11/19/08   Synchronized Global Recession

Editor’s Corner

Synchronized Global Recession

Ron Rowland

Governments around the world are finally starting to admit the obvious: recession is here. The U.K. and Eurozone crossed the line last week. Japan did likewise on Monday, leaving the U.S. authorities in what can only be described as denial. The façade appears to be cracking at the Fed, which today disclosed the minutes of its Oct 28-29 policy meeting. At the time, the most they had to say was a cryptic “downside risks to growth remain.” Now we see that the Fed’s own forecasts estimate that U.S. GDP will be somewhere between -0.2% and +1.1% in 2009, while the unemployment rate will be in the 7.1% – 7.6% range. Both projections strike us as way too optimistic.

Not surprisingly, consumer prices are also dropping fast. Today’s Consumer Price Index report showed a 1% drop in October – the biggest monthly decline since 1947. A 14% dip in gasoline prices had a lot to do with this, but other goods and services fell, too. Only a year ago everyone was worried about inflation, but now deflation appears more likely. It will be a unique feeling for Americans, who are accustomed to “buy now before the price goes up.” In deflation, the incentive is not to buy, because if you wait you will likely be able to buy whatever it is you want at an even lower price. This will wreak havoc on our consumer-driven economy, and it is one of the reasons that the calls to bail out the automotive industry are growing louder. We continue to believe bankruptcy is a better solution for Detroit, but all the possibilities are bad.

Stocks are still sliding in all corners of the globe. Along with many other analysts, we’ve been looking for a short-term bounce, but it may have already happened. Major benchmarks are quickly approaching the 2002 bear market lows, which in theory should provide at least some degree of support – but this year such rules are proving less than reliable. No wonder, then, that the worldwide flight to quality is continuing unabated. One-year Treasury bills are now yielding less than 1%, with the shortest maturities holding barely above zero. Even the 30-year U.S. government bond pays less than 4%. Whether the yields will stay so low when the bill comes due for the ongoing bailout efforts is unclear. We suspect not. Lower quality corporate yields are approaching 20%. Will Treasury debt reach junk status as well before the crisis ends? The fact that we can even ask the question says a lot.


Utilities again climbed in our sector momentum rankings to reach the # 2 spot, but the top three are still in place: Consumer Staples, Utilities, and Health Care. Other sector changes were minor. The weak are getting weaker as Financials and Materials hold on to the bottom two slots.


Micro Cap and Small Blend changed places, but otherwise there were no notable changes in our style rankings this week. The Mid Cap categories are still the worst place to be on an intermediate-term basis while the Mega Cap stocks are the closest thing to a safe haven the equity world has right now.


The top four international markets are the same as last week. Japan is still the top dog in a kennel full of sick animals. The Emerging Markets are in especially bad condition, and we suspect the situation in places like China is much worse than the local authorities care to admit. It is an inevitable consequence of the U.S.

“Capitalism without bankruptcy is like Christianity without hell.”

Frank Borman, Former CEO, Eastern Airlines


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