U.S. Recession - The Inevitable

Well, the Fed had cut the fed fund rate by 125 basis points to 3.00 in just two weeks. This could slow the decline of U.S. equity market for now. But, could the Fed save the U.S. economy from the inevitable? Personally, i don't think so.

Look at the Baltic Dry Index (BDI) -- the leading indicator of the economy, it has dropped from 11,000 points in Nov 2007 to just over 6,000 points in Feb 2008! Container rate has crashed! Furthermore, ISM services had contracted to 44.6, almost touching the level of recession. Last quarter GDP only grew at 0.6%, terribly close to zero. These are all signs of U.S. economy is heading towards recession, which many people have already believed it had. If this is the case, George Soros prophecy could become true -- the worst recession in 60 years!

So, what to do at this time of uncertainty? Of course, the defensive measure is to liquidate all your position in equity market and remain in the sideline. For aggressive investors or traders alike, continue to short U.S. stocks on strength, particularly financial related counters by using instruments like options and CFD. Because this could be the worst credit crunch in the making.

The Fed may cut the fed fund rate further in the next meeting, but the room to cut further may have to stop one day because of the continuing weakening of U.S. dollar which put pressure on the price level in the country, particularly many goods have to be imported from China and the rest of the world. If the fed make a wrong move, it could steer the world largest economy to stagflation instead of helping it prevent a recession.

Interestingly, every time the U.S. stock market plunges, the global stock markets plunge even more. Until now, there is only a 13% decline from the peak of around 14,000 points for the Dow Jones Industrial Average, whereas the other major stock markets had certainly plummeted more than that, some even more than 20%, a threshold for entering a bear market.

So my friends, the worst is yet to come for U.S. stock market. Not even a new president could prevent the inevitable. Just be prepared!