The Definition of a Recession
Are we in a recession?
The S&P 500 (even with yesterday's huge bump) is still down about 12%
from the early July highs.
But... let's back up. What is a recession? Is it characterized by a drop
in the stock market? Should it be?
If a bunch of wealthy corporations get wealthier, and a your 401(k)
account gets a bump, does that mean we're NOT in a recession?
I'll give you two definitions of a recession that I think will help clear
up any confusion.
Some of you might be thinking, "wait, doesn't the Federal Government have an official definition of recession?"
Yes - they do. The government defines a recession as two consecutive quarters of negative GDP growth. And that's helpful if you're a pencil pusher in the Bureau of Labor and Statistics, but it's probably not very informative or useful if you're an average American. GDP can be fudged.
So, I'd like to introduce to you two other definitions that I think are more accurate, useful and therefore, better than the "Official" definition from the government.
The first one is the general, overarching definition that you're likely
to think of when I use the word.
Recession: a period when a society's standard of living generally
falls.
Now. Unless you got most of your income from trading the markets over the
past two years, and you were able to double your net-worth from early
2009, I don't see how paying attention to the stock market can really
give you too much of a clue about your standard of living.
The above scenario also assumes you weren't in the market at all in 2008
when it tumbled. You somehow managed to get out of stocks in say, late
September 2008.
If so, then I guess your standard of living has increased. But that's
just you. Most people sold after taking big losses. Most people didn't
get back into the market until 2010 - or later.
And while stocks did fine over the past 2 years, the rest of the economy
hasn't really matched that performance. Unemployment is still high. The
bond market is pathetic. Housing is not recovering. Wages are flat at
best. And perhaps most importantly, the dollar buys FEWER goods than it
did two years ago.
Even if you hold a small amount of your net worth in precious metals, as
I do, it's hard to say that your standard of living rose since the
beginning of the official recession in late 2008.
So, using this definition, I'd make the argument that we probably haven't
left the recession. It's not a double dip. It's one big scoop from
October 2008 to today.
Our leadership makes the mistake of looking at the stock market as the
single biggest, and sometimes only indicator about the health of our
economy.
If that's true, then looking at the past two years and patting ourselves
on the back is foolish. Let's look back 10 years or even 12 years.
Stocks have gone nowhere in the past decade plus.
And unless you were a stock whiz and were able to time the lows and
highs, you're probably worse off then you were in 2000.
Have we been in a recession for 12 years? It doesn't feel like it - but I
think you'd be hard pressed to make the argument that the recession ended
sometime in late 2009, as the mainstream media would have you
believe.
Okay, so what's the second definition of recession? Well, it's one that
you're not likely to hear, because it comes from a colleague of mine and
fellow gold investor, Tom Cullis.
But regardless of the source of the definition, I think it might be more
informative than the first definition - and certainly more useful than
the official government definition.
Recession: a period of time when the expected rate of return on a
given investment is negative.
The thing about this second definition, which I think is helpful, is it
does describe almost any investment you can think of over the past 2
years. Even cash. Even oil. Certainly, it refers to stocks. Bonds. You
name it.
The only big obvious exceptions would be gold and to a lesser extent,
silver.
So are we in a recession?
I don't know. I think we probably are, and if that's the case, and things
are likely to continue down this road, we should cling to our gold and
silver. And with the market in flux, and gold investments especially
lagging behind, this might be the best time to buy gold stocks during
this bull market in gold.
If you're not feeling very adventurous (and I can't blame you for being
cautions these days) I'd recommend nibbling on shares of the
Market Vectors Gold Miners ETF (NYSE: GDX).
It tracks a basket of the biggest publicly traded gold companies in the
world. Normally, you'd expect the companies in this ETF to double or
triple gold's performance on a percentage basis. But they've barely kept
pace. I think as this gold bull continues, we can expect these big
"blue-chip" gold companies to outperform.
Like I said, consider nibbling on this ETF over the next few months. Buy
a block of shares every two weeks. Average in. And be prepared for
corrections and bumps in the road as this market continues to stumble
around.
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