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Jeff Saut: A V-Shaped Recession After All?


Fed actions may be felt belatedly.

Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

Paine Webber's Edward Kerschner and Thomas Doerflinger wrote an excellent strategy report back in the early 1990s, entitled "Alphabet Soup: Recovering from Recession," in which they advised investors to decide which letter of the alphabet the 1990-91 recession would resemble before picking the stocks they wanted to own over the next year. They pointed out that economic history suggests the pattern could be:

"I: When economic recovery failed to materialize, the recession of 1929-30 turned into the Great Depression of 1929-33. Almost the only good investment during this deflationary collapse was long-term Treasury bonds.

V: A sharp decline in GDP followed by a robust recovery within 12-18 months. Consumer stocks generally do well in a V-recovery, especially if the recession ratchets down the inflation rate, as occurred in the downturn of 1974-75.

W: The pattern of the back-to-back recessions of 1980 and 1981-82. Energy stocks and high-tech small cap stocks performed wonderfully in the 1980, but by the spring of 1981 it was time to scale into bonds to wait out the second and much longer dip of the "W." As the economy finally recovered in 1983, the best stocks to own were autos, retailers, S&Ls, homebuilders and technology."

But more likely, in their opinion, the 1990-91 recession would resemble a "U," due to "destimulative fiscal policy, a long-term squeeze on consumer spending, structural weakness in the banking system, and heavy corporate debt loads."

So, the best stocks for this unusual recovery would be global cyclicals and world-class growth stocks -companies that would "benefit from the economic expansion within the US but are also gaining market share in the slowing, but still relatively prosperous, foreign economies."

In keeping with the alphabet-soup theme: I have been suggesting the shape of the current recession might resemble the letter "L," which also seemed to be the pattern embraced by a number of economists.

However, one particularly bright portfolio manager asked this question last week: "What if Ben Bernanke is closer to healing the economy than anyone thinks?" Consider this: The nation's monetary base had been on a gradual rise since the 1960s. However, last summer it exploded, as can be seen in here:

Click to enlarge

What if the esteemed chairman sensed what was coming, and ramped up the monetary base in order to move out in front of these events? I've consistently argued that money is the oil that makes the economic engine run - and Ben Bernanke clearly has the "pedal to the metal." Ladies and gentlemen, there's a time lag between the expansion of the monetary base and when that money begins to spread into the economic system. Moreover, there are other metrics at work here, thanks to Mr. Bernanke.
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No positions in stocks mentioned.
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