Is Worst Of The Credit Crunch Behind Us?
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  1. Post-Mortem On The 1Q GDP Report
  2. Recession, Even If Outside The Long-Held Definition
  3. So How Bad Are Things Going To Get?
  4. Have We Seen The Worst Of The "Credit Crisis"?
  5. Maybe It's Not As Bad As We Thought
  6. Stocks - Have We Seen The Bottom?
  7. Conclusions - What To Watch For


When the 1Q GDP report came out on April 30 and was better than expected, I wondered what the reactions might be. If you will recall, the report cited GDP growth of +0.6% for the 1Q when many believed the report would yield a negative number. In fact, the mainstream media and Hillary and Obama have led us to believe that we are already in the grips of a serious recession. It comes as no surprise that they still maintain that stance, despite the latest positive GDP number.

Likewise, I knew that the gloom-and-doom crowd would claim (as always) that the GDP report was bogus, and that we are headed for economic disaster. What else is new? But I wondered how economists and respected analysts in the financial industry would react to the better than expected GDP report at the end of April. As I expected, many in the economic and financial industry downplayed the report initially and pointed out that some of the "internals" in the report were indeed negative, as I reported last week.

But I also wondered that if, after a week or two of absorbing the latest GDP data, some respected economists and financial pundits would change their views and consider that we might not be in or headed for a recession, and that the state of the US economy just might not be so bad after all. As I will discuss below, that appears to be happening.

There is a broad consensus that the fate of the US economy, and whether we have a real recession or not, hinges on the housing/credit crisis. I happen to agree with that assessment, but I also believe it is still too early to tell if a recession is inevitable. Now, in light of the latest 1Q GDP report, the opinions and forecasts of some respected analysts are growing less negative as I will discuss later on.

Finally, have you noticed that the stock markets have been going up nicely since early March, despite a ton of bad news? Stocks have a history of bottoming out before the economy recovers from a downturn. Some analysts believe that is what is happening now. Maybe it's time to consider getting back in.

Post-Mortem On The 1Q GDP Report

While the mainstream media and the Democrats all but promised a very negative GDP report for the 1Q, the actual advance number came in better than expected at +0.6% for the first three months of this year, the same as for the 4Q of last year. Granted, +0.6% is indicative of an economy that may be teetering on the edge of a recession, but it was at least mildly positive and above the pre-report consensus.

The immediate media response to the report was as expected, that the report was overly optimistic. As I reported last week, even the Wall Street Journal was skeptical:

"...But underlying data [in the report] - on consumer spending, business investment and construction - paint a picture of a deteriorating economy, one that expanded only because of a rise in exports and a buildup of inventories... Excluding exports and inventories, the economy contracted at a 0.4% rate..."

Yet as I also reported last week, there was some encouraging news in the latest GDP numbers. For example, consumer spending that makes up apprx. 70% of GDP actually rose 1% in the 1Q, at a time when consumer confidence fell to the lowest level in 20 years. While the latest WSJ/NBC poll found that 81% of Americans believe we are now in a recession, people continued to spend money in the 1Q. This is at least somewhat encouraging.

On the inflation front, the latest GDP report revealed that the price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.5% (annual rate) in the 1Q, compared with an increase of 3.7% in the 4Q. Excluding food and energy prices, the "core" price index for gross domestic purchases increased 2.2% in the 1Q, compared with an increase of 2.3% in the 4Q of last year. This was also better than expected. In a separate report released last week, the Labor Department reported that US productivity rose by a better than expected 2.2% (annual rate) in the 1Q. Non-farm output per hour worked rose 3.2% versus a year earlier, the largest gain in almost four years.

At the end of the day, it is clear that we are not in a recession just yet, at least based on the "advance" 1Q GDP report, which will be revised two more times in the coming weeks. Maybe a recession lies ahead, but it's not here yet. Perhaps the US economy will have sunk slightly into the negative side in the 2Q, which we won't know until late July when the 2Q GDP report will be released. But even if the 2Q GDP report is slightly or somewhat negative, that will not confirm that a recession is upon us.

Keep in mind that the government's $168 billion "stimulus package" is going out to most US taxpayers as this is written, and this should provide at least a modest boost to the economy in the second half of this year.

As a result of the better than expected 1Q GDP report and the stimulus package, some respected analysts are dialing back their forecasts for a US recession just ahead, and perhaps for good reason. Some readers have criticized my view over the last year or so that a recession was not the most likely scenario, especially in light of the housing/subprime/credit crunch. Still, I may yet be proven correct. Some well-known analysts are coming to agree as I will discuss below.

Recession, Even If Outside The Long-Held Definition

In the 30+ years I have been in the investment business, a recession has been defined as two consecutive quarters of negative GDP growth. But just as I have expected, the media wants to redefine the definition of a recession to something more politically correct. The media would now have us believe that the US economy is in a recession anytime that economic growth, or the lack thereof, creates a net reduction in jobs.

