Are Things Really That Bad?

Many people are making parallels between the current recession and the worst economic crisis our country has experienced, the Great Depression. I'll level with you: Things are bad. But they're not that bad. In fact, I think that if we can survive what is going to be a very ugly first part of the year, there will be opportunities on the long side in the latter part of 2009. Check out today's rant to gain some perspective on where we're headed.

And please don't forget to go to Change.org to vote for Uncrunch America -- a peer-to-peer lending network that is helping to "uncrunch" the consumer capital markets -- as one of the best ideas for change in America. Change.org will present the top 10 ideas to the Obama administration, and they will form the basis of a nationwide advocacy campaign to turn each idea into actual policy. We need your votes!

Toby

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Are We Headed for Another Great Depression?

In January 2008, I made the following forecast based on our latest ChangeWave Alliance surveys: A Recession and bear market are coming -- get defensive.

This year's forecast goes something like this: Survive the first quarter on the short side and there may be an opportunity to make money on the long side later in the year.

Our latest ChangeWave Alliance survey results show signs that consumer spending may be stabilizing. We'll have the details for you in Monday's Hot Sheet, but if we see this trend continuing in upcoming surveys, we can conclude that we have likely reached an economic trough. This will be the time when we can expect to see a stock market bottom and valuations will be the most attractive.

Will History Repeat Itself?

This does not mean everything will be hunky-dory in the short term -- far from it. The overall outlook gleaned from our survey data remains fiercely negative.

But with all of the doom-and-gloom headlines you're bombarded with each day, I want to make sure you have the appropriate context for understanding this recession.

We are not -- I repeat, NOT -- entering another Great Depression.

The Great Depression came about when more than half the country's banks were forced to close as a result of their stock speculation on 90% margin. It was then that the government stepped in and added fuel to the fire by raising taxes and interest rates, and reducing money supply by 20%.

The massive reduction in money supply and bank activity took 20% or more out of the GDP. The velocity of the economic collapse is what brought on 25% unemployment rates, massive deflation and the worst economic crisis this country has seen.

But we are nowhere near that level of catastrophe:

• Money supply has exploded 22% year-over-year.

• Interest rates have been cut to historic lows.

• The Fed is expanding its balance sheet from $1 trillion to $6 trillion in the greatest quantitative easing (i.e., printing money) the world has ever known.

• Bank failures are minimal, and the federal government (right or wrong) has insured the survival of the top 25 banks representing 85% of deposits. FDIC insurance protects the rest.

Please lose the Great Depression mindset. Things are bad, but they're not that bad.

The nearest corollary to what we're experiencing today is the 1981-82 recession.

A Blast From the (More Recent) Past

The current recession will be deeper and longer than the one we went through in the early 1980s.

Here are a few reasons why:

• The level of boom that preceded this recession was greater.

• Households have lost about 20% of net worth, as compared with 5% in past deep recessions.

• This greater financial loss leads to a deeper emotional "funk" and deeper financial retrenchment by consumers.

• The loss of income is much greater this time around. In the last major recession, 5% of labor compensation was "flexible," i.e. commissions, bonuses and stock options. According to the Bureau of Labor Statistics, that number is now 25%. Merrill Lynch now forecasts the loss of flexible compensation in 2009 at $182 billion, or a 2.25% GDP loss.

Keeping It in Perspective

While the current downturn will be more severe than the 1981-82 recession, it will be much closer to those levels than anything we saw during the Great Depression.

It's true that we're at the highest unemployment level in 16 years with 7.2%, and things will keep getting worse.

New research by UBS shows that a recession of 1981-82 magnitude would bring us to 8.25% unemployment. The Great Depression brought 25% unemployment and a 20%-plus reduction in GDP.

According to the UBS research, for the nation to fall to 10% unemployment, we would have to see a 6% reduction in GDP. A 6% drop in GDP would be twice as bad as the downturn in 1981-82, which was 3% peak to trough. We're forecasting a 4%-5% net GDP contraction from peak to trough.

The fiscal policy response by Obama and the trillions of dollars in quantitative money flooding by the Fed should offset a great deal of this contraction. And remember, in 1981-82 the Fed was raising short-term rates to 14% and inflation was running 10%-plus.

Waiting for the Signal to Get Long

What's my message?

Don't let yourself become an uber-pessimist on the level of recession or recovery. Once we get through this necessary correction of massive economic and leverage imbalance, our economy will grow again.

