This Economist is Forecasting a Recession – And He's Never Been Wrong

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The U.S. economy is "tipping into a new recession" and there's nothing President Barack Obama or the U.S. Federal Reserve can do to prevent it, according to Lakshman Achuthan, co-founder of the Economic Cycle Research Institute (ECRI).

Now, if you're wondering why you should believe this prediction ahead of others then there's something you should know: According to The Economist, Achuthan's predictions on the direction of economy – either toward recession or recovery – have never been wrong.

"We don't make false alarms," Achuthan said, noting that ECRI did not forecast a recession last year when other prognosticators were.

A new recession could topple the stock markets into another deep funk like the one caused by the 2008-2009 downturn when the markets plummeted more than 50%.

The ECRI uses dozens of leading indexes to make its forecasts, and as of last week, Achuthan said those indicators were all pointing to a recession.

"We're seeing the weakness spread widely," Achuthan told MarketWatch. "There's a contagion…that's not going to be snuffed out. The nature of a recession is not a statistic. It's a vicious feedback loop. Sales fall, production falls, income falls and that depresses sales. We're in that and it's going to run its course."

Worse still, he doesn't think any governmental policy changes can prevent it.

"It is not reversible," Achuthan told Bloomberg Radio. "There is virtually nothing that can be done to avert what is going to happen."

The ECRI recession forecast landed last week amid some mildly positive economic news – the nation's gross domestic product for the second quarter was revised up from 1% to 1.3%, and initial jobless claims fell below 400,000 for the first time since early August, to 391,000.

But Achuthan dismissed such data along with sentiment from chief executives who have cited improving revenue and earnings.

"These leading indicators are objective," Achuthan said on CNBC. "They don't listen to all the hubbub. They have a certain pattern they present in front of a recession and that is in right now."

That sentiment mirrors what Money Morning Chief Investment Strategist Keith Fitz-Gerald has been telling investors for weeks. Fitz-Gerald has been warned that the weakening economy will eventually result in a bear market that sends stocks hurling back towards March 2009 lows.

"There's nothing President Obama or Bernanke can do at this point," Fitz-Gerald said. "Our debt is once again a problem, our jobs situation stinks, our government is dysfunctional, and then, of course, there's Europe."

Prepare for More Recessions

Although it would seem too soon for a recession so quick on the heels of the last one, ECRI pointed out that shorter cycles are actually closer to the historic norm. In the 1799 to 1929 period, ECRI said almost 90% of U.S. economic expansions lasted three years or less.
Calling a Recession

Based on that, as well as a decades-long pattern of slowing growth and evidence of increasing economic volatility, ECRI predicts recessions will continue to hit more frequently in the years ahead.

When asked how severe this next recession is likely to be, Achuthan said that was "unknowable," although a major financial shock – such as a Greek default on its sovereign debt – would make things significantly worse.

"Back in the last recession in August of '08, prior to the Lehman debacle, these indicators were pointing to the worst global recession in 30 years," Achuthan said. "Then you had Lehman."

The collapse of Lehman Brothers triggered a global financial crisis that not only intensified that recession, it set the conditions for the weak recovery that followed.

Even absent such a shock, Achuthan predicted this recession will have dire consequences.

"It means the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar," Achuthan said. "If you think this is a bad economy, you haven't seen anything yet."

Don't Bail on the Market

Given the economy's bleak prognosis, it might be tempting to bail on stocks entirely. But Money Morning's Fitz-Gerald says there are five steps investors can take to protect their portfolios and eke out some gains, as well:

  1. Sell Strategically:Sell into strength and capture profits using trailing stops that are gradually ratcheted up as the bounce begins. This will help you raise cash (that can be used to buy into the rebound when it eventually happens)
  2. Hedge Your Bets: Usespecialized inverse fundsto hedge downside risk that will accompany the rollover to the downside and rack up significant gains at the same time.
  3. Consider Alternatives: Buy commodities – most notably gold and oil – on pullbacks. These alternative assets will help preserve the value of your portfolio as the markets roll over. Their value will accelerate dramatically when the world economy recovers – as it eventually will.
  4. Think Globally: Put new money to work in so-called"glocal" stockswith fortress-like balance sheets, diversified revenue and experienced management. Not only will they help hedge the value of your portfolio, but by concentrating your focus on them you are building in upside potential even if we haven't hit a bottom. Those offering big dividends are best because that will help you keep pace with the inflation the government debt will ultimately induce.
  5. Stay in the game:It's tempting to bail out given my prognosis for more downside, but attempting to time the markets is a fool's errand — and never works. You just wind up getting skinned twice — once on the way down and again because you were standing on the sidelines and got left behind when the markets ultimately reverse — which they will.

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  1. Werner | October 4, 2011

    Refreshing reading an article who does not blame Greece for the US's problems.
    Greece is just a small rehearsal of what i believe will happen to the US, with much more worldwide consequences.
    Withe the prevailing fiscal insecurity, or rather fiscla US imperialism, any non US citizen or resident had better keep his fingers out of any investment in the US. Just a question safeguarding one's interest.

  2. fallingman | October 4, 2011

    Important article. Thanks.

    You know, CNBS had a guest on the other day when this call came out who defamed Achuthan by impliyng that he was just scaring people so "they can sell their analytical services." And the host never challenged him. That's how it works on bubblevision. Disgraceful.

    I've never known ECRI to be wrong and am glad to see your appraisal that they have, indeed, never been.

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