Early Recession a Sign to Overweight Commodities

US monetary policy easing so far has been offset by a sharp re-pricing of credit and balance sheet de-leveraging, resulting in tighter overall monetary and financial conditions. In the IMF's words, this translates into growing systemic risk despite the Bear Stearns (BSC) rescue.

This is sending investors and hedge funds back into commodities, where as a Citigroup (C) report states, "a tidal wave of investment flows" is pushing both precious metals, hard and soft commodities to new historical highs.

The US dollar index is still looking massively oversold even after bouncing from a recent low of 70.70, but FF rates are still headed lower if the April IMF GDP estimates and warnings of "growing systemic risk" are accurate.

While commodities are looking increasingly "bubblish," historical asset performance through different economic phases dictates that investors will still be better off overweighting commodities in the early recession phase, as stock prices have yet to see the classic 20% sell-off, and bonds also decline during such phases.

Given the worst housing recession and the most severe financial crisis since the Depression, and the fact that US consumers are in worst shape in terms of financial resources to weather the storm than were Japanese consumers, the focus is now on whether this is a "V", "U", "L" or "W" recession, which will greatly affect how soon stock prices will be able to fully discount the economic downside.

Japan on the other hand may already be in stagflation. While some 25% of domestic economists surveyed by the government think Japan is already in recession and another 50% think Japan will see a recession within the next year, wholesale prices are now rising at the fastest rate in 27 years (+3.9% YoY), which will severely crimp corporate profits.

Thus we believe investors need to continue investing defensively and remain overweight commodities until we are clearly in the late recession phase, when stocks have historically regained leadership.

Disclosure: No positions.

Comments

[Greg Pinelli:]

Useless..useless..and useless...If you can't take a definitive position why are you posting??? This is becoming a pandemic on Alpha..wanna be analysts..and believe me I use the word very loosley.....post and HAVE NO RECOMMENDATIONS..NO EQUITIES..NO BONDS..NO NOTHING...DO YOUR MOMMIES NEED TO SEE YOU POSTING SO YOU GET YOUR allowances???

2008 Apr 14 11:15 PM

[Old Trader:]

Geo...I believe paragraph covers the writer's recommendations...btw, does YOUR mommy still lay out your clothes for you every morning? Geez....

2008 Apr 15 10:34 PM