Fixing Credit
The third threat is slower U.S. economic growth than in the rest of the world. This is a more complex question that deserves some discussion. Bridgewater Associates places the gap between U.S. and global GDP growth at 4 percent. 7 Dr. Marc Faber warns that corporate profits are going to be far weaker than Wall Street analysts are projecting.Dr. Faber writes: “[m]y impression from talking to a large number of investors and from attending numerous investment conferences is this: yes, the mood among institutional investors is negative due to recent losses, but the urge to buy the dips is still far greater than the urge to sell on rebounds. Institutions perceive the current credit problems to be temporary and still expect S&P earnings to recover strongly in late 2008 and 2009.” 8 Dr. Faber cites a March 17, 2008 research report by Morgan Stanley economist Richard Berner entitled “Downside Risk for Corporate Profits,” in which Mr. Berner writes: “I think the earnings outlook will disappoint.
The US economic outlook has darkened and fading operating leverage, dwindling pricing power, and deteriorating credit quality will squeeze margins.Despite the benefit of a weaker dollar, slower growth abroad seems likely to tame the overseas earning boom.” 9 Mr. Berner points to two areas of concern.
First, the fact that operating leverage is currently far higher than in the 1990s, meaning that “a deeper recession, especially one that spreads abroad, would promote a much more serious profit squeeze.”