Island Investing: The Question On Everyone’s Mind

Island Investing
Cale Smith, MBA
August 8, 2009
KeysWeekly.com

Q. Is the recession over?

A. Lean in close. I’ve got something you should hear. There has been a recent flurry of economic data released. If there were one conclusion to be drawn regarding whether or not we’re still in a recession, it would be this:

I have no idea.

I’m not alone, however. The truth is that nobody really knows. Anyone who claims they do is probably trying to sell you something.

There are two reasons it’s a difficult question to answer. The first is that there is a significant lag between the time that the relevant data is collected and the publication of the government’s official conclusions. The recession might have ended at noon yesterday, but we might not find out for months.

The second reason nobody knows when the recession will end is that most economists are horrible at prediction. Keep in mind when watching those talking heads that economists not only failed to anticipate the economic crisis we just went through, but they may have helped cause it, thanks to faulty risk and derivative models.

If the recession is over, it certainly doesn’t feel like it. While the decline in the economy appears to have stopped, all indications are that the unemployment rate will keep rising and people will continue to lose their homes at a high rate until well into 2010. Unfortunately, even if the recession is over in some parts of the country, South Florida will likely be among the last places to recover.

If you think the dour tone of the above would mean bad things for the stock market, however, you might be surprised to know that the stock market has been on a tear. The Dow just had its best July in 20 years. Why, you ask?

Consider the recent stock market rally to be driven more by relief that we’ve avoided a depression than widespread optimism about a recovery. Soon the market will likely start to be driven more by companies’ financial results than the emotion of the last few months. So it’s time to talk more about value investing.

Cale Smith is the portfolio manager for the Tarpon Folio and Gecko Folio. His firm’s website is www.islainvest.com and his blog is www.caleinthekeys.com.

Cale Smith

About Cale Smith

Portfolio Manager at Islamorada Investment Management.
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One Response to Island Investing: The Question On Everyone’s Mind

  1. Kirk Kinder says:

    Don’t be too quick to take the Depression scenario off the table. It seems that everyone thinks that, but this market run is eerily similar to the 1930 run up in both time, gains, and volume.

    I am not saying we are heading that way, but remember, the same guys taking the Depression off the table are the same folks who were blindsided by this. And, the structural inefficiencies that existed back then exist today. Namely, enormous debt to GDP and tight credit (despite the Fed’s massive printing – banks are hoarding).