Question of the Week: Investors Preparing for Double-Dip Recession

The "pause" button has been hit on the U.S. economic recovery, fueling worries that we're headed for a double-dip recession.

"We're in a pause in a recovery, a modest recovery, but a pause in the modest recovery feels like a quasi-recession," Former U.S. Federal Reserve Chairman Alan Greenspan said in an interview on NBC's "Meet the Press" broadcast last Sunday.

Greenspan touched off speculator interest in a double-dip downturn when he announced that a further decline in home prices could push the economy into a new recession.

[mm-toolbar]"If home prices stay stable, then I think we will skirt the worst of the housing problem," Greenspan said. "But right under this current price level, mainly 5, 7 or 8% below, is a very large block of mortgages, which are under water, so to speak, or could be under water. And that would induce a major increase in foreclosures, foreclosures would feed on the weakness in prices, and it would create a problem."

Question of the Week
With unemployment stuck around 9.5% - and mortgage-lending standards stricter than they've been in years - don't look for housing prices to escalate anytime soon.

Greenspan's double-dip fear mongering isn't the only signal that there's still trouble ahead for the U.S. economic recovery.

For instance, consider the fact that Greenspan-successor Ben S. Bernanke has referred to the economic outlook as "unusually uncertain."

Then there's ArcelorMittal (NYSE ADR: MT), the world's largest steel company, which lowered its third-quarter forecast, and voiced its concerns about the slowing pace of the global economic recovery because of a trifecta of troubles: A seasonal dip in demand during the European summer, slower growth in China, and higher costs for iron ore.

And don't forget the two often-overlooked-but-telling economic sources that are pointing south: the Economic Cycle Research Institute (ECRI) and the Baltic Dry Index (BDI). The ECRI charts weekly changes in leading economic indicators, and is extremely good at calling market tops and bottoms, while the Baltic Dry Index tracks worldwide international shipping prices of various dry bulk cargoes.

So what are they telling investors?

Question of the Week
"The ECRI has a 100% hit rate and is right now warning anyone who will listen that another downdraft is in store for the U.S. economy," said Money Morning Guest Columnist Jack Barnes.

Meanwhile, the BDI "has shown itself to be the EKG of future industrial demand," said Barnes. "And, right now, the BDI is screaming 'Danger, Will Robinson!' to any investor who will read it and heed it as a true leading indicator."

With signs of a slumping economic recovery, Money Morning published its "Defensive Investing" series to provide readers with strategies they could use to protect themselves against the possibility of a double-dip downturn.

Other articles have provided readers with related strategies. Money Morning Contributing Editor Shah Gilani advised investors how to pick stocks in the "New Normal" economy of ultra-slow growth and sub-par expectations, while Contributing Editor Martin Hutchinson pointed investors toward the "CIVETS" - the foreign markets that are continuing to grow, even as the United States works to regain its footing.

This prompted last week's installment of Money Morning "Question of the Week": Are you preparing for a double-dip recession? Have you tweaked your portfolio to handle a double-dip downturn? Have you employed defensive investing techniques to adjust to the economy's direction? Do you think double-dip concerns have merit, or will the nation's economy avoid another downturn?

The following reader responses reflect investors' concern over a double-dip recession and what some are doing to get ready for the slump.

Cashing In, Steering Clear

I don't just think we're in for a double dip recession, but rather a 'double-dip depression' that should hit the bottom in about five or six years! People should listen to Greenspan, the ECRI and the BDI because they are right.

I'm preparing for this downturn in several ways. First, I've just sold an investment property in order to get rid of the mortgage and to cash in. We will need to have as much available cash as possible in the coming 'deflationary' depression.

Second, I'm in the process of clearing all credit card balances to zero.

Third, I'm not touching shares with a 'barge-pole' as the stock markets are on the precipice of what will likely be the biggest fall in history, when this 'deflationary' bubble bursts. That means I'm staying clear of stocks, period. Even so-called defensives.

Oh yes, and fourth I am already short on the Dow Jones and may even go short on the S&P 500, too. However, I will only be short for the first few downturns, because once the fear and panic selling hits in earnest, the system will go into lockdown, or meltdown, or whatever you want to call it. So I will want to make sure that my money is out before that happens.

My advice, do the same. Cash in, get rid of your debt and stay well clear of the stock market until this is all over. When will that be? My guess is in 2016.

- Allan E.

Not-So-Calm Before the Storm

I am not sure whether it is proper to refer to a double-dip recession when most of the country, outside of Washington, D.C. and New York, is still looking for the bottom of the first dip. On the other hand it is clear that the stock market has made quite a recovery over the last 16 months or so, so this is really where the dichotomy falls.

Is the stock market really indicating that the economy is recovering, and the rest of the country will soon be catching up, or are we really in a prolonged recession/depression, and the stock market is just an indication that the stimulus money has predominantly flowed into equities, while the nation as a whole is still mired in the depths of the downturn?

I am betting that it is the stock market that is out of step, and that this will become apparent to everyone before too many more months. Housing has been a major leading indicator of the direction of the economy for decades, and presently we are looking at least another 7 million foreclosures over the next two to three years, according to what I read. If these foreclosures depress home prices by another 10-20% or more, which is certainly not an unreasonable guess, then the number of delinquencies and foreclosures may rise even higher. I don't know where the bottom will be, but it seems unlikely to arrive before 2012, and I have positioned my portfolio on the assumption that the downside risk is a lot more than the upside potential.

I think it likely but not certain that we will see new lows in the stock market, and am quite sure that we have stormy and volatile times ahead.

- Gordon F.

Double Dip For Sure - If Not Worse

We'll be lucky if it is only a double dip. Connect all the dots and it gets much worse than the liars and frauds-in-suits in D.C. are admitting: an unaudited Federal Reserve running out of ammo for their Ponzi gig; U.S. government debt that is becoming mathematically impossible to repay without massive currency devaluation or default; over 40 of the states flat broke and now advising of coming layoffs in the hundreds of thousands; public pension funds under funded by some $4 - $5 trillion according to the latest tally; unfunded obligations for Social Security, Medicare and Medicaid now estimated over $50 trillion.

To top it off, the economy is 70% dependent on consumers, many of whom are losing their jobs, homes and savings.

The EU has its own debt mess, but at least it knows how big the hole is, with politicians choosing to face the dogs head on and inform taxpayers about it - unlike the lies, spin and fraud we get from our on-the-take U.S. politicians.

- Moran

Still On First Dip

Wake up, we have never left the first recession - unless of course you buy into the consecutive quarters/no-growth B.S.

- Gary S.

Back to Economic Basics

My 89-year-old father is very afraid that it will happen! I only hope that we have enough understanding of Economy 101 on the part of all these so-called college educated officials to get us through this without such things as "supply side economics"!

- Phyllis B.

[Editor's Note: Thanks to all who responded to last week's installment of the "Question of the Week" feature regarding a double-dip recession. Check back in a couple weeks for the next question.

Is there a topic you want to see covered as a Question of the Week feature? Then let us know by e-mailing Money Morning at [email protected]. Make sure to reference "question of the week suggestion" in the subject line. We reserve the right to edit responses for length, grammar and clarity.

Thanks to everyone who took the time to participate - via e-mail or by posting their comments directly on the Money Morning Web site.]

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