If David Levy is right, will the recession that is surely coming be the one that cripples our economy so badly that a bad recession become a terrible depression? What do you think?
Conservative Tom
The U.S. economy will eventually fall into a recession, smothered by an excessive debt load, says David Levy, chairman of the Jerome Levy Forecasting Center.
"We are still in a disinflationary and balance-sheet adjusting phase in the U.S. and globally, and that is going to bring, at some point, another recession," he told Barron's.
"It could be sooner rather than later, and when that happens, we'll probably get a little bit of deflation. At some point, we'll see the 10-year Treasury yielding well under 1 percent, much as we have seen in Japan." The 10-year yield stood at 2.63 percent Wednesday morning.
The economy is showing signs of improvement. "But the big picture is that we still have way too much debt relative to income," Levy said.
The household debt-to-income ratio has dropped to 104 percent from a peak of about 128 percent, he noted. But, "we would like to see it down back around 80 percent to really feel we are in good shape."
In 2014, the economy could have "another plodding-along year," Levy predicted. "Whether we have a recession will depend on political decisions made in Washington, Europe and China."
The U.S. budget deficit will play a major role, Levy explained. "If we have a significant further deficit reduction — but we may well not — that would definitely increase the recession risk," he stated. "It would be hard for the economy to absorb a sizable deficit reduction two years in a row."
The deficit totaled $1.1 trillion in fiscal 2012, which ended last Sept. 30. The White House budget office forecasts a deficit of $759 billion for this fiscal year.
Some economists argue that the Federal Reserve can buoy the economy with its easing. "But at this point, the Fed is relatively powerless when using monetary policy," Levy argued.
"When you actually look at how monetary policy gets into the individual profit sources, quantitative easing ends up looking a lot less important."
If we enter a recession, deflation is a risk, Levy asserted. "In that case we actually could see not only some goods and services prices drop, but possibly even wage gains drop to zero or even slightly negative."
Other economists expect continued sluggish growth in the United States, at least for the short term. "The basic story of a deep recession followed by a lackluster recovery is essentially unchanged," Nariman Behravesh, chief economist at IHS, told The New York Times.
So what does Levy's view mean for investors? He is bullish on Treasurys and the dollar. "For the long-term patient investor who can ride out a little volatility, there are significant capital gains in Treasury positions and, obviously, protection from a lot of risk," he said.
Levy likes the dollar because he thinks the U.S. economy is the strongest in the world, despite its difficulties.
As for stocks, "we don't really trust the U.S. equity market, per se," Levy noted. "Still, we feel it is a lot sounder than the European and emerging markets broadly speaking. So we are actually doing a long-short play," explaining that he's long the U.S. stock market and short European and emerging markets.
Conservative Tom
Wednesday, 07 August 2013
"We are still in a disinflationary and balance-sheet adjusting phase in the U.S. and globally, and that is going to bring, at some point, another recession," he told Barron's.
"It could be sooner rather than later, and when that happens, we'll probably get a little bit of deflation. At some point, we'll see the 10-year Treasury yielding well under 1 percent, much as we have seen in Japan." The 10-year yield stood at 2.63 percent Wednesday morning.
The economy is showing signs of improvement. "But the big picture is that we still have way too much debt relative to income," Levy said.
The household debt-to-income ratio has dropped to 104 percent from a peak of about 128 percent, he noted. But, "we would like to see it down back around 80 percent to really feel we are in good shape."
In 2014, the economy could have "another plodding-along year," Levy predicted. "Whether we have a recession will depend on political decisions made in Washington, Europe and China."
The U.S. budget deficit will play a major role, Levy explained. "If we have a significant further deficit reduction — but we may well not — that would definitely increase the recession risk," he stated. "It would be hard for the economy to absorb a sizable deficit reduction two years in a row."
The deficit totaled $1.1 trillion in fiscal 2012, which ended last Sept. 30. The White House budget office forecasts a deficit of $759 billion for this fiscal year.
Some economists argue that the Federal Reserve can buoy the economy with its easing. "But at this point, the Fed is relatively powerless when using monetary policy," Levy argued.
"When you actually look at how monetary policy gets into the individual profit sources, quantitative easing ends up looking a lot less important."
If we enter a recession, deflation is a risk, Levy asserted. "In that case we actually could see not only some goods and services prices drop, but possibly even wage gains drop to zero or even slightly negative."
Other economists expect continued sluggish growth in the United States, at least for the short term. "The basic story of a deep recession followed by a lackluster recovery is essentially unchanged," Nariman Behravesh, chief economist at IHS, told The New York Times.
So what does Levy's view mean for investors? He is bullish on Treasurys and the dollar. "For the long-term patient investor who can ride out a little volatility, there are significant capital gains in Treasury positions and, obviously, protection from a lot of risk," he said.
Levy likes the dollar because he thinks the U.S. economy is the strongest in the world, despite its difficulties.
As for stocks, "we don't really trust the U.S. equity market, per se," Levy noted. "Still, we feel it is a lot sounder than the European and emerging markets broadly speaking. So we are actually doing a long-short play," explaining that he's long the U.S. stock market and short European and emerging markets.
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