The "R" Word
By Nick Murray, February 2008
As a measure of how utterly debased and stupid the rhetoric about the alleged imminence of a recession has been of late, nothing compares to a comment mined from an AP wire "story" that appeared in mid-January. In it, the chief market strategist for a foreign financial institution which shall be nameless - a chap who apparently has no background in economics, and/or two whom English is a second language - opined that "it's possible that the recession may only last one quarter." And you know that this is an accurate quote, because you know that neither I nor anyone else could make it up.
Herewith, some rational observations about the economic phenomenon called "recession." The first, as in any rational discourse (thereby excluding all journalism on the subject) is of course a definition of the term: a method of calibrating it, which is a bit different from a method of screaming apocalyptically about it in the cadences of Chicken Little.
A recession, as defined by the National Bureau of economic Research - and therefore by anyone who has actually taken an entry-level college course in basic economics, as opposed to financial reporters who are former weathergirls of either gender from a television station in Ames, Iowa - is two consecutive quarters of negative GDP growth. That is, a recession is a minimum six0month period in which the economy actually contracts. A "one-quarter recession" is therefore - like a water landing, a short-sleeve dress shirt or a new tradition - actually an oxymoron.
(A "growth recession," on the other hand is a period of economic growth that is slower than the previous period of economic growth. Since the latter is nowhere near scary enough for use by former weather girls of either gender, journalism has adopted the term "growth recession.")
The national Bureau of Economic Research will also be happy to disclose to you that there have been ten such episodes since the end of World Ward II. The average lasted approximately ten and a half months, and carried the economy down slightly less than two percent. (Over the last quarter century, as the economy has deepened, and our monetary tools for fighting slowdowns have improved, the time lapse between recessions has lengthened, and both their duration and depth have moderated. Indeed, since November 1982, the economy has only been in a recession for 16 months of about 300. But never mind that. It smacks too much of good news - or, as it is sometimes referred to, "truth.")
A ten-month, two percent contraction on an average of every six years suggests that recessions punctuate - on average - economic expansions occupying the other 60-odd months. Forgive me, but this seems to me to be a very small price to pay for an accretion of national wealth which is ongoing, and which has produced the wealthiest society that ever existed on the earth. It is, in other words, nothing more or less than part of the cycle, and the net effect of that cycle is the unprecedented betterment of humankind. (Why, even Americans on food stamps have 44-inch plasma TVs and are morbidly obese. Think of it: this society is so rich that even its poorest members eat too much? But I digress.)
Once again: there either is or is not going to be a recession in this country. (As I write, the chairman of the Federal Reserve is expressing to a congressional committee the Board's opinion that there is not, but what does he know?) The Fed has unequivocally declared its intention to fight such an occurrence with all the monetary weapons at its command. And both the legislative and executive branches have expressed strong interest in implementing some sort of fiscal stimulus. This is in keeping with the obvious truism that the more advance warning a recession gives you - as opposed to the last one, spawned by the sudden bursting of the tech bubble 0 the easier it becomes to fight it off.
If there is a recession, on average the equity market - being a discounter of the future, rather than a reflector of the moment, will turn up about halfway through it, while journalism is trumpeting each new negative statistic to the skies as evidence of deepening Armageddon. Thus, the people who panicked out in fear of a looming recession will - by the time it's officially declared over - have to buy their portfolios back at higher prices than those at which they sold. With the obvious exception of the deity Himself, the stock market is the universe's ultimate ironist.
And if there is a recession - and I, along with Dr. Bernake, herby repeat that I don't believe there will be- you may rest assured that its proximate cause will not have been oil, or subprime mortgage writedowns, or any of the usual suspects, all of which are quite adequately discounted in a 1350 S&P 500. it will, I'm perfectly convinced, have been journalism.
I expect journalism to be alarmist, declinist, economically illiterate, repetitive, stupid, and single-mindedly devoted to demonstrating that not only is the glass half-empty, but that this time it's irreparably shattered into a million pieces. But journalism's "coverage" of the economy and the markets in the last several months has been something altogether new in my 40-year career. It's made Chicken Little look like Pollyana. And it may yet succeed in frightening the whole country into sitting down hard on its wallet. Thus, if we do have a recession, I hope journalism will have the minimal grace to report it as what it will surely be: a self-fulfilling prophecy.
© 2008 Nick Murray. Reprinted with permission. Nick's lovely little book for investors, Simple Wealth, Inevitable Wealth, is available on his website www.nickmurray.com, click on "Books." We warmly Recommend it.
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