Odds Still Favor Deep Recession  

THE BIG PICTURE & THE ECONOMY

Today’s Big Picture view comes down to whether the US economy is going into a severe, long lasting recession or not.  My belief remains that we are, that’s where today’s slow-motion economic slowdown is leading us, but the jury remains out & lots of observers think not.  It’s so much easier to assume no change.

·         Severe Recession Ahead.  Supporting my side of this argument is the fact that the US economy is simultaneously undergoing its worst housing bust and its worst financial credit crisis since the Great Depression.  Also dragging us down is the multiyear period of stagnant wages & continuing depressing job picture for the American worker living in today’s subsistence paying Wal-Mart economy, and now the additional major squeeze being put on the American consumer, long the engine of global growth, from record high gasoline prices, soaring food prices and the shut off of the ATM machine which had been rising home equity.  Throw in the first war in American history which went right on the credit card, a totally divided, bitter and almost dysfunctional US Congress and a lame duck president with historically low approval ratings and the whole catastrophe is set up to unfold once again similar to back in the early 1970s with its accumulation of numerous problems including Watergate, executive branch resignations, oil crises, etc.  Also, after recently reading Elliott Wave theory guru Robert Prechter’s 2002 book CONQUER THE CRASH, which forecasted an extremely rare depression lying ahead, I surmise that the fact that five years have passed without a depression doesn’t negate Prechter’s logic or argument.  Listening to Mr. Prechter updated views on Bloomberg audio/video last week shows he’s still adamant that a bust lies ahead and that this extension of the latest upwave, wave V, is only and always to be expected.

·         No Recession Ahead.  The argument saying there’s no big recession immediately ahead centers around today’s historically low interest rates and the dramatic 325 basis points of Federal Reserve interest rate cuts since last September working their way through the system now.  Plus the $150+ billion emergency economic stimulus plan now being received.  And, of course, today’s economic strength, ex the US, being exhibited by much of the rest of the world after a couple of decades of freer trade, i.e. the benefits of globalization.  Which disciples of globalization say have done much to make the US and global economy much more resilient, flexible and able to withstand economic shocks and body blows to the economy than ever before.  So far the bulls have been correct.

Schwartz View:  My sense is the defining telltale about whether we’re heading toward a big US and probably, in turn, global recession is the going forward path of commodity prices.  As long as commodity prices stay high, that shows there’s enough global demand to keep global economies moving forward.  I’ve theorized that commodities in general would hold up “longer than most think this year” and so far, four months+ into 2008, they have.  But today we are possibly at a critical juncture for commodities after the mid-March break down in the whole complex and a bounce.  Plus I remain very wary about developments unfolding in July, since the stock market really went into its major sinking spell in January and the market historically looks out and discounts the future about six months ahead.  Thus I’m getting closer and closer to the point of just jumping ship on my remaining commodity positions and pulling back my long positions in general.  Obviously I don’t want to cut short the party today since commodities and related sectors are really about the only remaining sector still rising.  But I don’t want to be still at the party either, when say the police arrives.  Net, net, it’s a very tough decision when one feels they should go against the crowd.