The Economic Recovery of 2009: When do you know an economy is coming out of a Recession?

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When do you know an economy is coming out of a recession? Watch the banks and commodities.

Hey, I don't want to turn you into an "economics professor."  You would need your own beanie hat with a propeller to do that.  But let's cover the cocktail party "economics" conversation, so you can hold your own at a party.

There really is no "textbook" formula "how recessions end," but patterns tend to emerge.

First, understand why recessions start in the first place.  Banks stop lending.  Money supply shrinks.
Like it or not, the world runs on credit.  When credit dries up, business evaporates.
How do you get the machine moving again?  Lending. And all the lenders have "gotten religion" recently, and are sticking to traditional lending yardsticks.

Often, two completely opposite ends of the market tend to move first when recessions end.  They give "clues" things are starting to loosen up: banks and commodities... especially precious metals like gold and silver.

See, the rising price of precious metals can sometimes signal that we're starting to see money back in circulation.  This would be a very strong indicator that the recession is coming to an end sooner than most people expect.   A rise in commodity prices tends to signal a pick up in economic activity.  And when you get enough economic activity, you get inflation.

A little inflation is a good thing.  Over the past year-plus, we have had no economic activity to speak of.

Now, there are plenty of people in the market today speculating that we will have massive inflation.  That's because the government has been printing money like crazy.  And when you stuff this much cash in one end of the pipeline, at the other end of the pipeline, you should expect runaway inflation.

However (compared to other times), we have witnessed some massive price deflation in many areas of the economy: the price of your house, your stock portfolio and the job market.  So this massive "print job" the government has been doing (printing dollars) might actually just "offset" the price deflation we've seen. Or not.
I suppose all of the pundits could be right!
When was the last time that happened?

See, the issue is not whether we MIGHT see runaway inflation or not.
The real question is: what are we going to do about it?

Over 23 years, I've learned the hard way.  Worrying about the future is really a waste of time.

We have to focus on what's happening right now.

As strange as it seems, we need to set aside what might - or might not - happen a year, two years or even three years from now.
So what is happening right now?

We have seen a massive bounce back in the financial sector.  Banks are far from being healthy, or even back on their feet.  But the selling was completely overdone.  So they are bouncing.  On the other hand, commodities: energy, natural resources (and the countries that are rich in natural resources) are really starting to move.

When do you know an economy is coming out of a recession?

Watch the banks and commodities.
Here we go.

Thomas Mullooly  is the owner of Mullooly Asset Management, LLC, NJ Fee Only Investment Advisor, providing guidance for your 401k account. Mullooly Asset is a fee-only alternative to stockbrokers and financial planners.

Tom's popular email alerts help folks to reduce the risks in their portfolios. To learn how to stop making investing mistakes or if you would like a free look at your 401k account at work - or your 403b annuity, or section 457 deferred compensation plan at work, visit www.mullooly.net today!

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