Recession Risks More Likely Than Sluggish Growth

Filed Under (The HELL You Say!) by Forest Jones / on 04-10-2011

Recession may become more likely than an extended period of sluggish growth and  high unemployment rates, says Bill Gross, founder of Pimco, the world’s largest  bond fund.

Since 2009, Gross has said the U.S. and other developed  economies were entering a period of what he calls a “new normal,” a period  marked by lackluster economic performance but still one of growth.

Now it’s worse, but not too late to change.

“Sovereign balance sheets  resemble an overweight diabetic on the verge of a heart attack,” Gross writes in  a monthly investment outlook posted on Pimco’s website.

“If  global policymakers could focus on structural as opposed to cyclical financial  solutions, new normal growth as opposed to recession might be  possible.”

Structural solutions would include adapting labor markets to a  more globalized economy and to new technologies while preparing developed  economies to handle increased savings as opposed to increased consumption as  populations age.

But for now, policymakers must prepare for possible  economic contraction, since despite interest-rate cuts and other expansionary  measures, demand remains weak, and positive productivity rates don’t reflect the  whole picture in the labor market. Recovery hinges upon stronger  demand. “Near zero percent interest  rates have allowed profit margins to widen even in the face of anemic end  bdemand,” Gross writes.

Bill Gross

“As well, ‘productivity’ has remained high, but  only because of layoffs and the production of goods and services with fewer  people. While that is a benefit to capital, it obviously comes at a great cost  to labor.”

The economy has yet to officially slide back into recession,  but the debt-ceiling impasse and European debt woes have hurt confidence in  consumers, the very motor of U.S. growth.

Some say the recession is imminent.

“What is a bad economy is about to get much worse,” says  bLakshman Achuthan, co-founder of the Economic Cycle Research Institute,  according to MarketWatch. “We are seeing the weakness spread widely,”  Achuthan says, adding “there’s a contagion…that’s not going to be snuffed out.

The nature of a recession is not a statistic. It’s a vicious feedback loop.  Sales fall, production falls, income falls and that depresses sales. We’re in  that, and it’s going to run its course.”

The problem, other experts say,  is that U.S. households will need time to pay off the debts they ran up during  the credit and housing boom in the early 2000s.

As they pay down those  debts and spend less, the economy will remain stuck in the doldrums for years  and markets will soar and tank. That makes stock picking a tough task,  according to analysts at Deutsche Bank.

In other words, forget the  buy-and-hold advice that has served as the golden rule for the last several  decades.

“The next decade will likely be one where buy and hold will  generally be a fairly poor option in developed markets,” Deutsche Bank analysts  write in a letter to clients, MarketWatch reports.

“There will be large  cyclical rallies punctuated by recessions and funding crises.” In the  meantime, expect markets to remain volatile, swinging up one day and plunging  the next. Amid such bipolar trading, look for dividend-paying stocks,  experts say.

“Stay defensive, be in low beta stocks, and achieve returns  through dividends,” says Mark Tepper, a financial advisor with Strategic Wealth  Partners in Seven Hills, Ohio, according to CNBC.

Low-beta stocks are  those that are less volatile but offer less reward on the upside.

“High  dividend stocks may be seen as more stable, but they will not grow as quickly in  a recovery,” says Ben Sullivan of Palisades Hudson Financial Group in Scarsdale,  N.Y., CNBC adds.

“[If you] try to defend against one thing right now,  you position yourself for future failure.”


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