James Grant, in the WSJ on September 19, guessed that the recovery would be a "bit of a barn burner." He did the most eloquent job I've seen of describing why the current pessimism on the recovery's strength was wrong.
Now, I hope he's right because I don't like the recession any more than the next guy, but I can guarantee that he did not get the reasons why the recession will be V-shaped right.
Unfortunately, Grant just repeated the popular “recoveries have been V-shaped therefore this one will be V-shaped” mantra with the addition of some examples.
Let’s go over what he got wrong:
- The Panic of 1893. Grant referenced this as an example of a recession with a sharp V-shaped recovery. This is a actually very good example of a W-shaped recession where there was a recession from 1893-94 with a modest recovery with continued high unemployment followed by another recession had ended in 1896. Only after all the banks and housing bankruptcies had cleared themselves did the recovery really start and unemployment subside.
- “Error of Pessimism” Error. Grant uses Pigou’s quote on pessimism incorrectly. This refers to when stock prices are beat down after a recession, not to talk about how prices are overvalued or how an economy is likely to recover.
- Recession of 1981-82. This is not comparable to the current recession as it was caused by government action to eliminate inflation by raising interest rates and ended by a cut in interest rates.
- Recession of 1920-21. This was a deflationary recession caused by the government ceasing to buy war materials at the end of WWI. It’s just not comparable to the current debt recession.
Grant may have gotten off in the wrong direction because he misinterpreted the Singleton quote that he started with. The important words were “the vast majority of them cannot be predicted. So my idea is to stay flexible.” The few that can be predicted are what Singleton (a MIT Sc. D) concentrated on and he was one of the leaders in the digital revolution.
We might have a strong V-shaped recovery but Grant did not prove it. What is predictable is that even a V-shape recovery is not going to be strong enough to keep the market from undergoing a major correction sometime before the end of the year. Only after the market has declined and Pigou’s “error of pessimism” is occurring should a conservative investor buy more stocks.
Of course, if you’re aggressive like me you can make your bets to the downside.
Disclosure: RYDEX INVERSE NASDAQ 100 2X CL H