it eventually.
It would be great if someone could tell you with absolute certainty what will happen over the next year or two. But no one can. There are many possible scenarios, including a continued gradual recovery, a double-dip recession, a Japanese-style stagflation, or a genuine depression.
Conservative investors should play it safe. Weight your portfolio towards high-quality fixed-income securities and focus your stock list on banks, utilities, and leading telecoms. But even if you are willing to accept a higher degree of risk, cushion your down side by including some quality bonds or bond funds in the mix.
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