June 6, 2011 – The Economic Headwinds Are Coming


3) The Economic Headwinds Are Coming. Whenever someone is dead right about the long term outlook for the economy, I like to revisit their comments. So am once again running a conversation I had with my friend, David Hale, a month ago, back when investors were stumbling over each other to pile on risk assets, and the indexes were hitting new highs for the year daily.

I have followed David Hale's prognostications about the global economy for two decades, and have always found his views insightful, if not useful. Although based in Chicago (click here for his site), he is almost permanently on the road, consulting with foreign governments, major banks, and big hedge funds.

He called me recently while driving a rental car to some godforsaken Midwestern airport, holding a GPS in one hand, a cell phone in the other, and steering the wheel with his knees, to give me his current take. It is not a pretty picture.

The end of QE2 and Obama's many stimulus programs are about to create a major drag on the US economy. On top of this you have to consider the likelihood that the Bush tax cuts will not be renewed a second time. You can also take out the deflationary impact of high oil prices. Add it all up, and you come up with a negative 5% headwind in annualized GDP hitting at the beginning of 2012. Although the sedentary, Harris tweed jacket wearing David is not prone to making extremist, sensationalist comments, only one ugly word can come out of this: recession.

The bad news is that the markets don't know this yet. But they will. Using the traditional rule of thumb that equity markets lead the economy by about six months, that means you should start unloading your positions right about now.

The Economy is Facing Major Head Winds