The bond market, which is the most reliable indicator, has been pointing to a slowdown since at least April or May. The de-leveraging process facing the U.S. is so severe that a recession is inevitable.
If you have got a USD14.5 trillion debt burden, it is going to be a pretty severe recession. Recession is usually linked to the size of the debt a country has to clear up.
In fact, the U.S. economy has been in trouble far longer than most people appreciate and has been merely using debt to prop up growth.
The U.S. was borrowing somewhere north of USD500 billion a year to create GDP growth of a little less than USD500 million a year. The U.S. has been at stall-speed for the past ten years.
When GDP growth is less than the increase in national debt every year, it just does not make sense to go on like that. To us, that is not real growth; it is just papering over the cracks which are getting bigger all the time and may end up looking like the San Andreas Fault. It is hiding over the fact that maybe we are already in a serious recession where growth is impacted by the sheer amount of debt that is actually out there.
Here at MBMG, we have been taking advantage of the rally in the Treasury market over the past few months, but that party might end soon because a recession would hurt the government’s ability to raise revenues.
Once we get into that environment, at that point, you probably do not want to be holding Treasuries anymore because there is a huge amount of pressure coming down on the credit rating, not just from the growth slowdown or the move into recession, but the move into deflation.
Instead, we are holding forty five percent in cash in some of our most defensive portfolios and we have also been moving money into the Singapore Dollar and Asian government bonds.
What we are trying to do there is not only preserve capital, but to take advantage of other opportunities with cash. For instance, the Singapore Dollar has been a theme we are interested in, and some short term emerging market bonds. If you look at some of the shorter dated Indonesian bonds, we have had a kick-up from the rupiah doing ok, but also there is some yield from those instruments. Above all, please remember my old mantra of staying liquid.