The economists at Morgan Stanley are back with another cheerful prognosis for the US and world economy HERE.
My question is: How should we invest assuming these guys are right?
Snippets:
A double-dip recession is coming, courtesy of soaring energy prices and
the ongoing restraint from the housing downturn, falling home prices
and tighter financial conditions. Despite recent economic resilience, we’ve trimmed our growth prognosis ...
In particular, four ‘adverse feedback loops’ create downside risks to
growth, especially to the consensus view that the economy has skirted
recession and that a stronger second half is likely.
- First, the interplay between the housing downturn, falling home prices,
deteriorating credit quality, and lender caution is undermining
consumer wealth and ability to borrow.
- The second adverse feedback loop stems from the supply-induced surge in
energy prices that will undermine discretionary income in the US and abroad ...
- A third feedback loop involves slipping profitability, tighter
financial conditions and economic uncertainty that will likely slow
capital spending and hiring.
- Finally, rising inflation and inflation expectations in Europe likely rule out monetary ease and could prompt the ECB to tighten
... we think policymakers are on hold and will tolerate and even welcome
economic weakness to cap inflation and eventually bring it back down.
One thought is that G8 leaders will determine that the weak dollar is the root of all evil: it's causing a spike in oil prices, hurting economic growth, and contributing to inflation. So, expect a whatever-it-takes coordinated effort to support the dollar? This would result in a short-term decline of commodity prices ...
Another thought is that the strong sector bifurcation trend may become unsustainable. Energy is technically overbought and finance is oversold. So, would it be smart to take some money off the table on the strong "global growth" themes - as well as curtail short positions in finance & retail?
Ideas? Convictions?
