One of the unique experiences we have as business school students is the opportunity to hear from interesting and engaging speakers. A number of us on McCombs’ MBA Faceoff team just heard from Richard Yamarone, Bloomberg’s chief economist. The presentation had a decidedly negative outlook and Yamarone is unequivocally calling for another recession in the United States based on weak consumer demand and residential housing, government inaction and a continued lack of hiring or investment by the business sector.
Yamarone also discussed his “Orange Book” which is a summary of commentary on current economic conditions by C-suite executives in corporate America. Summarizing from the most recent edition, the key themes addressed were:
· Management is worried about inflation, particularly in food prices and agricultural commodities driven somewhat by adverse growing conditions due to draught in the American Southwest
· Managers are concerned about their ability to pass on price increases to consumers who are in a shaky financial position
· Uncertainty around macro drivers both in the United States and Europe
· Despite this the quarter demonstrated strong earnings
If we accept Yamarone’s argument, then in terms of asset allocation decisions we should be perhaps taking a more defensive view, favoring Large Cap over Small Cap, and things like consumer staples over cyclicals or durables. The picture for energy is less clear, though industrials may suffer. It seems as though opportunities can often be found in tech, however, we might look for companies that focus on innovation and not fabrication. Finally financials probably continue to be a mine field. While we have primarily been using EFTs to express our views on the market and will continue to do so, this assessment offers some guidance on how we will position our portfolios.
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