Double dip, state of play 10
The chance of a double dip of the world-economy (creating a recession in many national economies and a growth-recession in others) has risen substantially. I am positioning my Caps picks accordingly.
(Repeat warning: I do not pick individual stocks. I make sector bets up or down based on a macro-economical analysis combined with a "technical" analysis of the financial markets.)
Deep background: The globalisation of capitalism and the ongoing IT revolution have created an unprecedented growth potential within the world-economy. (See my long view series of blogs)
Middle background: The massive intervention of central banks and governments have prevented a meltdown of the financial system. Because of the recapitalisation of the banks the risk of systemfailure is low at the moment. As an intended sideeffect of those interventions the creditcrunch eased -almost out of existence. The massive world wide stimulus on top of the lowering of the systemrisk and the easing of the credit crunch have lifted the world economy out of recession. That lift came from a steep inventory cycle and genuine growth in some emerging markets. Together those measures have prevented the onset of a depression -for now.
But there is no follow through. The economy seems to be faltering again.
Stimulus and inventory cycle have for the most part played themselves out.
Because of the continuing housing crisis, rising unemployment and high household debt the American consumer (and some of the European consumers as well) will stay defensive. Downpayment of debt will stay the priority. That means that low interest rates and even direct subsidies will not create much growth. The consumer in the emerging capitalist societies have not yet the buying power to take up the slack.
Business investment is subdued. Uncertainty over the prospects of the economy, the wish to reduce debts further, the continuing consumer strike and an unclear direction of public investment will keep it that way.
All of that points to (very) low growth at best. But because the political sentiment has turned towards the reduction of public debt i think that even that is to optimistic. In Europe unprecedented large cuts in public spending have already been decided by governments in britain, germany and the netherlands. The mediterrenean countries will be forced to cut even more. In the US a move to the right in november will make it almost impossible to stimulate again. That makes a double dip almost certain.
I am also keeping a close watch on developments in China. While it is very difficult to get information that can be trusted it seems possible that we are seeing there a huge real estate bubble on top of the usual misallocation of capital. A deflation of that bubble could be the nasty surprise, the system shock that again raises systemic risk.
I believe the stockmarket in the US and Europe is priced for a continuing "normal recovery". It is even a bit overpriced for that. A new recession certainly has not been priced in.
I have therefore in Caps now done away with all the winners from the leg up since the march 2009 lows. I am beginning to build a bearish position again. To start with i use the ultra etf's. I have redthumbed individual stocks from a wide variety of sectors and with a wide variety of technical profiles to gauge who will lead the leg down. Timing of course is always a problem. Therefore i am building out the position carefully. If i convinced that we have established a downward channel i will again go to 200 picks. I am now at 80 -and growing.
I am still trying to reason out what the sectorrotation will be within this downturn. I would very much appreciate any suggestions about that.