I found it interesting that Warren Buffet was recently quoted as saying: “I am a huge bull on this country. We are not going to have a double-dip recession at all…I see our businesses coming back across the board.”
At the same conference, Jeff Immelt, CEO of General Electric GE, said that his firm's businesses were improving as well. On the other side of the fence, you have NYU econ professor Nouriel Roubini all over the press saying there will probably be a double-dip recession, or horrible growth.
Like most people, I am worried about the real estate market and the amount of debt our government is taking on. In some ways, I think it is hard to see through this to signs that the economy is probably continuing to work itself out of the recession, albeit slower than people would like.
One nice thing about hearing a more optimistic view from Buffet and Immelt is that they are part of companies that touch all aspects of the economy. These are not the heads of investment banks, but rather two guys who run cyclical businesses. One would think they have pretty good insight.
I'm not going to go through my own view here. Instead, I thought I might walk through some things that might happen if either of these views took shape.
First, let's review Buffet's perception of a U.S economy gathering strength at a faster clip than most people think. If this is the case, the bond market would probably be most at risk.
Coupling a greater demand for materials with the large deficit spending the U.S. government is doing, it is easy to construct a scenario where inflation picks up. Inflation and bonds do not get along. People look for returns over the inflation rate, which would push yields higher. In addition to there being price risk in bonds, the cyclical stocks would likely pick up steam.
As far as Roubini's view, you probably want to buy some water, food, and guns, and put the rest under your mattress. In all honesty, his market scenario is almost the mirror image of Buffett's.
Fixed income will win out over stocks because inflation risk is lower (although there is a chance of a sovereign debt crisis in the U.S. that would hurt bonds). What's more, companies will earn less money. Also, defensive stocks that are not as sensitive to economic activity probably outperform.
Just a quick look into the hypothetical futures as seen by two smart men with two extremely different outlooks.
Photo Credit: tyger_lyllie
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