I keep hearing television pundits’ claim that there is no threat of a "double-dip" recession. To offer one specific example, Larry Kudlow has recently promulgated such a notion. And Larry’s has a lot of creds; he worked in the Reagan White House and has popular shows on CNBC and ABC radio.
But he’s dead wrong on this one.
The government is artificially inflating the market with wasteful government spending to make it look like there is no recession when in fact there is. Reckless government spending puts forward a facade that everything is okay because Gross Domestic Product (GDP) is growing, however so slight, making it appear "not in recession." (This misconception also explains how the DJIA can be speculated to a valuation so high in the action zone.)
This is a dangerous mindset. And it isn’t true.
You don’t have to know Ronald Reagan or work in the White House to know that the power of the American market resides in the free-market. But that market, the free-market, is in recession and has been for a long time. To think to the contrary is to be misguided.
As Ronald Reagan knew all too well, the American market is most strong when it is lead by free-market activity – not government spending. In the chart below, the green line represents the total market economy (nominal GDP). Notice that the blue line has receded to below the green line since the 2008 crash. That’s free-market shrinkage – also known as a recession.
If these lines represented stocks, the one you would want to own is the red line – the U.S. government. Its bold upward trend reveals massive government expansion that came at the expense of the free-market. In other words, We the People are shrinking and the government is expanding. That’s why it feels like a recession.
That’s also why some people, looking at charts with only one green line on them, can be misled into believing the Market has recovered and no threat of recession exists today. This erroneous belief could cause you to misallocate your investment portfolio. And that could be costly.
Don’t be fooled.
Successful independent investors must raise their sights above misguided market assessments and electoral propaganda or risk getting blindsided by the next stock market correction that is sure to come. There’s simply no reason to be surprised when it does.
PS: If you haven't listened to my recent radio show give it a try. It was a pretty good one.