Recession Watch

April 17, 2015

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We now have 4 major economic indicators that are falling year-on-year at levels that have never been seen outside of a recession.

Furthermore, the Atlanta Federal Reserve’s GDPnow model is currently projecting Q1 GDP at around 0.1%, very close to a negative reading.

So is the US on the verge of a recession? Typically a recession needs to happen when imbalances build up in the economy and need to clear before the economy can start another growth cycle. Do these imbalances exist today?

One of the most reliable indicators for a recession is the Inventory to sales ratio. This is now exploding higher, and is also at levels not seen since the 2008/09 recession. This is shown in the last chart in the link below.

Can policy help with interest rates already near zero and several QE programs already come and gone? This is doubtful. This week one of most respected asset managers, with one of the best long term track records you can find, David Einhorn, produced his latest research on Federal Reserve policy. In short he said that Fed policy is a “destructive force that shouldn’t exist outside of fiction”. Here is a summary and the whole presentation.

With continued deleveraging, declining real disposable income and a low savings rate the economic outlook clearly has challenges. Without any clarity on where the next growth source is coming from, the US economy is now at a very crucial juncture.

Investment portfolios can survive a recession, or even do well, but this needs disciplined and dynamic management very different from recent years. Are you ready?


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