Eye on the Market I October 3.2011 J.P.Morgan Topics: Market and economic risks still tilted to the downside With weak US personal income and German business surveys rounding out September, if the US and Europe avoid a mild recession in 2012, they will do so narrowly. Our sense is that a recession is more likely in Europe, given the continued collapse in the periphery. As a result, markets now spend a lot of time waiting, wondering, postulating, tea-leaf reading and hoping for further assistance from the official sector. On most days, investment professionals come to work and first check to see what the Federal Reserve, European Central Bank, Bundestag, German Constitutional Court, Bank of Japan, Bank of England or Bank of China did overnight. In doing so, investors are Waiting for Godot: as in the play, investors don't know what he looks like; they don't know what he would do if he got there; they might not have ever seen him before; they just hope he shows up soon. The US Godot is unlikely to offer fiscal stimulus (quite the opposite, as shown in the chart on p2, 2012 US fiscal tightening), but might offer monetary stimulus instead, via the possible Fed strategies below. I put an asterisk next to the ones mentioned in Bernanke's 2002 speech "Deflation: making sure it doesn't happen here', so you don't think I got them from a Ouija board. • More purchases of long-duration treasury or agency bonds (*), or a cap on long-term interest rates en • Attempts to lower perceptions of future real interest rates, perhaps by doing one of the following: inflation targeting, GDP targeting, or by stating that rates would be zero until unemployment falls below a given threshold • Purchase of private credit (corporate or municipal bonds), assuming funding can be obtained from Congress (*) • Direct or indirect loans to businesses, with the goal of targeting a given percentage loan growth • Purchase of European government bonds (*), although Bernanke probably