Clearly that is happening - the unemployment numbers have confirmed for the last three months that net jobs are in decline. However, the April unemployment rate was actually better than expected and declined from 5.1% to 5.0%. Net job losses in April were only apprx. 20,000 which was well below the reported job losses of apprx. 80,000 in March and February.

Yet the greater question is, has the long-time definition of a recession changed? Do we now define a recession as two consecutive quarters of negative GDP growth, as we have for all these years, or is it some new definition that is much more limited? This is quite a debate, but it is fueled primarily by liberals that want to capitalize on President Bush's failures to advance their own agendas.

What is all too clear is that the US economy is indeed in a marked slowdown, recession or not. The slowdown has been precipitated and exaggerated by the subprime/housing/credit crunch, which is still far from over. And what we do know is that the housing slump has led to a plunge in consumer confidence to the lowest level in over 20 years.

So, is this a recession by historical standards? Not yet. But is it a recession based on the new media math? I would reluctantly have to say yes. Maybe we redefine it as a "psychological recession." Consumers are still spending, as noted above, but they feel really bad about the state of the economy, and think things are going to get worse.

So How Bad Are Things Going To Get?

The credit crunch is very real. The repercussions of the housing slump, the subprime crisis and the resultant credit crunch are far from over. Liquidity in the credit markets remains a fraction of what it was a year ago. We see this in the investment markets as well, where trading volume remains down significantly.

The Fed has slashed interest rates time after time in an effort to relieve the credit crunch, with the latest cut in the Fed Funds rate to 2.25% on April 30. That brings the cumulative rate cuts since last September to 3.25%, which is a more rapid rate-cutting spree than in the first eight months of 2001 when the Fed was last battling a recession. Still, it remains to be seen if this will be enough to avoid a recession this time around.

There are analysts on both sides of this fence. Some believe the combination of Fed rate cuts and other federal relief on the mortgage side, along with the stimulus package (more on this below), will be enough to prevent the housing crunch from sparking a real recession. Others believe it is too little, too late, and the plunge in consumer confidence will result in spending falling to levels that will guarantee a recession later this year.

The stimulus package that the President and Congress passed totals apprx. $168 billion, most of which will be doled out over the next couple of months. It remains to be seen just how much that will boost the economy and when. Will most consumers immediately spend the money? Or, will they save most or all of it (doubtful)? Obviously, the Bush administration hopes consumers will quickly spend the money in one way or another to boost the sagging economy.

But even if consumers do spend most of the newfound money, it is not certain just how much that will stimulate the economy. Estimates vary as to when consumers will spend the money, but generally it is believed that the stimulus package will add apprx. 1% to GDP. But when?

Some people have already received their government stimulus checks, but most will receive them over the next several weeks. This suggests that most of the positive impact on the economy from the stimulus package will not be felt until the 3Q. Furthermore, a one-time 1% boost will not, by itself, turn this economy around. Of course, we should not rule out additional stimulus to come, given that it's an election year.

Have We Seen The Worst Of The "Credit Crisis"?

As you know, the credit crisis has been sparked by the problems in the housing sector and subprime mortgage securities specifically. As noted above, the housing numbers, on balance, just continue to get worse month after month nationwide. Home foreclosures continue to rise; the inventory of unsold homes continues to rise; new and existing home sales continue to fall overall; median home sale prices continue to fall in most parts of the country; and housing starts continue to fall.

The question is, have we seen the worst of the housing/credit crisis? The answer to this question varies, of course, from region to region. Here in Austin where I live, for example, we have seen no noticeable slowdown in the housing boom; prices for homes are still going up generally; and credit for home loans is still widely available. This is also true in certain other areas of the country. Of course, in most areas of the US, just the opposite is happening and home values have fallen precipitously in some regions.

There is little doubt that the credit crisis is far from over and will persist for at least another year or two. It is clear that the credit crunch continues to spread from largely real estate related loans to commercial and industrial loans and credit card lending. Even Fed officials concur that lending requirements continue to tighten in most all loan categories nationally.

But might we have seen the worst of it by now? As noted below, there are those who believe we have. Some financial analysts now believe that the bailout of Bear Sterns in March may have signaled the worst of the credit crisis. That remains to be seen, of course.

Likewise, in light of the latest better than expected GDP report and the $168 billion stimulus package, some economic forecasters are shifting to a more positive, or less negative, slant. Given that, let's consider some more recent opinions on the overall state of the economy and the credit crisis.

Maybe It's Not As Bad As We Thought - Some Opinions

Here are some recent revised opinions on the current state of the economy from some sources that we should at least consider. The following quote is from Treasury Secretary Henry Paulson last week in an interview with the Associated Press:

"The worst of the nation's credit crisis may have passed...There's progress, and I think we're closer to the end of this than to the beginning... There's no doubt that things feel better today, by a lot, than in March... We will get some help from the stimulus [package]. Later this year, I expect growth will pick up."

