Economic Report: Is a Recession Imminent?
By Adam Lass
In this article
The IMF says, “It's just a soft patch.”
Manufacturing skirts the edge of failure.
Unemployment goes up but not by enough to allow a rate break.
Economic Report: Is a Recession Imminent?
The head of the International Monetary Fund, Simon Johnson, thinks that there is little chance of the real estate crash leaking over into the economy as a whole and causing a broad economic slide. “We're not saying it's nothing. We are paying very close attention to it. But we're not seeing it spread beyond residential construction.”
Apparently, he has completely missed the rot already spreading through the banking sector, which is odd, considering that he is basically a banker. Or considering the fact that manufacturing is teetering on the brink of retreat as we speak.
The Institute for Supply Management reported this week that its manufacturing index fell another 2% in March, registering a miniscule 50.9, putting us within the margin of error of the index's sub-50 failure zone.
Economic Report: How can it possibly not matter?
Not to worry: The IMF's Johnson assures us that this is a mere soft patch from which we will bounce back quickly. And more importantly, it won't impact the rest of the global economy, which is slated to grow 5% over the next twelve months whether its largest component - the US - is growing or not.
Not to be overly nationalist (Egotist? Economist? Something like that!), but isn't that pretty much the same thing as saying that I will make more money next year, whether I am employed or not? Yes, I have my investments, and yes, I suppose I could put the wife and kids to work. But somehow I suspect that my regular paycheck has a marked impact by the end of year, just as I would suspect that whether or not the US has a full blown recession will have an impact on the rest of the world.
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And speaking of paychecks, there are a few more folks out there who won't be getting one this week: some 321,000 folks hit the unemployment rolls the last week in March. Don't get too excited though: the overall rate only rose from 4.5% to 4.6%, still historically low and still considered by the economists at the Fed to be inflationary.
Economic Report: No help coming from the Fed
Speaking of the Fed, an interesting tidbit fell out of a conversation here at the office. When pressed for a reason why the market could rally in the face of rising inflation, my esteemed colleague, Christian DeHaemer, pointed out that while cash only costs American Business about 4% right now, gross profits were around 6%, allowing for a healthy net of 2%.
He sees this as a hardwired reason to buy US companies, and perhaps he's right to a limited extent. I will note that the WOW portfolio is still somewhat long American Blue Chips.
But with only just barely with seven call contracts and six put contracts in the model portfolio, as I see the other side of the argument. The Fed cannot deal with inflation right now because there is no inherent additional value in American stocks other than what is in essence a strange form of carry trade. And that carry trade would vanish if the Fed raises rates.
Economic Report: Sliding markets increase option gains!
I guess he sees the wine cup half full, but to my mind, what wine is there is getting mighty stale. Or, to be less colorful, I basically disagree with both Chris and Simon Johnson. In fact, I am going to have to side with Alan Greenspan here, and say that I do see at least a mild recession in the offing.
That is not to say that no money can be made during this time. In fact, an event like that will create all sorts of volatility in the stock market, and volatility increases option values.
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Adam Lass is the founder and manager of the WaveStrength Group, and is a contributing editor for Taipan Financial News. As the creator of WaveStrength's proprietary analysis system, Adam's expertise has shaped a franchise of successful investment newsletters and services, including WaveStrength Options Weekly and WaveStrength Apex.
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Related Resources
The IMF: Who will win and who will lose over the next 12 months.
Dept. of Labor: Who lost their jobs in the last week of March?
The Fed: What they can or cannot do about it.