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Raoul Pal: Feds Won’t Raise Rates; Recession Soon!
Aspire, Investments | 29 June 2015
By: Lim Si Jie
Articles (169) Profile

Raoul Pal warns that “the US economy is currently flirting with recession”. Former hedge funder and prominent Wall Street pundit Raoul Pal thinks that the U.S. is nearing the start of a recession. Despite the signs of an improving economy, there are several indicators that are signalling otherwise.

US Non-Farm Payrolls

The U.S. economy added 280,000 jobs in May, beating estimates (222,000) by a wide margin. Despite non-farm payroll (NFP) adding 280,000 new jobs in May, the unemployment rate ticked up to 5.5 percent from 5.4 percent last month.

This reflects a rebound in the total labour force participation rate, i.e. there are more people that are willing and seeking employment. The stronger than expected employment rate reported in May had the bears running scared, except for Raoul Pal.

Additionally, according to Raoul Pal, “trouble is brewing beneath the surface” despite the strong NFP numbers.

Lagging Indicator

Raoul Pal notes that “nonfarm payrolls have consistently lagged Institute for Supply & Management (ISM) by around six months over the last 30 years.” The strong NFP figures from May is largely due to the business cycle and GDP from Q4 in 2014.

Generally, the business cycle lasts about seven to eight years, trough to trough. Raoul Pal predicts that the next trough in the business cycle is likely to be sometime in 2015, 2016 based on historical data.

Economic Indicators In Recession

According to Pal, other economic indicators are painting a different picture from the NFP figures. Economic indicators such as Fed surveys, retail sales numbers and durable goods orders are “all kind of in recession territory”.

The falling industrial production indicator in the U.S. is perhaps the most troubling indicator of all. There has never been five straight months of declines without a recession in historical norms.

Piecing all the economic data together, the probability is very high that there is a recession coming, or the US is already in one now.

Cautious Outlook For Equities And Bonds

With the volatility in the foreign exchange markets and bond markets increasing, it might even overflow into the equity markets.

While Pal’s prediction may seem extreme, his previous bold calls have proven to be on target. He previously predicted a dollar breakout, and dip in oil prices to about US$30 to US$40 per barrel.

Recession Could See Bargains

If Raoul Pal is on target with his latest recession call, the Fed is unlikely to raise interest rates any time soon. The current Standard & Poor 500 (S&P 500) Price-Earnings (P/E) ratio (20.47) is currently above historical average (15.54).

As such, the market is likely to experience a major sell-off if the US economy is heading towards a recession, which could bring current stock valuation lower.

Investors can definitely look into cheap stocks with strong book values at that point of time. It will just be a matter of time before those stocks recover from the sell-off and rise back to their true values.

S&P 500 Historical P/E Ratio; Source: http://www.multpl.com/

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.


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