Warren Buffet, the legendary investor and reportedly the richest man on the planet, had this to say last week:

"The worst of the [credit] crisis in Wall Street is over... I think the Fed did the right thing in stepping in on Bear Stearns."

Buffet said that he believes the worst of the global credit crunch is behind us, but he added that there is still considerable pain ongoing for individual consumers in many parts of the US. Based on his latest public remarks, it appears he believes we will get through this rough patch and continues to be bullish on the long-term prospects for the economy.

And this from Merrill Lynch CEO, John Thain last week:

"The U.S. credit crisis is easing and the risk in its housing market is dramatically lower now."

And this from our good friends at

"...we reiterate the view we have held from the beginning - which is that the subprime crisis would cause the economy to slow and, in extremis, cause a short recession... At the moment we are not even sure that the slowdown will cause a recession... But we rejected months ago... the idea put forward that we are in the greatest financial crisis we have seen since 1929."

And this from the Bank of England, which has had its own credit crisis:

"While there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually in the coming months... As uncertainty falls and market liquidity improves, it should become clearer that some assets appear cheap relative to credit fundamentals."

While the housing/subprime/credit crisis is far from over, there are at least some signs that we may have seen the worst of it.

Stocks - Have We Seen The Bottom?

The major stock market indexes have been rising nicely since early March. This rally, in the midst of a great deal of bad news, has investors asking: Have we seen the bottom, and is it time to get back in? No one knows for sure, of course, but based on the discussion above and the possibility that the worst of the credit crisis might be behind us, I think there is a good chance that stocks could continue to trend higher just ahead.


Stocks have a history of bottoming out and rebounding well ahead of a turnaround in the economy. Thus, the latest strength in stocks might continue for a while. Most of the professional money managers I recommend are now positioned on the long side of stocks (vis-à-vis mutual funds). That includes Niemann Capital Management and Potomac Fund Management that I discussed at length last week.

Keep in mind, however, that I still believe (as do others) that the US equity markets may be in a broad trading range for the next year or longer. Since the range I envision is very broad, stocks could still have considerable upside potential from current levels.

Yet in this dicey environment, I think it is even more important to have a portion of your equity portfolio with professional money managers that have the flexibility to move to the safety of cash, or hedge positions, should market conditions dictate.

Conclusions - What To Watch For

As I see it, the economy has three major issues to deal with in the coming months and years. First, we have to get a better handle on exactly how much subprime exposure banks and Wall Street firms have, and whether or not they can survive. I expect we will have a much clearer picture on the subprime and related exposure before the end of this year.

Next, we're going to have to work through the housing dilemma. In some geographic areas, housing prices may continue to climb, albeit at a slower pace. In many others, however, housing prices will likely continue to fall, or stagnate where they are for an extended period of time. Either way, it's not good news for those who want a booming housing market to create equity in what is likely their largest investment.

Finally, I think the sticker shock associated with food and fuel prices is a major contributing factor to the recent plunge in the consumer confidence numbers. It seems that gas prices go up each day, and we're not even into the summer driving season yet. Food costs are also rising quickly, so it's no wonder that consumers are in a funk.

Despite that, the economy did remain in positive territory in the 1Q. Consumer spending, which accounts for apprx. 70% of GDP, continued to rise in the 1Q, although modestly. It remains to be seen if the economy will have dipped slightly into negative territory in the 2Q. And it will be interesting to see how much the stimulus package boosts the economy in the 3Q.

After reviewing the outlooks from all of my various sources of economic information, I believe we may have seen the worst of the subprime and housing crises. However, I also tend to agree with Peter Bernstein, who I quoted last week as saying that our current economic malaise could hang on longer than most people expect. Even so, there should be opportunities in the market for those who are properly positioned to take advantage of them.

Finally, I happen to think that now may be a good time to dip a toe back into the murky waters of the stock market. Sure, there's risk involved, but as I noted last week, sometimes you take on more risk by doing nothing.

So, if you are sitting on the sidelines, or are under-invested in equities, this may be a good time to consider investing with one or more of the professional money managers I recommend that have the flexibility to move to cash or hedge positions, just in case there is more bad news in the pipeline.

To talk to one of our Investment Consultants about these programs, feel free to give us a call at 800-348-3601, or send us an e-mail at [email protected]. Plus, if you missed out on the free, no obligation risk tolerance assessment that I offered in my April 22 E-Letter, just click on the following link to access our Confidential Risk Tolerance Profile questionnaire.

Wishing you profits,

Gary D. Halbert


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"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

Posted 05-13-2008 1:08 PM by Gary D. Halbert


MoneyTalks wrote re: Is Worst Of The Credit Crunch Behind Us?
on 05-14-2008 10:27 AM

Good letter this week Gary.