That '70s Show Rerun?

This post originally appeared on RealMoney Silver on Dec. 16.

When I understudied for Doug Kass in The Edge, his RealMoney Silver trading diary, way back in February, my theme was "That '70s Show," with the concern at that time being surging inflation caused by the Fed's massive money creation in the second half of 2007.

Well, Fonzie, those certainly were "Happy Days," being pre-Bear Stearns, Fannie Mae (FNM Quote), Lehman Brothers, American International Group (AIG Quote), General Motors (GM Quote) and Madoff. Inflation did surge in the first half of 2008, but the financial crisis subsequently intervened, and now we are plunging into what could be the worst recession of the post-War era.

The following quote effectively sums up the feeling:

Not for many years has a Christmas season begun with so many tidings of spreading discomfort and lack of joy about the U.S. economy.... The nation is now also plunging deeper into a recession that seems sure to be the longest and could be the most severe since World War II.... For many Americans, the Yuletide will be a time of less elaborate meals, infrequent parties, fewer and cheaper presents.

Although the recession is now "officially" dated from December 2007, many are pronouncing (with justification) that the downturn is accelerating. Merrill Lynch recently presented a chart showing the Economic Cycle Research Institute's leading indicators, which have plunged to heretofore unseen depths.

ECRI Weekly Index Growth Rate

Homebuilders have been on their backs for a while, and the auto industry's woes certainly accelerated this fall.

From the same article as above:

All last week the bad news mounted. The auto industry reeled from a new-model sales rate 35.8% below last month's already somewhat depressed pace.... But the decline is no longer confined to autos and home building, which is down 33% from last year, as it has been for most of this year. In classic fashion, the recession has begun to work its way through the entire economy.

Clearly, the consumer has realized the jig is up and is cutting back significantly. Retail is tough this season but not a total disaster. The question is, What happens come January when the credit card bills are due? Merrill also shows that personal consumption is plunging, with the following data from the Bureau of Economic Analysis.

Real Personal Consumption Expenditures

Retailers are reacting, of course:

For retailers, Christmas may be black rather than just blue. Department stores and retail chains normally count on ringing up about 25% of their annual sales in the weeks (four this year) between Thanksgiving and Christmas, but they may be unable to do so this year.... Anticipating thin shopping crowds this season, stores are cutting down on part-time sales help and even committing the unheard-of act of promoting pre-Christmas bargains.

Rather than give you the answer to the question, "Well, what should I do?" right now, we are going to probe the problem in more depth. Pay attention, though, as I am starting to feel like the obvious course of action, from an investing perspective, is not so obvious.