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A recession seems inevitable to me

December 06, 2007

Chuck Royce: "Four related issues concern me, and each is influencing the way I see the current equity market: recession, the credit crisis, deleveraging and the dollar. A recession seems inevitable to me, and that’s my major concern."

Although smaller stocks have successfully weathered previous recessions, they typically haven’t done so following long-term periods of strong returns. Credit tightening and the effects of hedge funds deleveraging are worrisome because highly leveraged parties are scrambling to find additional capital in a contracting market. The weakness in the dollar is important because international competition grows more intense by the day. When the Fed5 lowers rates, it’s an effective short-term solution to warding off recession in the domestic economy, but I’m concerned about the longer-term effects on the dollar internationally.

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