How to Invest in a Declining Economy

Despite enormous monetary and fiscal stimulus efforts, the world economy continues to trudge along like a weary pack mule.  Most European countries are in recession, the United States is growing at just 1.9 percent, and, from what we gather, China’s epic twenty-year boom is stalling out.  Where are things headed next?

Today we’ll check in with Dr. Copper for a trustworthy answer…

Dr. Copper – the metal with a PhD in economics – is always the first to know which way the economy will go.  Copper’s broad use in industry and many different sectors of the economy, ranging from infrastructure to housing and consumer electronics, makes it a good early indicator of economic activity.

When copper prices rise, economic activity soon often increases.  When copper prices fall the economy often then stagnates.  Over the last year, copper prices have fallen 20 percent.

Obviously, the price of copper is in a downtrend…and it appears the world economy is following…

Blindsided by a Recessionary Onslaught

“The global economic outlook for the second half of the year is at risk of a sharp downward revision this week when China, the main driver of world growth, publishes quarterly data that analysts widely expect to be the worst in at least three years,” says Reuters.

‘“In a nutshell, the global economy suddenly looks in a perilous state and, rather than pre-empting a downturn, central bankers may have found themselves blind-sided by a recessionary onslaught, or even worse – deleveraging and deflation,’ Geoffrey Yu, foreign exchange strategist with UBS in London, said.

Over in Spain, bulls ran down and gored three runners yesterday as they made their way down the cobblestoned streets of Pamplona.  Similarly, in Madrid, bond investors gored Spanish government debt by ramming yields on the 10-year government bond above 7 percent…the level where issuing new bonds to pay current debt becomes impossible.  Nonetheless, Eurozone leaders are cobbling together 30 billion euros by the end of July for Madrid’s ailing banks.

Here in the United States, the economy’s stuck in first gear and can’t seem to gain any traction.  Last Friday, for example, the Bureau of Labor Statistics reported that the U.S. economy created just 80,000 jobs in June.  Somehow the unemployment rate remained at 8.2 percent even though it typically takes 125,000 new jobs per month to keep up with population growth.

But that’s not the half of it.  According to the Social Security Administration’s numbers, 85,000 U.S. workers enrolled in the Social Security Disability Insurance program during the month of June.  In other words, the number of Americans enrolling in Social Security Disability exceeded the number of new jobs that were created.

Unfortunately, this has been going on since the recession officially ended in June 2009.  In fact, since June 2009 the economy’s created 2.6 million jobs whereas 3.1 million workers signed up for disability benefits.  Clearly, this hasn’t been much of a recovery…and the little bit of recovery that policy makers pushed so hard for appears to now be fading.

How to Invest in a Declining Economy

This week, as reporting on second quarter corporate earnings begins, we’ll get some insights on how the economic slowdown is impacting businesses.  Earnings have gone up every quarter since the fourth quarter in 2009.  That’s 10 quarters in a row.

But, at some point, all good things must come to an end.  Perhaps we’ll learn that second quarter earnings did not go up.  Maybe we’ll find out that they’ve gone down.

In late May, economist Marc Faber, author of the Boom, Gloom & Doom newsletter predicted a 100 percent chance of recession either in late 2012 or early 2013.  Then, yesterday, Dr. Doom Nouriel Roubini said the “perfect storm” scenario he predicted in May, including stalling growth in the U.S., debt troubles in Europe, a slowdown in China, and military conflict in Iran – is unfolding right now.  Roubini thinks this perfect storm will hit the shores of the global economy in 2013.  Regardless of the ultimate timing, one thing is clear…the stock market’s sailing into strong headwinds.

Recessions are never good for retirement investors.  ROTH IRA and 401K account’s invested in index mutual funds typically get killed.  Additionally, the S&P500 has never been able to sustain above 1,400.  It momentarily spiked above 1,400 in early-2000, and in mid-2007 it even jumped above 1,500.  Both times it rapidly crashed.  Earlier this year the S&P500 briefly rose above 1,400 before selling off.

Here at the Economic Prism we always expect the impossible…but we don’t bet our retirement on it.  What we mean is, while it seems unlikely, the stock market could rise as the economy slows.  Maybe the Fed will announce QE3, and give the market a boost.  Still, we’d rather take a moment now to position ourselves close to the exit.  This, we’ve found, is the best place to be in a declining economy.

Next to the exit, with popcorn in hand, we can watch the coming spectacle with delight…and we can quickly duck out when the chairs start flying.


MN Gordon
for Economic Prism

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