The next wave of credit crunch worries is roiling markets this week. On top of massive global de-levering and credit contraction, plunging consumer demand and tanking corporate profits, we have news this morning that the July US Producer's Price Index was up 1.2% M/M and 9.8% Y/Y. On a monthly basis, this was double the consensus estimate and suggests price pressures still exist for producers. This is the highest annual rate in 27 years.
I still expect inflation to moderate over the coming months as commodity prices continue to contract in this cyclical downturn.
Meanwhile, this morning I received a summary of August 14 conference call notes from Merrill Lynch economist David Rosenberg called “The Elusive Bottom.” You can read a copy of the full report via John Mauldin's web site here.
Rosenberg reiterates his belief that we are only about half-way through the present US recession and that stock markets are not likely to bottom for another 6 months. Importantly, he also presents the same thesis that my partner and I first postulated in 1999 and I wrote about in Juggling Dynamite in 2006: namely that we are presently in a secular bear market in stocks that began in 2000.
Since October 2007 we have also been in a cyclical bear market within the overall secular bear climate. Rosenberg points out that his means we now risk a much stepper, longer decline in markets that has the potential to retest the lows of the last cyclical bottom in 2002. Remember those lows as I have written several times were 776 on the S&P (1270 today) and 5678 on the TSX (presently still at 13000). Very few people, who are blindly holding equities in these markets, realize that the prior lows of 2002 are feasible targets this downturn. And sadly this is not something the investment sales world is bringing to anyone’s attention.
What is impressive to me about Rosenberg is not just that he is well researched and reasoned in his data, but that he has the nuts to say these things while working at one of the biggest securities sales firms in the world. It is actually surprising that Rosenberg is tolerated at Merrill Lynch. I suspect that the only way he gets to speak so freely is that he does not go on to say sell equities and go to cash. He is an economist after all. He is not a money manager, so he does not have to actually implement investment strategies to cope with the economic risks he predicts. Not to be at cross-purposes with the sales force at his firm, Rosenberg mostly suggests raising fixed income weights and moving into more “defensive” stocks more than moving to cash.
But the reality is defensive stocks drop with growth stocks in a bear market. The unadulterated truth is that cash is king at these times. This is why my partner and I stopped working for a large securities firm years back to start an independent firm that works only for our clients. We have captured postive returns and not lost money over the past year, because we enjoy the freedom to see the truth and do what is best for our clients in bull and in bear markets.
For some further clarity on the big picture over the past few years, and where we are today, watch this insightful clip: A year in subprime turmoil.
Cory’s Chart Corner
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