What are the tell-tale signs of a recession? By definition a recession is two consecutive quarters of declining growth in earnings, GDP, or profits. Larry Kudlow, the economist and CNBC market show host, argued this past September that aggregate US tax data showed that some 78% of U.S corporate profits are coming from overseas trade and that a paltry 1% of U.S profits is from U.S domestic business. Kudlow argues with supporting data that this has been the case for the first seven periods of 2007 and is likely to continue. So by definition, US corporate profits are already in a recession as measured by their domestic activity.
The question remains about the U.S consumer. They have kept spending when a prudent man would have long bet they would have to stop. No argument here; Maestro Greenspan may have magnificently conducted a new- found consumer liquidity symphony to artificially create growth by enabling easy access to home equity as never before, but will we now finally pay the piper with a consumer led recession?
We have to say that the odds greatly favor a consumer led recession and we see little room to creatively engineer new, responsible consumer spending. Credit card debt is at all time highs, home equity lines have been tapped out with payments that are increasingly falling delinquent, and the U.S has nearly a $9 trillion account deficit. On top of this we are faced with a credit freeze that no matter how much liquidity is injected will not whisk away the massive losses originating from excessive appraised loan to values.
We see only one saving grace or offset at this juncture. China is sitting with over $1.5 trillion of U.S dollars from their trade deficit with the U.S and are our friends and enemies in OPEC. They have little use for these deflated greenbacks, save as a long term investment. The problem is the U.S dollar is continuously in decline as the U.S Fed cuts interest rates to stimulate domestic growth (and advantaged U.S trade) and these cuts only exacerbate the likeliness of a global trade war. Foreign investors would surely like to spare themselves the loss derived from currency conversion or spending dollars elsewhere by investing here to buy U.S assets. My perdition, then, is that the US, led by Goldman Sachs' invisible hand clasp with Treasury, will walk the Chinese and Arabs right over to spend their dollars here. After all, the IMF and World Bank have both detailed the dearth of capital investment in the U.S over the past five years as our achilles heal to growth.
So the real question is, will a democratic Congress bless this workout? Will the Congress accept the real politic that trade and jobs were lost in fair, inevitable low cost producer competition and now accept that the "enemy of the people" are here to invest in us? It'll take a sell job. But our bet is that hedge funds and private equity firms will be facilitating this fee producing business next. Just keep your eye on the activities of the Carlyle Group and Blackrock to know if we are right.