Forecaster David Levy warns that emerging-market weakness will intensify a global recession, which will eventually hit the U.S. economy.
“One after another, when they talk about their outlook and performance, companies refer to weakness, weakening, or greater weakness in the emerging markets,” the 60-year-old chairman of the Jerome Levy Forecasting Center in Mount Kisco, N.Y., recently told Barron's.
“It is much like the housing bubble in the U.S. nearly a decade ago when it started, because the deterioration of the emerging markets has the ability to topple the global economy,” he said.
“Parts of the global economy have already turned down, including Russia, which has some special problems related to energy and economic sanctions, and Brazil. Most of South America looks pretty close to recession, and we’ve seen slowdowns in other parts of the world,” he said.
Levy explains that most economists underestimate the relationship between the U.S. and emerging markets, which account for roughly 40 percent of global gross domestic product.
As far as the U.S. economy itself, it’s not bad – but could be a whole lot better.
“The U.S. is doing fairly well. It does, however, have impediments to rapid growth, including a lot of debt, expensive housing, a crash in domestic energy investment, and, contrary to some views, a lack of incentives to expand fixed-capital investment much. But the one thing that has actually caused the economy to weaken a little is sagging profits,” he said.
“There is no way the U.S. by itself is about to keel over. The danger is not so much that we’re going to start to slide sharply, but rather that conditions overseas will become much rockier,” he said.
And he explains that this could pull the U.S. into a recession.
“Such a scenario has never happened, certainly not in modern history. There is no postwar recession prior to which the U.S. economy was doing fine, only to get knocked down by the rest of the world. That’s one reason people don’t see the risk. But the emerging markets are not just going into a recession, they are going through a secular adjustment,” he said.
As for how average investors can safely survive such a treacherous economic environment, he suggests thinking outside the box.
“Investors typically work with basic tenets, whether it’s 'don’t put all your eggs in one basket' or you need to balance income and growth. Normally, that makes sense. The problem is that a lot of these tenets actually have to change, or at least be reinterpreted,” he said.
“This is a time when shorting strategies — or at least underweighting emerging markets, if you are allocating assets — make sense. The one thing that keeps its value, with no risk attached, is Treasurys, and maybe a few other types of fixed income.”
To be sure, investors have been jittery as stocks have plunged and markets got off to their worst four-day start to a year and economists slashed fourth-quarter U.S. growth estimates amid a China-led rout that continued to engulf markets around the globe.
But, as savvy investors should know by now, ask a different economist and you’ll get a different prediction.
Two world-famous economists have explained their opposing views and the U.S.' flirtation with recession recently on Newsmax TV.
Newsmax Finance Insider Larry Kudlow told "The Steve Malzberg Show"
that investors must remain calm, cool and collected despite the recent nerve-rattling stock market volatility.
"Don't get too bearish right now," Kudlow, a senior contributor at CNBC, said. "We're not going into a recession, we're not going into a stock market crash, we're not going into a banking crash," he said. "We can do a lot better than this."
Peter Schiff, CEO of Euro Pacific Capital, doesn't agree with Kudlow.
Schiff warned Newsmax TV
that the U.S. stock market is in a freefall, and such a death spiral will ultimately pull down the rest of the sputtering economy.
Schiff explained that you only have to look at the plunging U.S. stock indexes to see the economy's future. "It's very dangerous right now in the market," he told "Newsmax Prime"
on Newsmax TV. "We are already in or rapidly heading into a recession," he said.
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