Recession?

It’s very possible that the US and global economy will avoid a “hard landing”. Why do I think that?

1.) monetary conditions are lax, viz. a vis low interest rates and a weak dollar

2.) net exports are stronger, due to domestic growth within Asia

3.) inventories do not look excessive, viz., steel industry, as an example

4.) corporations are not over-leveraged or over-invested relative to cash flow generation

5.) outside of the housing market, there has been little labor hoarding ahead of this downturn. With high relative margins and limited pricing power in the labor markets, there is less need for lay-offs.

The global economy should avoid a recession because:

1.) China should grow at 10%. This is after economists have reduced estimates.

2.) China doesn’t have a non-food inflation problem—therefore, fiscal policy can be flexible

3.) worldwide, labor has limited pricing power, viz wage growth is actually shrinking

4.) given the economic environment, central banks can respond to weak/slow growth with rate cuts

5.) internationally based corporations are under-invested.

Look for the Fed to get aggressive with rate cuts. We could see the “Greenspan days” where rates are back down to 2.50% - 3.00%.

But, if we do have a recession, historically, the Fed has cut rates an average of 6% (obviously it won’t happen now). Know this interesting tidbit: the biggest rate cut was from July 1981 to November 1982, where the Fed cut rates 1100 bps, from 19% to 8%! That started a secular Bull Market from 1982 - 2000.