Today we drop back to take a look at the economy and its long term effect on our portfolio returns. I am in Orlando this week, speaking at the Newport Advisor Conference sponsored by the Newport Group. The attendees are primarily investment advisors focused on larger retirement accounts and pensions. This week's letter is the gist of my speech I gave yesterday, as the entire speech would be way too long for a weekly letter. I want to thank the Newport Group for letting me do this, and thanks for the very kind way they have hosted me. Note: this week's letter will print a little longer as there are a lot of graphs. And next week I will address the housing market, as was my intention this week.
It is increasingly widely agreed that we are now in a recession as I predicted this time last year. The good news is that much of the underlying economy is not in that bad a shape, but it has had two serious body blows administered by the twin collapsing bubbles of the housing market and the credit crisis.
My position is that the recession will be rather long and relatively shallow, and the inevitable recovery will be longer and more drawn out than is typical, resulting in what I call The Muddle Through Economy for a period of several years. I define a Muddle Through Economy as one which grows below normal trend GDP growth of 3% for a period of time, typically in the 2% range.