Wednesday, November 14, 2007


Several readers have asked me about the recession talk in the news. They sometimes have mentioned the Dorfman article that suggest one of the worst recessions ever is on the way. My opinion is that a recession is unlikely.

My key reason is that total compensation will rise about $500 billion in 2007. Furthermore, the inflation that Ben Bernanke is worried over is the "wage-price spiral inflation" that can take over during the economic boom of the prosperity phase of an economy. Bernanke is holding the fed funds rate about 75 basis points above the t-bill rate because he is trying to keep wages from rising too fast!

Of course, Ben thinks he has the fed funds rate at the perfect level right now. He is prepared to lower rates more if there are more economic problems and he is ready to stand pat if it appears the turn has been made.

A number of signs suggest that the turn is here. It took only a hint that Merrill would hire a new CEO and the stock soared. I do not recommend investment banks as an investment right now but it would be amazing for Merrill and Citi to replace their CEO's while suffering such a short period of pain.

By the way, the big write downs were probably political moves. One almost has to express sympathy for Charlie, Nancy and Harry. Here they were ready to tax carried interest as the source of funding to eliminate another bad tax, the AMT tax, when the carried interest profits disappeared! Wow, I know I sound like the greatest cynic of all time but it is amazing how "bad" the economy has gotten just about the time the congress is ready to raise all sorts of taxes. Of course, this might simply be a chicken before the egg story. The quote about cynics that comes to mind is that "diplomats are honest, well respected people who are hired to go lie for the best interest of their country".

Believe it or not, Bush is playing a strong game of poker and he holds the winning hand. He has Iran backing away almost as fast as Mrs. Pelosi. Congress is going to go way past its deadlines without finding the way to push through much in the way of new taxes. When the congress packs up and goes home (probably after coming back after Thanksgiving) the market should see a relief rally. The decks are being cleared. 2008 is going to be a good year for investors. NO RECESSION IN SIGHT!