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San Francisco Fed Paper: Recession Odds Top 50% Read more: http://www.foxbusiness.co
Old 11-14-2011, 01:20 PM   #1
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San Francisco Fed Paper: Recession Odds Top 50% Read more: http://www.foxbusiness.co

I saw this article recently. Do you think that we need to prepare for another recession? If so, what type of action steps (changing asset allocation, keeping more in cash, etc) do you think would be appropriate? I hope to retire in 4 to 7 years if possible.

San Francisco Fed Paper: Recession Odds Top 50% | Fox Business

The European debt crisis is raising the odds of a U.S. recession, with economic contraction more likely than not by early 2012, according to research from the San Francisco Federal Reserve Bank.
While it is difficult to gauge the odds precisely, an analysis of leading U.S. economic indicators suggests a rising chance of a recession through the end of the year and into early next year, researchers at the regional Fed bank wrote Monday. The risk of recession recedes after the second half of 2012, they found.
New governments in Greece and Italy, with fresh promises to tackle fiscal problems have in recent days, allayed investor concerns about a near-term sovereign debt default in the euro zone, but Europe's debt crisis is far from resolved. The region is facing its worst hour since World War II, German Chancellor Angela Merkel said Monday.
Although domestic threats to economic growth in the United States are limited, a shock from abroad could derail a fragile recovery.
The weak U.S. economy is more than usually vulnerable to turbulence beyond its borders, as the unexpectedly severe U.S. effects from Japan's devastating earthquake in March demonstrates, the researchers said.
``A European sovereign debt default may well sink the United States back into recession,'' wrote Travis Berge, Early Elias and Oscar Jorda in the latest San Francisco Fed Economic Letter. ``However, if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013.
The assessment of recession risk is more dire than that of many private economists. A Nov. 4 Reuters poll of primary dealers shows Wall Street economists see a 30 percent chance of a U.S. recession next year, down from 35.5 percent a month earlier.
Last week the Federal Reserve's influential vice chairwoman Janet Yellen warned on the threat from Europe, saying governments there need to take forceful steps to contain the crisis or risk substantial damage to the United States.
Before taking her post at the Fed Board in Washington, Yellen headed the San Francisco Fed.
Her successor, John Williams, is due to give a major policy speech Tuesday. (Reporting by Ann Saphir; Editing by Padraic Cassidy)
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Old 11-14-2011, 01:31 PM   #2
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The region is facing its worst hour since World War II, German Chancellor Angela Merkel said Monday.
I thought it was pretty strange hearing a German Chancellor talking about the stresses of WW2 in Europe.

Knock knock: Who invaded Poland? Who built and staffed the death camps?
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Old 11-14-2011, 01:38 PM   #3
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I thought it was pretty strange hearing a German Chancellor talking about the stresses of WW2 in Europe.

Knock knock: Who invaded Poland? Who built and staffed the death camps?
Those damn Lithuanians are at it again?
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Old 11-14-2011, 01:49 PM   #4
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In this piece Hussman opined that the chance of recession is near 100%. Mind you, he has been a permabear the the past several years and was wrong about the recovery: Hussman Funds - Weekly Market Comment: Reduce Risk - November 7, 2011

Nevertheless, there is enough shaky ground out there that we could be headed for trouble, and thats why I continue to hold a high cash position. My port is treading water, and I am waiting to redeploy some $$s below where the market is today.
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Old 11-14-2011, 03:06 PM   #5
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Originally Posted by midnighter777 View Post
I saw this article recently. Do you think that we need to prepare for another recession? If so, what type of action steps (changing asset allocation, keeping more in cash, etc) do you think would be appropriate? I hope to retire in 4 to 7 years if possible.
Since you are 4-7 years from retirement, I think it is time to gradually start moving to a more conservative asset allocation for the decumulation phase. So seriously, if I were in your shoes I would be designing a gradual move in that direction. I guess I started mine 3 years out, but 4 years out isn't much longer than that.

I wouldn't try to include a possible recession as a separate factor in your retirement planning at this point. There are a lot of scary articles floating around because people like reading them. It's possible that any one of them might be true, but you, we, and the author really have no idea what the future will hold. If we did, we'd all be wealthier and very very quiet about it...
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Old 11-14-2011, 04:44 PM   #6
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I'm with the 100% crowd. Seems unlikely we would be growing as Europe stops buying from us and tries to freeze up the banking system again. We're barely scraping along with GDP growth as it is. Pretty easy to dip it under 0%. But who knows what will really happen.

I've already got cash raised duing the latest peak (about 10%, though I'm nominally 100% equites). That'll carry me through a couple of years (I'm retired, DW is not, DS is in college, and we have a negative cash flow) plus some reinvestment if equities dip farther than they have so far. A little late to raise cash now I think, unless you're a true believer. I haven't changed my equity allocations out of Europe or anything like that. I'm sort of hedged, since if the market just zips up from here I can just burn through the cash first before touching equities without impacting my total rate of return very much. So nothing major, just working around the edges a bit.
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Old 11-15-2011, 10:18 AM   #7
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Irrespective of what you read in the news, you always need to be prepared for a large drop in the value of your equities (assuming your bond portion is very conservative). If your equity portion dropped 50%, what would that do to your plans? What are your contingency plans if that were to occur?

I think one of Larry Swedroe's books went into a pretty detailed analysis of arriving at your portfolio asset allocation using what-if's.
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Old 11-15-2011, 10:35 AM   #8
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Dallas Federal reserve President (Fisher) calls it an academic study.

He appears to be a little less worried. Here is the interview.

News Headlines
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Old 11-17-2011, 02:39 PM   #9
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I caught an interesting discussion on NPR recently about the problems the Euro is having with Greece. The issue, at its core, are different attitudes about government and money. In the speakers opinion Greek culture cannot be changed quickly enough to make the changes necessary to avoid default, Greece will drop out of the Euro.
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Old 11-17-2011, 09:10 PM   #10
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Economists don't have much of a track record with regard to predicting the future.
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Old 11-17-2011, 11:13 PM   #11
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However, I think this prediction that Greeks will not start acting like Germans anytime soon is a pretty safe one to make. It's those pensions.

Greeks in America work very hard; they have become like Germans, only they drink ouzo rather than schnapps.

If the Germans don't find some chancellor who will just say no they are doomed. Remember how many Germans did not want to give up their Deutschemark? They knew what those Southerners would eventually do to them.

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