Rational Advisor

THis week there’s been a lot of talk about US recessions and when it will be here etc. Just to let you know, recessions do not happen every day. Since 1950, the U.S. has been in a recession only about 13% of the time. And in the last 20 years, it was even less (more like 6%). The two most recent circumstances were so mild they barely registered on the “Recession Richter Scale” .

In addition to the economy turning negative, recessions are also characterized by some combination of (amongst other things) rising unemployment, declining stock prices and usually an inverting of the yield curve (bond techno-speak for longer-term rates being lower than short-term rates).

The 2001 U.S. recession showed nothing insofar as a slowdown in housing or consumer spending. It was suffered almost entirely in the corporate sector. To be sure, those factors have now reversed. American companies are flush with cash (corporate profits, cash flow, cash on hand, cash in the bank, cash not accounted for, cash in a big brown…boxes, etc. etc. are strong, if not downright impressive) whilst the US housing sector and American consumer is tapped.

So what is the likelihood that the U.S. will be showing consecutive months of negative growth in the near future?

According to Credit Suisse analysts running three models trying to statistically predict the chance of a U.S. recession, the probability is not as high as one might think or fear.

Using August economic data, the probability of a recession varied from a 3% chance in the next ninety days to a 33% chance in the next twelve months. Keep in mind none of this includes any data from September when the Federal Reserves cut interest rates by 50 basis points.

Interestingly the August 2007 panic wasn’t even the highest reading of the year. That came in March when the jobless claims south of the boarder jumped and the likelihood of recession hit 36%.

So the chances are slim that we may have one. But even if we do go through one, some of the best investments will be in Bonds, Dividends, and Global large cap companies.

Rational - My hero as a kid was Lassie. That dog knew everything, and always provided concise, one-bark answers.

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