To Dip or Double-Dip?

Includes: DIA, QQQ, SPY
by: Vahan Janjigian, CFA

There has been a lot of talk lately about whether or not we will have a double-dip recession. I have long been in the camp that says a double-dip is a real possibility. I believe the probability for a second recession is higher now than it was last March. But how does one actually assign a number to this probability?

The economists Nouriel Roubini and Martin Feldstein are perhaps the most bearish on the economy. They say the chances of a second recession are about one in three. This means they believe that if the economy were to experience the same exact conditions it is experiencing now hundreds of times, one-third of those times would result in a recession. Another way to look at is that the probability that we will not have a second recession is about 67%. In other words, even the most bearish economists believe there is a much better chance that we will avoid a second recession than there is that we will actually have one.

That doesn't mean we should not take seriously the probability of a second recession. Yesterday, Warren Buffett expressed his confidence that a second recession would not occur. But I don't think that Buffett would entirely rule out the possibility. It is encouraging to hear him say that Berkshire Hathaway's businesses are "coming back almost across the board." He also claims that headcount at his companies has risen.

Some experts have complained that the real problem is that the banks are refusing to lend money to businesses--particularly small businesses. Instead, they are being cautious and keeping lots of capital on their balance sheets. Of course, to some extent, they are being forced to hold onto their capital due to regulatory requirements. So it was interesting to hear Buffett say, "I know Wells Fargo, they would love to have $50 billion more of loans now. Go in and talk to the banker."

This sounds like an invitation to me. I would encourage small businesses to do exactly what Buffett suggests. Let's put Wells Fargo to the test and see if they are really willing to make those loans.