We're in a Recession - and On the Way to $60 Oil

As the markets continue to slide (now hitting their lowest levels in almost a year today), commentators and analysts are afraid to say "recession."

If you turn on CNBC or read a business newspaper, you'll see the terminology of choice - "possibility of recession" or "on the path to recession."

I want to be the first person (that I know of) to go on record saying this: The United States is currently in a recession.

What does that mean?

Well, if the recession started around the 2007's Q4, then we may be in for a bad earnings season. However, many of the blue-chip companies important to our markets and economy have extensive international operations, where growth is strong. (IBM pre-released that they will have a very strong quarter.) Also, a weak dollar aids companies with extensive overseas operations, so while you may not get to vacation in Europe this year, the bottom lines of many conglomerates will swell (or, at least, not crumble, if the domestic economy is weak).

Looking back, markets usually perform worst right when the economy is in recession - that may explain the 10-15% losses in major indexes over the past three months. Of course, if our markets emerge with just a 15% slap-on-the-wrist, we should consider ourselves lucky. If the markets endure another 10% haircut over the next few months, I think everyone will agree that we're in a recession even if the economic data isn't on the books yet.

What's good about a recession? It encourages competition and efficiency. One can easily argue that many of our core industries have been in a recession of their own for a while - American carmakers have been hemorrhaging money and laying off workers for years, while many mortgage and housing companies have already gone bankrupt. When industries struggle, the strong survive. When American companies and industries strengthen, they will be better suited to compete against rivals in Europe and Asia, eventually leading to prosperity a few years down the road. The "Jobless Recovery" following the recession of the early 2000's created a 5-year golden era for the American markets and economy.

Plus, another benefit of a recession will be a massive decline in the price of oil. Sure, there are fundamentals that should provide support for oil at a historically-high level, but that level is NOT $90/barrel. The price of oil is no longer driven solely by fundamentals; now, the emotion and whims of traders, coupled with news, creates buying frenzies of selling panics. If it is declared that the US is in a recession, I think that we could see $60 oil. The actual impact on the worldwide demand for oil will probably be negligible, but psychologically, news of a recession would be very significant. I wouldn't have the guts to bet against the price yet, but if we see $60 or $50, it would present a great buying opportunity.

Though things are looking grim, I'm buying. I increased my position 50% in Buffalo Wild Wings, a stock that's fallen over 50% because of one slightly week quarter. (People will eat wings even if the economy is retracting 1%/year instead of growing 2%.) No debt, lots of cash, tremendous growth, and a superior product are all reasons to invest in Buffalo Wild Wings. Check out articles in my archive; all of the analysis is still valid today.

I also bought Intel after the bell today below $20/share. It's truly a irrational world when the media focuses on a 2 cent miss instead of the 51% increase in profits. Why should a solid company lose 15% of it's value for THAT? Especially as the economy is looking grim, a show of good corporate growth should be rewarded by investors, not thrown to the curb. As long as there's nothing awful on the call, investors should hopefully start acting rationally and Intel may pop back up to it's closing level today.

So, I want to go on record making two predictions, which admittedly, may not end up being factual:

1) It will later be shown that as of January 2008, the United States is in a mild recession

2) Oil will dip to $60/barrel sometime in 2008

Bold? Maybe. Only time will tell.

Comments

[thriftybob]

China and India will only be too happy to spend some of their piles of dollars to buy and use whatever oil we don't use. The number of cars on their roads is increasing at 22% per year, and those cars will need fuel. Otherwise, oil would already be at $60 because our demand has already declined.

[bhakta]

I agree the USA is in recession. I will not be surprised to see it become depression. The cause is not high oil prices. The cause is the indebtedness of the country, the communities, the states, and the individuals. The entire world has not over-spent like the US Govt and US Citizens. Formerly, when Asian governments were over expanding, and over-spending they'd get slapped by the IMF, their currencies were attacked and their economies would collapse as in 1997. It is high time the US GOVT lived within its means, entiltlement programs that cannot pay their own way be cut, and the common people learn to live within their means too, not by plastic cards! I am carrying about $500,000 in credit offered by bank credit cards and if I were stupid enough to use them, there is no way the banks would ever get paid! The sub-prime disaster is only the first step, and many will follow as people will not pay their credit cards, car loans, lines of credit etc. However, the US is only a small percent of the world population, and the big population nations of India and China are still booming, and I do not foresee them collapsing along with the USA. Some export industries will suffer, but these countries have such huge markets internally, that the USA is not going to cause them to collapse too.

[Tom C]

Peter Schiff of Euro Pacific Capital has now for several months been screaming from the rooftops that the US is in recession and Nouriel Roubini has been predicting from mid 2006 that by 2007 q4 the same (among others).

This recession is not going to be a soft landing it will be hard and deep. Why? Because the imbalances that have built up in the economy are so enormous in every part of the economy. Households have a negative savings rate, the country has a large current account deficit, the housing bubble built on lax lending standards and outright fraud has well and truly burst, commercial real estate is going down the tubes, auto loans are rising in delinquency, same with credit cards, unemployment is rising, inflation is rising....do I need to go on.

[Jim A]

How about $30 -40 per barrel oil. A US recession would kill demand in China and India which are causing prices to spike. How are US real estate prices going to drop 20% while oil stays at $ 90 per barrel?