Recession?

My neck is hurting from watching the market go up and down over the past several months. Actually, it has been mostly down and my wallet is hurting more than my neck. The newspapers are filled with news of bank troubles and layoffs and arcana around the Federal Reserve's interest rate machinations. There is almost a gleeful tone to the coverage. Maybe they sell more newspapers during bad times? The President and Congress are contemplating a short-term stimulus package that may put up to $300 cash in the hands of consumers which probably is great news for Circuit City and Best Buy but will do nothing to create sustained wealth.

Does all this mean a recession and mass layoffs? For what its worth (and this blog is free), I do not think so.

The economy is much more flexible and transparent than it was even just 15 years ago when we had the last real recession; and, even that one was mild by historical standards.

We are increasingly a service-based, knowledge economy. Variable compensation in the form of incentive pay, stock options, bonuses in lieu of base pay increases all have made wages much less 'sticky' than in the past. This makes it easier for companies to reduce their variable costs without resorting to layoffs.

Globalization of business and advances in information technology make it less likely that the economy develops sustained disconnects. Business is constantly and rapidly adjusting to keep inventory, prices, costs and demand in balance and therefore avoiding the massive short-term adjustments such as layoffs that were required in the past. We all complain about the pace of change in business these days. Another way to look at it is that we change a little bit every day so that we do not have to change a lot all at once.

Finally, the underlying economics of the global and US economy are strong. Wealth is created by productivity and growth comes from increases in productivity. Productivity is, in turn, driven by investment, education and the accumulation of experience. All the rest - interest rates, stimulus packages, even the daily vagaries of the stock market are all short-term noise.

Ignoring the noise and economic static and looking at the world things have never looked brighter. India, China and Southeast Asia are growing market economies. Russia and Eastern Europe have much greater economic upside than downside. The better off these countries and regions do, the better we all do.

My advice? If you are an employer, put away your severance plans, you will not be needing them. If you are an investor, this is a great buying opportunity both with equities and hard assets. If you are an employee, expect a smaller paycheck in 2008 but the demand for your services will remain strong. And, no matter where you fall, sit back and put in your earplugs. The noise might get deafening.