The next recession has almost certainly already started, sell stocks!
Posted on 20 August 2011 with 5 comments from readers
Recessions are not usually announced until well after they have started as you first have to have two quarters of falling GDP. It is therefore likely that either the very low or near zero growth rates will be revised down for Q2 or that Q3 will definitely see us slide into a new recession.
Japan is already there on the official data (click here). French GDP did not grow in Q2 and Germany was only 0.1 per cent up.
Foolish equity investors
That this economic slump comes as such a shock to equity markets is beyond belief. The warning signs of a slowing recovery have been clear since late last year and yet analysts only actually believe data when their profit forecasts are trampled into the dust by it.
Over the past month the S&P 500 index has fallen by the most since March 2009, the 666-bottom of the global financial crisis. Stocks in the S&P are falling as a single block, a surefire confirmation that bigger falls are to come.
The death cross last week with the S&P’s 50-day moving average falling below the 200-day average was a rubicon. Hedge funds have piled on short positions to the highest level since March 2009.
Equity valuations look cheap on historic profits but not if profit forecasts prove too optimistic, and analysts still expect double digit profit growth in 2012. A recession means that just will not happen, short of a miracle. Ergo stocks will fall further.
The evidence of a recession being upon us is surely now overwhelming. US growth in the first half has already been revised down to barely statistically material levels.
The collapse in the stock market last Thursday came after a plunge in the key Philadelphia regional manufacturing index to the lowest in two-and-a-half years. There were even more bad figures on housing and unemployment.
However, the really scary news is all coming out of Europe and therefore liable to be misunderstood or ignored on Wall Street, making it all the more worrying to the market as it wakes up to its signficance.
For those who have been asleep last week there is another Lehman-style crisis upon us in Europe. Bank lending is starting to freeze up. One large European bank was forced to tap the Fed for $500 million in overnight funds for the first time since the last crisis.
Lehman Act II
After the collapse of Lehman there was a massive contraction in global trade and the Great Recession of three years ago when global credit dried up because banks could not trust each other. Inter-bank lending was frozen.
Lehman happened with the Fed in charge. The trouble in Europe is that we are in headless chicken territory with no clear authority and a lot of politicians trying to shift the blame for what is about to occur.
Global stock markets not only have not yet discounted a recession that has almost certainly already started, they are only just beginning to realize how bad it might be. Moreover, a repeat of Lehman would be much worse this time, without the Fed calling the shots and with the Fed still overstretched from the last crisis.
Is it any wonder that gold and silver prices are soaring? There is a fear among the biggest and smartest investors that the whole financial system is going into a major crisis, and that not only guarantees a recession but puts the recovery from it in serious doubt. And the real problem is that this assessment is most probably right.
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5 Comments posted by readers:
Another excellent commentary, Peter! You’re firing on all cylinders today, and you’ve made two comments herein that are so classic, they each deserve honorable mention:
1. “That this economic slump comes as such a shock to equity markets is beyond belief.” Yes it is beyond belief. Why is it that Keynesian economists are often very wrong? Maybe it’s because Keynesian economics is a disgraced profession.
The stock market and economy are were both at a turning point back in mid June 2011, according to Martin Armstrong’s Economic Confidence Model . . . but then again, Armstrong ain’t a Keynesian.
2. Europe: headless chicken territory. Roger that!
Hey Obewon, yep, i’ve been ‘asleep’ for the last 5 weeks roughly. Came down with a near deadly bronchial infection that progressed to pneumonia, thought i was going to die! lol.. My life went into a tail-spin, losing control over such things as asset management. Now i’m 100% again and looking at this economic train wreck, wow, what a mess. I took a hit in oil..lost about 20% on one Canadian junior i had picked up (to louise yamada, what about that $140 bbl? hey?) . That’s life. Lucky for me i’m long in PM’s about 25% of my portfolio. Now i have to make a decision, do i unload the Canadian utilities equities, incur a tax liability over cap gains, go to cash, and wait. I’m averaging about a 6% return on my equities…not bad. In Oct 08, these same equities (fts, bce, ipl etc) came off about 30%. Any strong words of advice? (Dump the oil, take the loss?) I’m feeling we are approaching the end game this fall… what do you think?
Cheers!
James
Obewon, It was an unfair question, so let me pose the answer Unload 50% of the equities, which incidentally all held their ground over the two months, changing price nary a drop, weathering the duress. (excluding oil). The horizon is unclear. It could be ‘33 over again. The odds for a global financial melt down sometime including the next 5 minutes are 99%. Go to cash.
@ James, My Canadian eFriend:
Good to hear from you, after such a long time!
I always tell folks that I ain’t an investment advisor; but I can tell you what I did. Several months ago, I sold off 50% of my equities, except for gold & silver mining stocks and REE stocks. Then in early August, I sold off the remainder of my equities (except mining & REE stocks).
Your situation sounds similar to mine, and my understanding of the Canadian market is that it’s very vulnerable. The Canadian real estate market is particularly vulnerable, and CRE may be a catalyst that triggers more problems for the Canadian RE market in general.
Over the past few weeks, while the Dow & S&P were falling, some of the REEs got taken down, and I used my cash position to buy more REEs. I realize that if “the tide goes out” it will lower all boats, but Richard Russell said yesterday that most of the current market correction should be behind us; I’ve felt that way for a week or so now.
Hope that info helps.
P.S. Regarding oil: several points of interest here. First, Europe is in recession, and North America is going into recession right now; China is likely to have a “hard landing. These events will reduce oil demand. So I don’t see the need to hold onto oil stocks, especially if I have a capital gain.
@ James M.:
I just read this report about the impact that Canadian RE has on the Canadian economy, and thought you might be interested in reading it. This report contains lots graphics and quantitative stuff that is useful in trying to figure out where the Canadian RE market is headed.
Link:http://www.zerohedge.com/news/guest-post-more-insights-mass-psychology-and-canadas-real-estate-obsession