2012 Outlook: Another Recession?

Includes: GLD, UUP
by: Robert Hallberg

The world economy has remained weak ever since the recession / depression that began in 2008. Only through massive quantitative easing and stimulus programs worldwide have we been able to manufacture an artificial recovery. But the economy has once again started to slowdown and there is talk about another recession.

It is virtually a certainty that we will get another recession but the question is when and how big will it be this time? Rescissions are actually quite common and we have had 20 recessions over the last 100 years, which comes out to about one every four years on average. The chart shows the time period and the length of all previous recession since year 1910.

Whether we will have another recession in 2012 still remains uncertain. The economic numbers are suggesting a substantial slowdown, not only in the U.S. but in China and India too, while most of Europe and Japan is already in a recession. However, this is an election year; not only in the U.S. but in 59 other countries throughout the world and those in power will do whatever they can to forestall a slowdown in the economy.

The chart shows GDP growth among major economies throughout the world. The growth in Europe is virtually nonexistent and Japan is already in decline.

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The official economic numbers are weak but if you consider alternative figures created by free market economists the picture gets even worse. Shadowstats.com calculates alternate GDP numbers reflecting the inflation-adjusted, or real, year-to-year GDP change, adjusted for distortions in government inflation usage and methodological changes that have resulted in a built-in upside bias to official reporting. Based on these figures we are already in a rescission and we actually never came out of the rescission that started in 2008.

(Click to enlarge)

The underlying problem facing the economy is too much debt caused by excessive spending, bailouts, and stimulus. During the last financial crisis of 2008 we had moderate to high debt level, but since then debts have exploded. In the U.S., debt-to-GDP just exceeded 100%, and even financially conservative countries like Canada and Germany have significantly increased their debt burdens over the last couple of years. As a consequence, next time we are hit by a financial crisis the problem will be much worse. The chart shows the increase of debt among major economies.

(Click to enlarge)

The economic picture is not pretty and whether we will official have another recession in 2012 still remains to be seen. Nevertheless, we can expect great volatility in the market and I suggest that retail investors be defensive and keep plenty of “dry powder” in anticipation of a possible selloff or other possible shocks in the financial system.

The dollar (NYSEARCA:UUP) might may continue to see some temporarily strength while the problems in Europe continue play out. But once the world take their eyes off the issues in Europe the dollar is likely to be under pressure again. I suspect that gold (NYSEARCA:GLD) will have another good year given the amount of uncertainty and money printing that is likely to occur.

Disclosure: I am long GLD.

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