Update 3 on my recession post

A while ago I wrote a post - Top 10 Reasons this recession will never end - and followed it up with two updates: Update One and Update Two. 

It's been a few months since my last update and I thought I'd take a moment to review my recession variables to see if anything has changed. The markets seem stuck in a 50/50 bull/bear dynamic, making it near impossible to figure out what the macro trend will be. I find reviewing my recession variables often helps me sort out the noise from the facts.

Keep in my, many variables that are important (ie. employment for instance) don't make my list because in my view they are more the result of variables on this list. If everything on this list suddenly was green (ie. doing better) then employment stats would be better. The more red (ie. things doing worse) then the more macro measurements - employment, housing, GDP, etc. - are likely to be worse also. 

To understand how I define these variables simply refer to my original post (linked to above).

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1. Crashes Hurt for a long time - worse - The DOW for the year is down seven per cent, erasing every dollar of gains it made over the past 10 months. Yep, we are still stuck in an endless cycle of dashed hopes and endless pain.
   
    
2. Until Debt do us Part - worse - US is now AA, Greece is going to default, fears of contagion throughout Europe, US home prices predicted to fall further, people questioning whether US banks actually have enough capital to survive contagion of debt defaults out of Europe.  And the irony? The only thing that can save things is, you guessed it, MORE debt =)
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3. Eroded Trust - worse -We've now got protests cropping up all over the US and they will only get bigger as unions join the protestors in coming weeks. Trust in the president, congress or the financial sector are at all time lows and still sinking.
   
   
4. Anxiety - slightly better -  In all my posts this is the first time I've been able to say anxiety is better. In the stock market (ie. for traders) it's not, with the VIX rising steadily. But out there on the street I think anxiety is starting to lower. I think this is happening for a variety of reasons:
   
   
1. People have really cut back over the past three years, so they are saving more which means they are better prepared for a collapse than they were in 2008.
   
2. With protests and the 2012 election coming up, people are moving from that 'passive fear' state of mind to an 'activist' state of mind.
   
3. A lot of people have finally exited the stock market and as such aren't beholden by the wild fluctuations.
   
4. Familiarity breeds contempt - people are simply getting numb / desensitized to the endless news cycle of fear and panic.
   
   Now, while it's good that anxiety is going down, because a populous living in a constant state of anxiety is an unproductive, uncreative, uninvolved populous (you can't make decisions if you are frozen by fear), this factor alone doesn't reverse recessions.
   
   But it is a good sign that anxiety is lessoning and people are starting to get involved in fixing the country in whatever ways they can think of (whether that be protests, or saving more, or spending less, etc).
   
   
5. Growth versus Replacement cycle - worse -  Innovation is not only still in a comatose, it's getting worse. Solar stocks have been trashed (most down over 70 per cent this year alone - not to mention Solyndra who went bankrupt).
   
   Smartphones are where it's at though right? This year alone RIM is down 60 per cent.
   
   LinkedIn? Down 20 per cent this year since its IPO (and down 30 per cent off its 52 week high).
   
   NetFlix? Down over 60 per cent off it's 52-week high.
   
   YTD Google is down 16 per cent. 
   
   Point is, innovation (what little there is of it) is not being rewarded. Companies are being written off left, right and center (just look at the p/e for many growth oriented companies, they are sinking like a rock).
   
   No one wants to invest based on future growth and when you really think about it, the markets are punishing companies who are trying to innovate for the future. Only a handful of companies (such as Apple) have been spared this fate.
   
   
6. Shareholder model breakdown - WAY worse - The market is always a tier / spectrum of risky to safe investments. For instance, bonds are safe, small cap equities are high risk, and mid and large caps are somewhere inbetween. However, the markets are now being manipulated by the FED who is stripping away the safe end of the spectrum - lowering returns on bonds, increasing margins on gold, etc. - which then drives people back in to equities in hopes of making some kind of return (so people are trying to hide in high-yeild dividend blue chips).
   
   The only problem? A LOT of people (myself included) have simply gone to cash and simply refuse to participate in a market that makes no sense right now and which is nothing more than making a bet on what politicians will do any given week.
   
   Many IPOs that were slated for 2011 have pulled back in the past few months and are now looking at 2012 (and I suspect many will defer their IPOs in 2012 as well). They don't want to be a part of the stock market right now because it's an insane place to be.
   
   
7. Lowest Common Denominator Thinking - slightly better - There is definitely a shift going on out there where people are not turning on teachers and unions as much as before with a 'I don't get six weeks vacations so why do they? I don't get a pension, so why do they? etc.'
   
   While there is definitely still some of that, the shift seems to be moving now towards 'Instead of stripping away what they've achieved, maybe I should be helping them protect it so that I live in a society that protects the average working person.'
   
   Whether unions and the like are good or bad is irrelevant. The point is though that within the populous, people are slowly moving away from fighting over the scraps of bread crumbs. A big part of that is the focus has now shifted to the rich versus everyone else - the 99% versus the 1%.
   
   While this is dramatic to watch, it's good for the economy, because it will start to push politicians and corporations to create a more balanced economy that works for everyone. Things will never be ideal, but to get out of this recession you need some kind of willingness to create a balanced ecosystem.
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8. Globalization - unchanged - nothing new on this front. Although if Europe falls apart the global market will simply be flooded with millions more unemployed workers, driving down the cost of labor further.
   
   
9. Baby Boomer Cost - unchanged - deficit is still ballooning, health care costs still the same, 401ks still massively depressed, on and on. Although, there has been talk of raising the retirement age to 70 or 75 (while negative for baby boomers and standard of living within the US, it would address some of the costs coming our way for the baby boomers as they age). But all in all this issue remains unchanged.
   
   
10. Extremism - unchanged - No terrorist attacks, good. No mass shootings, good. No nuclear reactors blowing up, good.
    
    Yet, we've got the stock markets swinging down 500 points one day and up 400 points the next. We've got the markets up seven per cent one week and down seven per cent the next. We've got (peaceful, for now) protests cropping up all around the US. We've got a president stoking the fires of class warfare. We've got Europe on the verge of a recession (depression?).
    
    So net-net, we're still living in extreme times. Having said that, if we can go a few more months without starting another war (ie. invading Iran), without some nut job blowing something up and without the protests turning violent, I do think we may be seeing a calming in the world.
    
    But it's definitely too early to say this variable is better yet.
    
    
11. Bonus: inflation - worse - Bell Canada raised it's prices seven per cent last week. Some of my favourite foods at the grocery store jumped 20+ per cent this week also. The only positive is gas prices seem to be a little bit lower (but mostly on fears of a double dip recession). We'll have to wait and see if lower gas prices result in lower food prices, or if that correlation has been decoupled for the time being.
    
    On the whole though, things are more expensive than they were only two months ago.
    
    This variable might get better in the near future, but for the wrong reasons. If a double dip occurs then we'll see deflation. But for the time being, we've got say that inflation is currently getting worse (if only slightly).

 So there you have it, another recession update. What's interesting is that some variables that have never turned green since I started this thread back in March, suddenly turned green. On the negative side, variables that SHOULD be turning green by now, aren't. In fact, they are getting worse.

So the positive is things are starting to change out there, the question however is whether net-net they are changing for the better or the worse. It would appear that it's still too early to tell (at least based on my personal views of assessing a recession).