Recession is on the lips of everyone in the financial-services industry, and several heavyweights have proclaimed we’re already in it or it’s on the way. Merrill Lynch, Goldman Sachs and Morgan Stanley have all predicted the U.S. economy will be cloudy with a mix of mild recession in 2008. Not surprisingly, there are plenty of others that disagree. But with influential factors like oil, housing, consumer spending, credit, a falling dollar and new government still outstanding, it’s anybody’s guess.
Merrill Lynch economist David Rosenberg thinks we’re in the first month of a recession right now. The four key data points used by the National Bureau of Economic Research (NBER) to track the economy—employment, “real personal income,” industrial production and real sales activity in retail and manufacturing—“seem to have peaked around the November-Decomber period,” he wrote in a recent research note. And this year’s champion of the Street, Goldman Sachs, predicted late last year that a recession was on its way, a sentiment it followed up earlier this year when economist Jan Hatzius said in a note that “the latest data set suggests it is already here or will arrive soon.” He concluded that mild contracting was in store for this year, followed by recovery in 2009. Jim Rodgers, the former partner of George Soros at the Quantum Fund, fervent promoter of China and author of “Investment Biker: Around the World with Jim Rogers,” said on Bloomberg Television last week that a serious recession was imminent. What caused it? Among other things, “Greenspan was printing money like a crazy Indian,” and Bernanke did the same, but “like a crazy person.”
Rogers’ comments were amusing, but maybe it’s “recessionists” (our new word) like him that are crazy. “We think the risk of recession is overblown, and the fear of inflation is overblown,” says Lincoln Anderson, LPL’s chief investment officer. He’s joined by Bear Stearns economist David Malpass, who said on CNBC’s “Squawk Box” last week that he thinks we’ll avoid recession; Lehman Brothers economist Drew Matus puts the likelihood at 35 percent; and Deutsche Bank economist Joseph LaVorgna says recession talk was being fueled by overemphasis on the December unemployment report (which showed unemployment rose to 5 percent). Writes LaVorgna: “Continued gains in the 6- to 7-percent range should be enough to sustain reasonably respectable consumer spending, and if consumer spending holds up, then so too should the economy.”
Jeff Saut, chief investment strategist for Raymond James, says that is the big “if.” Saut doesn’t believe recession is on the way, but he also concedes it’s too early to tell. “The economy is certainly slowing, but the big question going into this year is whether the overspent and undersaved U.S. consumer is finally sated on debt—but we won’t know that for another few months,” he says. But the trends don’t look good: He notes the savings rate is trending higher while credit is declining, which may already indicate the consumer is indeed hiding and hording his money.
But is there too much money, too much liquidity? LPL’s Anderson doesn’t think so. “I don’t see the sea of liquidity that is being talked about,” he says. He says he sees the cash simply moving into cash. “Institutional and retail money market funds have done moon shots in the past 6 months as people fly to cash,” he says. “Institutional money market funds are up 37 percent in 52 weeks, and retail money funds are up 25 percent—that’s where the growth has been.”
Sure, the unemployment figure of 5 percent is bad, and he calls it a shot across the bow of the Fed, but he says he doubts the likelihood of it having a snowball effect. And housing? “People are saying that, ‘Before every recession, the housing market falls apart,’ but does that in turn mean that because the housing market is falling apart a recession is on the way?’”
However, a spike in oil and/or a continued plunge in the dollar are items to watch. “If oil prices get up to between $120 and $140, it will break the back of the expansion,” he says. “And if the dollar plunge continues, then international investors in debt and equity will say, ‘See you later,’” he says. “But frankly, I don’t think either is likely.” As for asset-allocation changes, Anderson says he is overweight growth over value 60/40, versus the S&P that is currently 45-percent growth and 55-percent value after six years of market action, he says. He’s tilting towards large cap stocks after being weighted towards small for some time; he’s cutting back exposure to 5 percent in both international and emerging markets, and solidly into intermediate- and long-term bonds.
Saut says the Raymond James Investment Policy Committee is underweight equities (55 percent), overweight cash (20 percent), underweight fixed income (15 percent) and is recommending 10 percent in “tangibles” like timber, metals, etc., “Going into this year I was absolutely cautious—and I still am.” Saut says election-year political rhetoric should also be on the list of recession-inducing factors. “In 1992, 1993 when ‘Hillary Care’ was on the agenda, not a single proposal made it through Congress, but billions of dollars in capital [health care sector stocks tumbled] were lost just based on the rhetoric,” he says. One hedge fund manager even runs a fund based largely on whether government is working or in recess (Read the story here).
John Samples, director of the Center for Representative Government at the Cato Institute, a libertarian think tank, says the government can be counted on to screw things up by trying to manage the economy. “In sum, Congress is likely to do some damage to American prosperity between now and Election Day. A do-nothing Congress, on average, would be a good thing,” he writes on the Cato Institute's Web site. Of course if you like charts, the S&P 500 index has risen in the final seven months of 13 of the last 14 presidential election years, according to the Stock Trader's Almanac.
Jeremy Siegel, the Wharton Finance professor affiliated with WisdomTree, the ETF company, is forecasting tepid GDP growth (1.5 to 2.5 percent), better stock market performance (10 to 12 percent) and that Hillary Clinton will be the next Commander-in-Chief. Siegel believes recession will be avoided, but that U.S. economy has far more to fear from rising oil, food and gasoline prices than a credit crunch. But that’s just one opinion.