The "R" Word

U.S. markets tanked again on Friday. Asian markets caught the same bug on Monday. The gazillion dollar question--the one that nobody seems to be able to agree upon--is to what extent the debt-market messiness will affect, or has already affected, the "underlying" global economy. The FT's lead editorial this weekend argues that it hasn't--yet--but spotlights some ominous signs, including a recent OECD report and troubling data on the U.S. job market. The economist Nouriel Roubini says on his blog that the "utterly ugly" employment stats confirm the worst: "the U.S. is headed towards a hard landing."

The FT's piece says that "if calm returns to the money markets within a few weeks, little harm is likely to be done," adding that the "more substantial threat to the real economy is not from money markets at all" but "from the continued weakness of the U.S. housing market." Housing prices are falling at nearly 4 percent, annualized--a sharper decline than at any point since the Great Depression--and some experts are starting to throw around the "R" word.

There are all sorts of reasons to be cautious right now. But let's also take a good, hard, contrarian look at the silver linings. Goldman Sachs is dipping into distressed debt markets right now. Berkshire Hathaway may be doing the same thing. And, of course, we're still riding half a decade of banner growth, the past six months notwithstanding. Again, there are all sorts of reasons to be cautious--just so long as one keeps clear-headed.