It’s been a little over six months since my last related post, and a few weeks since I realized this, hence the update. As various reports come in, I’m gratified that they are mostly in line with expectations. The weakness in housing continues, and the effects are spreading to other parts of the economy. Downturns in consumer credit and sales confirm my expectations of a poor holiday season. Roubini is expecting the ‘official’ recession to begin in Q1 or Q2 2007, and his recent forecasts on GDP growth have been squarely on target.
I’m trying to stay very aware of the principle that the market can stay irrational longer than a bear can remain solvent, so my hedging will be limited for some time until more warning signs emerge. I do note that almost half of non-financial American companies are no longer rated investment grade, and the murmurings are that defaults now delayed by easy credit are likely to start rising in another six months to a year.
Internationally, there has been some truly spectacular growth, with some ETFs generating returns in the 30s or 40s (that link is time-sensitive). The Dow has also been shouldering its way up, now trading around 12,000. It is not impossible that it could spike up to 14,000 before it corrects, so caution is advised for both bears and bulls. With financial weakness pervasive across sectors, there should be opportunities to watch some truly spectacular death-spirals when recession hits.