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How State Taxes Put a Bigger Pinch on the PoorIt may come to pass that all this talk of a recession, on top of the real issues of the depressed housing market, higher energy costs and tight credit, could end up being a self-fulfilling prophecy. However, if we stick to the definition -- a recession is defined to be a period of two quarters of negative GDP growth -- it won't happen.
By this measure, I just do not see a recession in the cards. The presidential election will be going fast and furious in the third and fourth quarters of the year. In addition, the third quarter will see the long awaited summer Olympics in China while the fourth has the election midway through it, plus the holidays. Even if the Federal Reserve Board is supposed to be independent, does anybody really think that there isn't a lot of winking and nodding going on in Washington DC during election years?
I would speculate that if we are going to see two quarters of negative growth, it would come earlier in the year. But we're not there yet, and although the stock market has been anemic as of late, I think solid unemployment numbers will carry us through the first quarter. I think the spring is the most likely candidate for a negative quarter but I just don't see two in a row.
Having expressed my doubts about there being a recession in 2008, let me be clear that regardless of definitions, the nation may feel like it's in one anyway and I do not see next year's investment picture changing much from the malaise we are now in. It will be another year for stock pickers and the indices may very well end up where they started off.
Tighter credit slower economy -- just that simple
If the economy operates at a certain speed with a certain amount of cash floating around, then it must operate at a lower speed with less cash -- or pretend cash, as the case has been. Be it the government, through issuing bonds or more currency, or individuals through credit cards, equity lines, cars loans and the like, the growth of credit has to slow. There is no option, no other path, and to me no amount of optimism about 2008 can change it.
This is not to say that I expect a "recession" in 2008 -- but the banking system has started to reduce the value of their assets (by tens of billions of dollars) on their books which means the pretend value of these companies and their own ability to leverage has been diminished. Therefore we, as a nation are worth less; we hold less equity.
The Federal government has reduced the value of the nation by allowing the currency to float downward, increasing the money supply as they have no choice. Why don't they have a choice? Because when they lower bond rates, fewer people buy them (in particular, foreigners) and they have a lot of debts to pay -- the growing national debt -- which brings us to deficit spending, the hallmark of the Federal government.
George Bush pretends that tax cuts have benefited the economy during his administration but this is not true -- it has been the easy credit and global expansion that has fueled growth. Any other administration would make the same conjectures. It is our job to filter the 'spin'.
I envision 2008 as one that might show modest gains in certain sectors of the market but no thanks to the government or the banking system or Congress. The two biggest fears that Washington and Wall Street have is that consumer spending and employment will show signs of weakness. This is a legitimate fear. Regardless of how much money is pumped into the financial system to prop up Wall Street, consumer credit standards will be more rigorous, meaning that more money in the system does not correlate directly to an abundance of credit, unless rates hit the floor, allowing more people to qualify.
Sectors best equipped to weather an economic storm
It seems to me that a low growth year favors utility stocks since they have stable business and higher than average dividend yields. I think the defense industry will be stable and might even see some growth. I do not expect anybody to be campaigning on big defense cuts even if they posture to bring the troops home from Iraq. Health Care should perk up some after several spotty years. I think the chances are the energy sector remains strong but I do not see this as a sure thing. Slowing economies mean slowing demand so this picture could change.
It is nice to end on a positive note, so I think I will quote James Cramer once more, "There is always a bull market somewhere!"
To find potential opportunities and verify my track record, read Chasing Value or Serious Money.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.
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Reader Comments (Page 1 of 1)
11-19-2007 @ 5:33PM
william lindblad said...
You might be right, and I hope that you are.
However, I do a reality check from time to time and I doubt that this will be the case. Even guru Allan missed the housing/mortgage default problem that is upon us. On his part this was a simple error as he is a data/report person and studies paperwork. If you want to see this a tip from Cervantes is in order. Instead of playing Don Q., you need to take the position of Sancho, down in the trenches. Mine, though empirical, is we have way too much housing inventory and much more still under construction. Prices are too high, credit short, and buyers, near non-exisitent. The lay-offs in this industry are just beginning and will not top until March/April. We are seeing this "domino effect" in the supplier sector and it will continue. Time will tell. What the Fed and other agencies do will have an impact. Good or bad remains to be seen. I am not for cutting rates as this will tend to make our problem - a world problem.