Comstock Partners: 'Overwhelming' Evidence of Recession Ahead

Sunday, 22 Jul 2012 03:58 PM

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A slew of economic indicators shows the U.S. economy is headed for a recession, according to Comstock Partners, a New York hedge fund.

Retail sales have fallen for three consecutive months. Monthly jobs reports have consistently failed to meet expectations, while indices gauging the manufacturing sector, once the bright spot of U.S. recovery, are slumping also. Consumer confidence is down and home sales are off as well despite some improvements seen in the sector.

"We first noticed the first signs that the economy was beginning to soften about three months ago," Comstock Partners wrote in a market commentary.

"Now the evidence of a slowdown has become so overwhelming that it is difficult to avoid the conclusion that we are headed for a recession," the fund added.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

"The breadth and depth of the slowdown are greater than the growth pauses experienced in mid-2010 and mid-2011, and indicate a strong likelihood of recession ahead."

Talk that the Federal Reserve will try to juice up the economy with a fresh shot of liquidity into the financial sector is growing.

Under such a scenario, the Fed buys bonds held by banks, a monetary policy measure known as quantitative easing that pushes interest rates down to encourage investing and job creation.

The Fed has stimulated the economy twice with quantitative easing on top of interest-rate cuts since the downturn, but a third round won't do as much because such intervention produces diminishing returns.

"The stock market is ignoring these fundamentals as it did in early 2000 and late 2007 in the belief that the Fed can pull another rabbit out its hat. It couldn't do it in 2000 or 2007 when it had plenty of weapons at its disposal," Comstock Partners said.

"Now there is little that the Fed can do, although it will try since it will not get any help," the hedge fund added, referring to a congressional unwillingness to tackle fiscal issues during an election year, which Fed officials say needs to happen.

Other experts agree that the U.S. economy will cool once stock prices, no longer buoyed by Federal Reserve moves, begin to fall.

"The gravity of weaker growth will most likely overcome the levitational effect on equity prices from more quantitative easing, particularly given that equity valuations today are not as depressed as they were in 2009 or 2010," New York University economist Nouriel Roubini wrote in a Project Syndicate column.

"Indeed, growth in earnings and profits is now running out of steam, as the effect of weak demand on top-line revenues takes a toll on bottom-line margins and profitability," he added.

"A significant equity-price correction could, in fact, be the force that in 2013 tips the U.S. economy into outright contraction. And if the U.S. (still the world’s largest economy) starts to sneeze again, the rest of the world — its immunity already weakened by Europe’s malaise and emerging countries’ slowdown — will catch pneumonia."

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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