The Bear Market And Recession

We've taken some hits lately, but the markets still finished up in 2007. More recently, we are down about 6 percent in just the first few weeks of 2008.

I have moved into more conservative and defensive areas. Investment grade corporate bonds and California municipals that have sold off with everything else are where I have moved over the past few months. I am more income oriented these days as I now have to live off my investments. But I still like some distressed mortgage debt and REITs, but only when the discount is large enough (15-20%) to be compelling and able to absorb any repricing.

If we believe the Goldman Sachs forecast from last week, a recession is
imminent, with unemployment heading to 6.5%, a contracting GDP at .8%
for all of 2008 and the Federal Reserve dropping benchmark lending
rates to 2.5%.               

I'm not as pessimistic as Goldman Sachs, but I'll concede a 50-50 chance of 2 negative
quarters (the standard measure of an official recession) in 2008, and I don't see interest rates going so low, 3-3.5% seems about right. The unemployment projection of 6.5% is realistic. In real terms, we are probably already there. Unemployment figures are generally under reported. 

I expect some financial band-aids to come through congress soon, although we can't expect much of an effect. Many of these subprime loans will have to be written off and layoffs will continue. There will need to be some bloodletting for the long term health of the patient.

Certainly we are in a market correction that probably will range from 10%-15% over the coming year. Inflation is the wild card. If that shows up in a meaningful way, the recession is on and the Feds will be stopped in their tracks. And then we better start to dreaming up some creative new recipes for dog food and ramen noodles.

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A bronze naked godlike creature with a BBQ apron. And I like cats!

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