Are we headed for another recession?
That’s what the markets seem to be saying. Global stock markets are down over 20% from their highs in July, and global bond markets yield almost nothing. If you don’t like 10-year US Treasuries at 1.76%, you could try German bonds at 1.69%. Some fundamental data are troubling as well: Chinese manufacturing appears to have contracted for two months in a row, now; US employment growth seems to have stalled out.
Most significantly, there are concerns that the debt crisis in Europe will “spill over” to the United States. If the Greek government defaults and European banks have to take losses on those bonds, they may lose so much money that they need to cut back on lending. A lot big corporations borrow from these banks because of their global reach. If they can’t borrow, they may have to cut back.
That’s what many are thinking. But there are some holes in the theory. For one, European governments aren’t shy about propping up their banks. The French nationalized many of their banks in the early ‘80s, privatizing them again after about 5 years. And the US Treasury’s TARP program prevented a systemic failure here in 2009.
Also, recessions usually begin with a shock to the system—people are surprised by some negative event, and so they pull back. That’s what happened in 2008 when residential property values began to fall. There’s very little about the European situation that is a surprise. As a result, cutbacks are less unlikely. Where would you cut?
There’s always a chance that the economy could stumble. But for now, the chances appear slim.
Douglas R. Tengdin, CFA
Chief Investment Officer
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