Prepare for a US Slowdown

Feb 2, 2013

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
Earlier this week, US GDP figures were released showing that the US economy contracted at an annualized rate of 0.1% in the last three months of 2012. Prior to that, the US economy grew every quarter since the recession ended in 2009. The primary culprit for the fall in growth is not surprising; it is mostly due to falls in government spending.

In fact, were it not for falls in government spending, the economy would have grown. Underlying private sector growth remained fairly stable. For example, the US job reports continue be strong, as witnessed by the most recent gain. Nonetheless, there is a very strong likelihood that the US economy will continue to slowdown.

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The reason is again government spending. Due to the high budget deficits, government spending is going to cut growth significantly throughout this year. Any drop in government spending leads to falling growth, even if the private sector remains strong.

In addition, taxes rose in the US at the start of 2013 (in particular, the payroll tax cut expired), meaning that consumer spending is likely to fall too. Assuming that this fiscal contraction continues over the course of the next year, the US may end up back in recession, or with growth close to zero.

What is interesting about this situation is that the stock market seems to care less. In fact, markets have remained strong despite this recent fall in growth. The reason is that the fall in growth is due to falls in government spending, while the private sector remains relatively strong.

Since the stock market reflects corporate earnings, the market movements reflect private sector activity more than overall economic activity. Chances are, at some point the stock markets will suffer, simply because private sector activity will decline as a result of the GDP falls.

This will impact Indian markets too, given the high stock market correlations. Furthermore, foreign inflows will suffer, meaning that the rupee is likely to weaken. Now would be a good time to position our portfolios to take into account a likely US slowdown.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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1 Responses to "Prepare for a US Slowdown"

santosh arora

Feb 2, 2013

Dear mr Asad Dossani, Author,
The Lucrative Derivative Report
thanks. May i request u to have more comments on indian market, Indian companies, Indian cooperates, Indian govt, Indian brokers, Illigaly transfer of share with the help of banks & brokers, illigal practises by hired companies by cooperates of India, fly night co with the help SEBI with faulty management, Indian banks & Govt companies like CIDCO in New Mumbai
please use expertise with ur flourshing mind of to do some thing to humans which r in billions arround u in India. Leave the USA for its own fate.
wish u all the best

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