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By Christine Benz | 08-08-2011 06:07 PM

Leuthold: We Could Be Headed for New Recession

Steve Leuthold of Leuthold Weeden says that a market rebound would create selling opportunities for investors.

Christine Benz: Hi. I am Christine Benz for Morningstar. The market has suffered a steep pullback over the past few weeks. Here to provide some context on the recent market action is Steve Leuthold. He is the founder and chief investment officer at Leuthold Weeden Asset Management. Steve thanks for being here.

Steve Leuthold: I am delighted.

Benz: So, Steve you wrote a commentary that went out to your clients late last week. You talked about why you think the market is currently in a bear market. You think stocks are in a bear market. What are the three big factors that you noted that you believe to be weighing on stocks currently?

Leuthold: Well, I think, and this is kind of in chronological order maybe, but I think the complete failure of the what I call the 'Congressional clowns' to accomplish anything meaningful in addressing the deficit was probably the starting point. And the deal that they came up with, as best as we can determine, shaves maybe $22 billion in cuts over the next year, with no revenue increases, and it didn't even close the loopholes that are there in terms of the tax code which applies to hedge fund managers and carried interest and also applies to the oil companies and to a lot of the subsidies that still exist like the subsidy for ethanol.

Benz: Right.

Leuthold: To me it doesn't make any sense whatsoever, but it seems to me it was a fault of both sides; the Democrats and the Republicans. And all they are interested in apparently is retaining the good things that they can keep for their folks back home and for the people that contribute to their campaign funds. I mean it's really disgusting. You know, Obama Monday said the U.S. is still an AAA country, but the Congress is a CCC- as far as I can see it, and that's one big problem.

The other one is certainly what we saw a week or so ago in terms of the government estimates on GDP growth that were revised back down for the first quarter, down to 0.3% which is really pretty low. And I think it probably stimulated more thought that we're headed not, I don't think, for a double dip, we're maybe headed for a new recession. It may take another two quarters to see that, but people say, "Well, it can't end that early." I mean, we have expansions that are for 100 months, 110 months, and so on. But this is a different environment that we saw back in the first recession. I mean, we had basically some fiscal responsibility on the part of the politicians. We were still a really dominant growth country at that time, which we no longer are, and it's very possible that the expansion phase would only run maybe 30 months which is about the long-term average for expansion.

So, we're no longer the super nation in the world, and we've got to realize that, especially when you look at our balance sheet.

And then the most recent thing, number three, was the triple whammy or as my friend Bob Farrell calls it, the Perfect Storm. The third thing was what's happening in the eurozone and the real difficulties that are there. Even the dollar looks better than the euro. I mean, you are seeing the dollar up today after the downgrade. You are seeing the yields on 10-year Treasuries that are down because the money is flowing in here because it's still regarded as a safe place, but that's only relative to what you have available elsewhere like in terms of the eurozone.

Benz: Right. So, Steve, you didn't even mention the downgrade of U.S. Treasuries by S&P. It sounds like you think that that's pretty much a nonevent for the markets?

Leuthold: Oh, well, yeah. I mean you hear a lot of talk about that. Everybody tries to blame it on that, blame it on Standard & Poor's but the fact is, it's the U.S. Congress that has made the situation difficult. And if I were rating them, I wouldn't even rate them a AA+. I'd rate them maybe AA-. But what we have failed to do in addressing the deficit is absolutely embarrassing, and with what has gone on in Congress over the last two months, as an American I am embarrassed about what's happened. And I think a lot of other people are.

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