Encouraging Economic News

The Lange team just received Tom Gau’s latest quarterly newsletter and, as always, it is filled with wonderful information. Tom is not only a CPA and a CFP, he is also a renowned educator. In fact, Jim Lange is headed to Chicago at the end of this week to participate in Tom’s 2-day educational boot-camp.  Unlike many other advisors, Tom has a number of encouraging things to say about the current economic situation.  Since we could all use some good news, we wanted to share — with Tom’s permission — some of the highlights of his 1st Quarter 2009 Update.

While there seems to be no end of frustrating economic news, Tom points out that we are finally starting to see some positive signs.  For starters, March’s three-week stock rally was brought on by unexpected good news from banks.  Citigroup, Bank of America and JP Morgan Chase all announced that they were profitable during the first two months of the year.  In addition, home sales rose unexpectedly in February, many companies are reducing costs and improving processes and strategies, and the U.S. and foreign governments have implemented programs to support the world economy.

Tom also notes that while the current recession has been painful in many ways, it should be regarded as part of a normal business cycle.  Business progress is never conducted in an orderly fashion.  Typically, recessions pave the way for business revivals, revivals develop into booms, booms breed crises and crises very often turn into recessions.  This is the way the business cycle has worked for generations and there is no reason to expect otherwise now.

That leads us to the big question – are we in a recession or, as some analysts suggest, a depression?  According to Tom, most economists believe that a recession becomes a depression when it stretches out for 36 months.  Therefore, we have until January 2011 before we get to that point.  On top of that, a replay of the Great Depression (1930-1941) is very unlikely thanks to many safeguards now in place that did not exist during the Depression – including deposit insurance and unemployment insurance.  It is also helpful to note that unemployment in 1933 jumped to 25% (we are currently at 8.5%).

To help bring the recession to an end before it has a chance to turn into a depression, Tom’s suggestion is to stop saving now.  That may seem like an odd piece of advice coming from a financial professional, but if an economic recovery is to actually take hold, consumers around the world will need to start spending instead of saving.

One more great piece of advice from Tom – to survive in this market, rely on logic and not your emotions.  In a chaotic market like this one, it is very easy for investors to fall into one of three traps:  searching for a miracle stock that will recoup all of their losses, making trades based on the latest news reports instead of long-term trends and being so paralyzed with fear that they don’t do anything at all.

A bit of common sense can help you avoid these traps – as can a bit of professional help. It is always important before making any financial move to seek the advice of a financial professional.  If you think the Lange team can be of service, please call the office at 1-800-387-1129.