Double-dip recession porridge: 3 bears dish it out

September 12, 2011

Now that fears of a double-dip recession are on everyone’s mind, the bears are on the prowl and really cranky.

What’s the best way to tame our fears and become confident long-term investors? Let’s listen to what some of my favorite bears have to say and then take a look at the big picture.

The most ominous threats are that of a European bank failure or double-dip recession that would slam both the U.S. and Eurozone. One of the most vocal ursines — Nouriel Roubini, professor of economics at New York University — starts out his jeremiad by asking the question “Is Capitalism Doomed?”

“The massive volatility and sharp equity-price correction hitting global financial markets signal that the most advanced economies are on the brink of a double-dip recession,” Roubini writes.

Bemoaning the Euro debt crisis, America’s fiscal crisis and even the Japanese earthquake and tsunami, Roubini is not sanguine the current system can handle these calamities. Consumers are gloomy and the U.S. housing market is still in the dumps.

“To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states.”

Roubini’s route to this radical shift? More infrastructure spending, progressive taxation, reduction of household debt burden and “breaking up too-big-too-fail banks and oligopolistic trusts.” Paging the U.S. Treasury Department, Congress, Federal Reserve and Bank of America.

A no less enlightened bearish overview comes from money manager Jeremy Grantham, chairman of GMO LLC, who has been sour for years on global economic prospects.

Grantham’s recent missive “Danger Children at Play” rambles on about the end of the U.S. empire, yet cobbled together some cogent ideas on how to regard our fin de siecle.

Grantham, also chary of household and sovereign debt demons, offers a broader, if not darker sociological overview of the cauldron of political, economic and historical challenges:

“My worst fears about the potential loss of confidence in our leaders, institutions and `capitalism itself’ are being realized. We have been digging this hole for a long time. To go further, if we mean to prosper long term, I’m sure we need to act to make debt less attractive to everybody; it really is a snare and delusion.”

Our third, cold-porridge taste comes from bond manager Jeffrey Gundlach of DoubleLine Capital LP, the most pessimistic of the three. Gundlach likens the current environment to the blow-up of 2008.

Gundlach told Advisor One “the time is ripe” for another AIG or Lehman-level collapse “based upon the growing lack of confidence in the growing debt of Spain, Italy, Greece, Portugal, Ireland and ultimately of France.”

Like the other bears, Gundlach is not keen on the stock market or the ability of politicians or central banks to pull us out of this muck and mire.

Surprisingly, not one of these savants recommends a sprint-like retreat into gold or stocking up on canned goods. Gundlach suggests low-risk assets. Grantham advises a cut back on risk taking and endorses quality stocks, although he doesn’t name any specific companies in his recent newsletter. Roubini doesn’t make any investment recommendations.

I’m never one to discount the possibility of another “black swan” event like 2008, so it’s hard for me to be entirely dismissive of these gentlemen. If something bad will happen, it will, but not in a way that we can completely predict. European bankers may work out their balance sheets or squabble while Rome burns. Little will change in the short term with the U.S. jobs or housing markets.

What you can do is prepare something that involves a time investment and not a call to your broker. If you already haven’t done so, sit down and prepare an investment policy statement.

This is an honest accounting of what you own, how much you plan to invest, how much you can’t afford to lose and your goals for the future. Then construct your portfolio accordingly.

Don’t be afraid to admit that you may need a complete overhaul. If you are retiring soon and need to protect assets, then you may have to consider a diversified bond allocation. You can do it yourself or work with a fiduciary such as a registered investment adviser or certified financial planner.

Whatever you do, don’t get spooked by forces you can’t fathom. You still have power over how much money you can have at risk, the amount you can save and your level of household debt. I can’t believe how good I felt years ago when I paid off my home-equity and car loans and was able to invest on a regular basis. Once you get these things under control, your world looks considerably more bullish.


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