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Lloyd Clucas
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Professional investment portfolio management since 1974. CFA Charter (1981). Juris Doctor degree, Northwestern University School of Law (1965). Founder, current Chairman and CEO, Askari Equity Management LLC, successor corporation to RIA asset management proprietorship since 1974. ... More
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Askari Equity Management LLC
  • For The Next Five Months... 0 comments
    Jul 26, 2012 5:46 PM

    The Summary Market & Economic Outlook
    The US economy trudges forward but is slowing - as we have forecast all year. Worrisome features include the stagnant growth of Real Disposable Personal Income and the flattening out of NIPA Profits growth. Job growth is "OK", given the economic headwinds. The principal headwind is the massive debt overhang - now mainly with government. It impedes growth. A recent NBER paper supplies more academic support for that proposition.

    We are sliding toward a US recession, most likely in 2013, but still unlikely in the next 5 months. The two big hits will come from Eurozone Financial Collapse and/or The Fiscal Cliff. They both seem likely, in enough size, to put us in recession. The consensus of economists is for accelerating economic growth in the US in 2013. We disagree.

    Asia is going through a somewhat more traditional "business/credit cycle" adjustment. Not the sort of balance sheet recession of the industrial West (plus Japan). After some inflation fighting, they're now seeking to stimulate growth again. With reasonable balance sheets, they'll have some success at it.

    China still has serious malinvestment issues; India its perennial regulatory, political, and infrastructure issues. Japan prepares for seppuku, with plans to double their sales tax. Its debt load is out of control and the financing of it is now finally starting to crumble.

    Europe continues in a death spiral. The EU's LTRO bought time by guarantying bank liquidity through 2014 - as long as collateral standards continue to erode; they are and will. Under ELA authority, however, a miscreant nation such as Greece can evidently have its central bank print euros to monetize deposits of zombie banks.
    It will sink the Eurozone. It is unlikely that Germany can muster the 2/3 vote required to stop the Eurozone's ELA assistance to miscreant nations. Structural reform and political union will likely take too long to stanch the financial hemorrhaging.

    Furthermore, the Eurozone is still not addressing structural issues which are wrecking them (e.g., sclerotic labor laws and runaway entitlement spending). Their excessive spending will soon require massive Euro printing or the breakup of the Eurozone. There is no time for the amount of structural change they require; let alone political and fiscal integration.

    US equity markets have reached the end of our forecast "safe" period (the end of June). Going forward, too much depends on the whims of largely irresponsible governments - the Eurozone nations, the ECB, Congress, the FRB, the US President - and on the actions of spoiled electorates, insistent on being supported by their neighbors.

    Markets remain and will continue to be, very skittish. That's despite readings from the conventional sentiment indicators suggesting complacency (e.g. VIX). Profits, profitability, and productivity are beginning to flag - as we'd forecast. We see slower second half growth, not the pick up most economists have been forecasting.

    Currencies continue to be debased globally, making relative values even more difficult to ascertain. Developed nations' bonds are at ludicrously low yields, with a good chance of going even lower, as the Eurozone crisis intensifies. And it will.

    The U.S. problem from Europe is only partly from recessions/depressions I expect over there. An even bigger blowback is our banks' probable net financial exposure to their banks: ~ $3.52trn by our calculations from latest BIS numbers. That looks possible when the Eurozone blows apart. The chances are good that it will.

    As Congress and Obama dither, the US faces a headwind of perhaps $456bn in higher taxes in 2013 and maybe $214bn in government spending cuts - in the wrong places. We expect damage and a recession beginning in 2013.

    The critical issue is how to ride out that storm. In the old days, you just raised some percentage of cash and waited. Today, big monetary inflation, whether before or after the recessions/depressions would require holding no such nations' cash or bonds. Rather, it requires ownership of assets -- especially productive assets.

    CPI inflation likely starts when the FRB cuts the interest it pays to banks for holding reserves with the Fed. Their last minutes discuss the possibility of doing so. Ownership of reliably productive assets - and even gold (e.g. IAU) and oil (e.g. CVX, APA, SU) - would be essential. Valuations are still "OK"; so that's not too uncomfortable - for now.

    The FRB's free money policy allows cheap leverage to buy equity assets on emotional sell-offs to marked undervaluation. Raising cash to do this seems ill-advised as long as money remains free, and the leverage is not excessive or of long duration.

    With slightly bigger, more stable, dividend-growing equities, that's how we expect to go (e.g. PEP, PG, UL, JNJ, TGT, WMT, ABT, MSFT). We have moved further into Asian markets (e.g. FXI, EWH, EWS, EHPE, VNM) and emerging market local-currency debt (e.g. ALD, ELD, PCY, CEW) and trimmed exposure to fully-priced equities e.g. TJX).

    Disclosure: I am long PEP, PG, UL, JNJ, TGT, WMT, ABT, MSFT, FXI, EWH, EWS, EPHE, VNM, ALD, ELD, PCY, CEW, TJX.

    Themes: market-outlook
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