Debate rages about the shape of the US economy. Some say, including the Fed this week, the recession is over. There will be continuing improvement in the economy. Slow and steady. This is the V shape theory. We have hit the bottom of the V and are on the way up.
Another theory is the W shape. We have started up the other side of the V, but at the top or before we will drop back to the starting point or worse. Those who espouse this theory base it on several areas. First, it’s unemployment. While unemployment historically lags recovery, they see this one as different. They see unemployment continuing to fall. This is based on consumer spending. They see us as a consumer based economy and believe the 80 million baby boomers are running scared and will not go back to old spending habits. McMansions are a thing of the past. Plus, they see the economy as overheated by government stimulation. The government just extended the tax incentive for first time home buyers. The cash for clunkers program gave the economy a shot. They see corporate profit improvement coming from cost cutting, not revenue improvement. They see little, if any, more opportunity to cut more costs.
Huge amounts of money are going into TIPS. The government bonds indexed to inflation. Investors buying TIPS believe we are headed into a period of high inflation as the Fed tries to increase interest rates.
Another theory follows the idea that mortgage rates will go up putting another damper on the housing market and starting another downward spiral. The same kind that started this whole thing.
We are certainly in unusual economic times. No one can really predict what will happen, which shape is right, and how choppy the water may be or how smooth.
If you guess right, you will get reward for your risk. If you guess wrong, you will take a big hit. Good luck.
