Lending Club Blog

Is a Double Dip Recession Looming?

Today it appears that the major topic on investors’ minds is the potential implication of a double-dip recession.  While no one can be certain what will happen, we can identify some important signposts that might point the way to what could unfold.  Let’s start by examining how often double-dip recessions have occurred.  The reality is that they are extraordinarily rare.  Since 1854, there have only been three in the United States: in 1913, 1920 and 1981.   All three occurred during periods of tightening central monetary policy which stands in stark contrast to today.   The first, 1913, came during the birth of the Federal Reserve which was prompted by the severe banking crises of the previous decade.  The latter two occurred during a period of rapidly escalating inflation, which does not seem to be a concern at the moment.

If we avoid a double dip recession, one can reasonably surmise that credit quality will improve as the economy begins to grow (albeit slowly) and less American workers lose their jobs.  A potential counter balance to improving credit quality will be the rising interest rates that could negatively impact fixed income prices  While high quality, higher yielding instruments may also fall in price, they typically fall less than low yielding instruments and offer significantly more current income.  If interest rates don’t rise (and we also don’t see a double-dip) the increases in yield will improve portfolio returns without the price-risk associated with a rising interest rate environment.

What if history is wrong and we do experience a double-dip?  Given that previous double-dip periods had substantially different circumstances we will be to a great extent in uncharted waters, but we certainly can speculate.  Another downturn in economic growth will likely punish equities and most commodities as it implies shriveling end-demand.  Low yield, fixed income instruments should rise in price but will offer little in current income as yields are already at, or close to, historical lows.  Such an environment would likely make investors very defensive and fall back to cash and CDs to avoid capital losses.  Higher yielding fixed income opportunities would remain for investors who focus on higher quality credit. These particular instruments would likely rise in value and produce enhanced monthly income during a period of turbulence.

Double dip or slow economic growth? Let us know what you think!


The above is for informational purposes only and represents the opinion of the author and is not investment advice, is not specific to any investor’s financial situation and may not be suitable for any investor.  Before investing, you should consult with the appropriate advisors.

Wednesday, September 15th, 2010 at 3:12 pm

Comments (8)

  1. I think it is just going to be slow economic growth. A large part
    of it could be the elections this fall and their outcome. What we
    need to do is lower taxes on average workers and small business and
    that would give much more of an economic benefit than “stimulus”
    plans would. I’m interested to hear others opinions on this :)

    September 15th, 2010 at 3:31 pm

  2. Noah:

    I think we are headed for a double dip. Unemployment continues to
    grow especially for individuals making less than 100k a year. This
    happens to be the majority of the workforce in the US. The other
    big issue we face is that large US corporations continue to hold
    large portions of cash and refuse to use the available cash toward
    growth until we see a change in administration. Put it all togethor
    along with a government that continues to spend more than it brings
    in will create a major problem for the dollar, causing a major
    problem for the companies that are holding cash thus having a
    constant downward affect on the economy. The solution I see is to
    cut Federal Spending and unfortunately taxes will have to be raised
    or at least not cut to pay down our current obligations. We have a
    very tough road ahead of us and if we are willing to elect
    individuals that are willing to make tough choices we may come out
    of this in a few years.

    September 16th, 2010 at 7:52 pm

  3. I think that Americans are savvier about money than ever before and
    although it’s taken a major recession to get us there, we are all
    counting our pennies and looking into smart investment and income
    opportunities. Like never before. We will come out of this smarter,
    stronger and better for it. Slow economic growth…but we are
    getting there!

    September 17th, 2010 at 11:32 am

  4. Well it wont surprise me if we do have a double dip recession. I
    discovered today that foreclosures in Hawaii are now numerous
    enough that in Canada it is being ranked in the top 10 places in
    the U.S. for Canadians to invest in real estate. This is the first
    time this has happened. Las Vegas and Arizona are still prime
    places, but Hawaii had seemed to be holding its own until now.
    Unemployment is not coming down and hundreds of thousands of people
    have given up looking for work so they aren’t being counted it
    seems. I agree that at least in the short term corporate taxes
    should come down, but there has to be pressure onbusinesses to
    increase employment if this happens, otherwise it doesn’t do anyone
    except shareholders any good. Not that that is a bad thing, but in
    the current circumstances we have to turn this ship around.

    September 18th, 2010 at 8:42 pm

  5. Lone6f9:

    The other big issue we face is that large US corporations continue
    to hold large portions of cash and refuse to use the available cash
    toward growth until we see a change in administration.

    September 20th, 2010 at 7:58 am

  6. If they large US corporations continues to hold large portions of
    cash, This issue cannot be resolved..

    September 24th, 2010 at 11:22 am

  7. Bayongbong:

    I think we are headed for a double dip. Unemployment continues to
    grow especially for individuals making less than $100k a year. This
    happens to be the majority of the workforce in the US. There is no
    turning back now.

    September 25th, 2010 at 7:27 pm

  8. Leila:

    There are some positive signs like an increase in orders for
    durable goods. Also, businesses are predicting better sales and
    growth. It is just the jobs that are going to come along the
    slowest. Until we have more jobs, we will not see a rise in
    consumer confidence.

    September 30th, 2010 at 5:25 pm

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