Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Wednesday, February 27, 2008 10:44 PM

Let me give a list of reasons why we won't have a recession. Lots of these ideas came from Ed Hyman at ISI, some from Jason Trennert at Strategas, and some I figured out myself. Oh, before I start, my granddaughter Lola Jane, Uncle Dougie Kass' honorary niece, has noticed I have not mentioned her for a few emails, and even at 17 months of age, she is not to be messed with, so Lola Jane, this one is for you. (And it is true that I read Doug's missives to her, but only when she won't sleep.)

1) The four week moving average of unemployment claims- which come out later today- have been bumping around 350,000. At 400,000, we will probably be at 0% growth, so claims are still showing sluggish economic growth. The monthly Bureau of Labor Statistics jobs report is still showing job growth, and the last recession saw over -200,000 job losses per month.

2) There is usually massive inventory liquidation going into a recession and we haven't seen evidence of that yet. Could be the system is that much better in inventory management, but we haven't seen the customary sell down in inventories.

3) Interest rates are historically low world wide and after Ben's testimony today, it is obvious that U.S. rates are going lower. The Fed has been pumping massive amounts of money into the system as shown by the rapid growth in M2. My bet is the ECB (European Central Bank) will also capitulate and lower rates before long. The Fed Funds rate equivalent in the Eurozone is 4% and while I think it needs to be reduced to spur growth, 4% isn't a killer. There is a lot of noise about a stagflation type of environment developing. The last bout of stagflation in the 1970's saw interest rates/inflation at almost 14% and near double digit unemployment, so I think the hysteria is a touch premature.

4) Corporate cash is at a record $1.6 trillion dollars and is at 11% of market capitalization. There are apparently more than two bids for the General Motors building in NYC at better than $3 billion. There is a lot of cash around, a glut of investable funds. Banks have to overcome their trauma and start to lend, but even if they don't, the mountain of cash will find a home which would spur growth.

5) The weak dollar is starting to spur export growth and best guess is that GDP will be bumped by 1% per quarter because of this.

6) Developing economies are growing at better than 5%. Last US recession the growth for this sector rate fell to 2%. The growth rate still could decline, but hasn't yet. The developing world accounts for 30% of world GDP, 2% more than the US (this is a big switch from just a few years ago) and they should provide a good market for our exports.

7) Q4 GDP will be revised up from the originally reported +.6% to +.8%, maybe more. The second quarter is soft, but by all accounts is still positive. The massive Fed rate cuts take a while to kick in, but it seems that time has been bought. I don't think that much of the heralded tax rebates will be spent ( most will be saved or used to reduce debt), but some will which would aid Q3, and then the impact of the Fed cuts will be felt.

8) The overwhelming consensus is that if we are not in recession now, we will soon be. Hoping the consensus is wrong.j