John Hussman’s composite recession predictor has been flashing red for about 10 days, and it’s been very good. It did not falsely flag last summer’s swoon as an oncoming recession, while it nailed the 2008 decline in Dec 2007.
Add to that the austerity in Europe which is reducing external export demand (based on the new export figures, Q2 GDP looks to be revised to under 1% — far below “stall speed”) and then also the credit crunch strengthening the dollar, and you have a recipe for a serious slowdown in US corporate overseas profits.
This chap at Stanford seems to agree.
So while I’ve been spectacularly wrong about the timing of these things and have lost money making one-way bets, I certainly wouldn’t want to be invested in equities right now. Having cash on hand to buy later (average decline in the S&P in a recession is 40%) makes a lot of sense. The current rebound in the market might be an opportunity to lighten up portfolios. Even gold may go down quite a bit in that instance, though not for long.
Of course, once Benny and the Feds start serious QE3, which I now believe is inevitable, we will see a rerun of the asset inflation of the past 2 years, but whether enough and early enough to avert a serious further dive in stocks is uncertain.