Given today’s highly volatile markets and slowing US growth, many investors are wondering whether the United States is on the verge of another recession and want more details about which countries are poised to suffer or benefit when investor sentiment shifts.
In the third of an ongoing series of posts dedicated to reader questions, I’ve compiled some of these questions, along with my answers. If you have an investing-related question you’d like me to answer, please post it in the comments section below, and check out the first and second installments of this series here and here.
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Q: Regarding my view that a double dip isn’t likely this year but could happen next year: Good article. The only issue I take is with the notion that uncertainty over the “fiscal cliff” mess won’t begin to drag down the economy until 2013. People are already talking about it. If the range of possible outcomes are still as uncertain in September as they are today, then it could prove to be a drag on growth sooner rather than later–especially if the Presidential race remains too close to call. In such a case, I suspect that a lot of businesses may decide to postpone hiring until after the election. So we might actually slide into negative growth during Q4…Blog Reader
A: I don’t disagree. As we get into the fall, if the election outcome makes the fiscal cliff look more likely, I do believe that the potential fiscal drag will start to cut into Q4 growth, particularly into growth related to business spending.
Q: Regarding the same post: “Leading indicators”–the best leading indicators are ECRI, copper prices and Treasury yields–they are all signaling recession. What’s your response? Seeking Alpha Reader
A: My preferred leading indicator is the monthly Chicago Fed National Activity Index (CFNAI), which has the highest correlation with next quarter’s gross domestic product of any measure my team has tested, including those you mention. Currently, the CFNAI is signaling slow, but positive US GDP growth next quarter of between 1.5% and 2%. In addition, even ECRI data is not yet signaling a recession and is instead suggesting sluggish growth of around 1%.
Q: I received lots of questions in response to my post on the 15 riskiest countries today. Here’s one: How extensive is the overall pool of countries from which you drew these 15? Is this meant to be the top 15 riskiest countries of the whole world? And if so, then to spell this out clearly, are you suggesting that Egypt, to choose one example, has a market valuation that is less sensitive to “risk-on” and “risk-off” sentiment shifts than any of the above countries? Blog Reader Meanwhile, other readers on Seeking Alpha asked me why countries such as China, the United States, Greece, Argentina and Venezuela didn’t make the list and wanted more details on why I chose the countries I did. I answer these questions together in the response below.
A: My list of the 15 riskiest countries was not meant to be an exhaustive list of all countries in the world. Instead, it was meant to be a look at the riskiness of a tradable subset of countries, meaning that there are liquid instruments to get exposure to those countries. Thus, some countries like Venezuela weren’t included. Other countries like Greece, Portugal, Ireland and Argentina weren’t included in the analysis as I question their efficacy as reliable vehicles to trade risk due to their dependency on idiosyncratic political issues.
To analyze our subset, we relied primarily on realized one-year USD return volatilities of the countries’ MSCI country indices as measures of risk. Countries that have a relatively stable currency relative to the dollar would show up as less risky.
Meanwhile, the United States didn’t make the list as it has relatively low volatility compared to other countries, particularly emerging markets, and even though China is an emerging market, it’s somewhat less sensitive to “risk on/risk off” than other emerging markets thanks to its stable currency.
Source: Investment Strategy Group Research