And the growth of the post-recession U.S. economy will not be due to the "steroids" of leverage -- and that is a good thing.

Yes, it is going to get worse before it gets better, especially for financials.

And key earning expectations are still too high. But by mid-2009, they will have been lowered to the point that they will overshoot reality on the downside, which will set us up for some big, long-side profits late in 2009 and into 2010.

The best opportunities will be found in stocks that:

1) Are not tied to the overall economy;
2) Are not tied to financial balance sheets;
3) Do not have leverage on their balance sheets; and
4) Are in the path of the federal government's spending tsunami and/or provide cost-cutting efficiencies in healthcare, business productivity and energy.

We need to get through the earnings downgrade gauntlet before we get too bullish, but let's keep our heads on straight as others fall into depression and give up.

Make sure you have the ChangeWave Alliance and ChangeWave Investing working for you during this crucial transition year for our economy and your portfolio. Getting the switch from bearish short-term plays to bullish investing on the long side right will make a huge difference in your wealth.

Toby

P.S. At ChangeWave Investing, we're relying on the deadly accurate forecasting power of the ChangeWave Alliance Research Network to determine the right time to get long. If you don't want to miss out on what will be the best buying opportunity of your lifetime, I suggest you do the same. And it's as simple as signing up for your 90-day, risk-free trial subscription. Join us now.

700 Target on the S&P 500 and How You're Going to Profit!

The S&P 500 is just a shadow of its former self. It's hovering around 900, and the Pollyannas are saying that's "good news." We've seen the bottom, right?

Wrong. The fundamentals are miserable. The economy is bleeding jobs, and the credit markets are frozen.

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Watch 'Bulls & Bears' on Fox News

Be sure to tune in to Fox News Channel this weekend and join Toby and the crew on "Bulls & Bears" for their weekly market roundtable as they kick off the Fox News Channel business block on Saturday, Jan. 17, at 10 a.m. Eastern. ("Bulls & Bears" replays at 4 p.m. Eastern, Sunday, Jan. 18, and 4 a.m. Eastern, Monday, Jan. 19.) Or you can catch the show Saturday evenings at 6 p.m. Eastern on the Fox Business Network.

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Wine Find: Two Wintery Favorites

Since it's been so cold out lately, I've been braising all sorts of meat, and making lots of stew and cassoulet. And these big, bold flavors need a big wine that can hang.

I am a huge fan of Elyse Winery in Napa, which is owned by winemaker extraordinaire, Ray Coursen.

He learned to make wine at Whitehall Lane Winery, where he was taught that the secret of great wines is in the blend.

He sources grapes from all over and really brings out the best of the grapes he finds.

Ray has a wine that I love with braised foods called Le Corbeau ("The Raven").

"Le Corbeau ('The Raven') is predominately Grenache, made in the style of the seductive and expressive wines of the Chateauneuf du Pape region of the Rhone Valley. This saturated ruby-colored wine has aromas of lavender, smoky bacon fat, wild game, maple, black pepper, earth and caramel, along with hints of dried raspberries and orange peel.

"On the palate, it has a smooth entry that leads to a broad mouth feel with flavors of crème de cassis, blueberries, citrus rind, tobacco, blackberry preserves and intriguing notes of roasted Provencal herbs.

"The 2005 Le Corbeau will age beautifully for the next seven to 10 years and pairs nicely with duck, lamb, venison, wild mushrooms, cassoulet and stews." (From www.elysewinery.com.)

Ray calls this a "thinker's wine," and I call it perfect for wintery foods.

You can pick up a bottle for $44.

Another Elyse favorite of mine to pair with wintery foods is the C'ést Si Bon ("It's so good").

"It is made from grapes indigenous to the Rhone Valley in Southern France, yet very well suited to the terroir of the Sierra Foothills. This wine has delightful and intriguing aromas of dried raspberries, tangerine peel, white pepper, jasmine and pomegranate, along with hints of leather, smoke and earth.

"On the palate, flavors of wild plums, black raspberries, Fuji apples and a hint of minerality lead to a creamy, sensuous mouth feel and genuinely long finish. The 2005 C'ést Si Bon is medium in body and amazingly well-balanced, with vibrant fruit, firm tannins and bright acidity." (From www.elysewinery.com.)

At $28 per bottle, it's a great deal, because it really is "so good"!

To share your favorite wine or food experience, e-mail me through the form at www.changewave.com.