Macro Picture Getting Uglier

After last week’s dismal Q2 GDP and retroactive lowering of previous periods, we have received another couple of slugs of bad data early this week: yesterday’s big miss in the ISM index, which came in just above contraction at 50.9, and today’s negative growth in personal spending.

Any of these by itself is not catastrophic but, taken together, they really begin to paint a picture of an economy that is running out of steam. Now we have an impending deficit deal which amounts to negative stimulus at the end of the day, and it’s time to start wondering again whence the aggregate demand is going to come.

Yes, my friends, the deflationary winds are whipping up again. This doesn’t bode well for growth stocks or commodities. High grade bonds, blue chip dividend stocks, and selected foreign markets are looking like the better bets in this macro environment. And of course, if all else fails, there is that often hated but ever useful asset: cash.

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2 thoughts on “Macro Picture Getting Uglier

  1. Hi Harry,
    Today’s market responded to your blog. The market hasn’t seen such selling in a long time.

    Aloha,
    Shirley

  2. Aloha Shirley,
    You’re right, we haven’t seen a bout of selling like this since Q1 2009. In last weekend’s article at SA I included a paragraph at the end warning readers of the very concerning action in the money markets. It seems the continuing Italian bond spread blowout has opened the lid on this boiling cauldron of trouble. Once they come after Italy, the euro, as I have been saying all along, is really on the ropes.

    The money markets have begun to freeze up again as some banks stopped taking certain classes of bonds as collateral. Yesterday’s downside action was fueled by institutional margin calls and there was some forced liquidation of assets into a free-falling market. That is something you never want to see if you’re long. We have taken some beating even in our largely defensive blue chip equity positions but these are long term holdings that we fully expect to recover. Our bond positions and large cash allocation are serving us well, and we look at this as an opportunity to buy quality assets at a discount…but not yet. For now it’s time to stay in port and let the storm pass.

    Best
    Harry

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