Recession Act 2

I had the opportunity to bend the ear of a Chicago financial advisor at dinner last night. Basically Tom confirmed a lot of what I have heard and read elsewhere, which was sobering. “We’re in for more pain, a lot more than most people realize.” A specific observation: “The money supply has been shrinking for five months straight. The economy can’t grow in such a situation.” With regards to our home state of Illinois and its ongoing financial mess, he noted this: His firm has recently been researching bonds. In every category, he said, whether amount or term length, the largest numbers for sale are State of Illinois. Everybody, it seems, is trying to get rid of them.

Contra the Washington mantra, the recovery is wobbly at best and very likely will be taking a pause in the second half of the year. Europe will now certainly be doing the same, nearly simultaneously it would seem. China’s economy is also likely heading for a slow down, probably in conjunction with its own real estate meltdown.

Almost every developed country has the goal of devaluing its currency to make its exports more competitive. This “race to the bottom” (as it’s been called) can’t work for everyone, of course, but looks least likely to work for the US Dollar which still functions as the world’s reserve currency. We won’t be “exporting” our way to recovery anytime soon.

One of the most amazing signs of the severity of this recession is that, despite the enormous amounts of money central banks are pouring into the global economy, the overall trend is still deflationary. TARP and the stimulus’ billions just seem to have been sucked up by the driest of sponges (hence the shrinking money supply). It’s almost impossible to overestimate the impact of the collapse of home and commercial real estate values (a slide many are predicting will be resuming soon).

I asked Tom if a great aunt surprisingly left him a $1 million dollars, what would he do with it right now? His reply: keep 30% in cash (USD) and put 70% in gold coins. That’s about as defensive as you can get. Batten down the hatches. The predictions of a decade-long stagnation are looking more accurate all the time.