They think its all over....

Have you noticed however, that they all follow a certain formula? Firstly the unsuspecting victim enters the haunted house in the middle of a stormy night. As they go from room to room the creepy music builds to a crescendo and finally they enter the basement where….. Tiddles the household cat jump out and startles everyone. We all then breathe a sigh of relief. Unfortunately for the hapless victim however, that’s when the nasty man jumps out with the chainsaw and the hockey mask.

The current economic meltdown has played out very much like a horror film although if we look more closely, there are more than just anecdotal similarities.

Recessions are fuelled by anticipation (or pessimism to be more precise). When we are in a Bull (rising) market everyone is confident and that feeds into the market, which increases the price, which increases the confidence which…..you get the idea. A Bear (falling) market operates in reverse. Pessimistic investors sell their stock, which depresses the price, forcing more to sell and the spiral continues.

The point is, that investors make decisions now, on what they think is going to happen at some point in the future and this creates a lag. Therefore we see the results now of how we felt six months ago. It’s a bit like stubbing your toe in the middle of the night. You know you’ve done it and you know its going to hurt, but you get a second or two to think about it before the pain actually hits.

Recessions also come in different shapes and sizes? Oh yes, there is no ‘standard’ recession and you never know which type it is, or was, until it’s over.

You can have a ‘V’ shaped recession which means there is a sharp plunge followed by a quick recovery. Then there are ‘U’ shaped recessions involving a more sustained downturn before growth returns. The L shaped recession is the worst kind as they go on forever. Just ask Japan. And finally there is the ‘W’ shaped one. It’s actually like a ‘VW’, but that isn’t a letter in the alphabet so we make do with ‘w’.

If you can remember back to 2006 there was a bit of a wobble and we all panicked as we thought that the bubble may be about to burst. Lots of important and knowledgeable people like Gordon Brown told us not to worry because everything was fine and they had ‘eradicated the boom and bust era’. That was the first dip.

Then came 2007 and it all went a bit pear shaped. The big bust that we were told couldn’t happen, happened. That was the second dip and is where we are now.

Now we are being told that everything is fine again and the green shoots of recovery have started. That may have something to do with a general election next year and the spin doctors attempting to portray an image of Gordon Brown galloping to our rescue astride his trusty steed. Not an easy image on the eye we admit.

We may therefore be tempted to loosen up a bit. To dust off the savings accounts or buy that new car we’ve been eyeing. All of which helps to fulfil the prophecy of recovery, push the markets up, and we all think everything’s going to be just fine.

But as any self respecting B movie star will tell you, that’s exactly when you’re most likely to be parting company with a limb or two. So if it does turn out to be a ‘W’ recession you may just want to keep a tight grip on that popcorn.