The area around Yellowstone National Park has been experiencing a series of mini-earthquakes in recent months and, given that it lies on top of a mega-volcano and one of the four major fault lines, there is a reason for concern.

"The local tourism board probably doesn't want you to write that," says Dan Fuss, co-manager of the Loomis Sayles Bond Fund. Unfortunately, the geology around Yellowstone shares a lot of similarities with the global economy these days.

No one knows whether the next crisis will be a volcano or an earthquake, like a possible default by Spain or California, or whether it will be a minor economic tremor like the one in Dubai or the travails of Greece. But the economic environment isn't very comforting.

Fuss, who shared Morningstar's 2009 Fixed-Income Manager of the Year award with his fellow co-managers, isn't necessarily predicting another tsunami. Indeed, the Big One probably already came in the fall of 2008 and the struggles of Dubai, Greece and Harrisburg, Pa., could just be aftershocks.

"There will be a very weak recovery," Fuss declares. Compared to many forecasters, he is an optimist, although that's a matter of relativity.

His prediction for an anemic recovery comes despite his belief that corporations fired too many workers in 2008 and 2009, and he thinks the nation's unemployment rate could fall into the 8% area later this year or early in 2011. Contrast that with the prediction of Christine Romer, chair of President Obama's Council of Economic Advisors, who recently said the jobless rate isn't likely to fall to 8.2% until 2012. Fuss' rosier scenario is based primarily on the excessive number of people who were fired, not on economic strength.

Businesses and consumers have learned to live lean. "The trauma is over, but this is not a sharp, broad-based recovery in inventories," Fuss says. "Retailers can't access commercial paper, and why should they? Macy's carries lower inventories than they did two years ago, even though the cost of money is cheap."

Since late 2007, the global economy has experienced two recessions, one in inventories and the other in the credit markets. Fuss, who has spent almost half a century in the investment business, admits he had never seen anything "like the wind-down in commodity prices and currencies" starting around Labor Day 2008 that triggered the largest "inventory contraction probably ever as everyone cut production and carry trades unwound."

Most of the inventory correction was over by March 2009, coinciding precisely with the equity market bottoming. "It took until August 2009 for the inventory rebuild to spread from high-growth industries to the broader economy," Fuss explains. "Now inventories have caught up in industrial production. Consumer goods inventories caught up faster because there was very weak demand. That rebuild is now over and the cycle should stabilize."

So why is Fuss more optimistic about jobs when he isn't enthusiastic about the overall economy? It sounds bizarre that companies find it difficult to hire workers when unemployment stands near 10%, but he relates an anecdote that illuminates this phenomenon.
In late 2008, when many companies were seeing 50% to 70% declines in new business orders, they laid off or furloughed some of their most skilled people, excessively says Fuss. Many Americans were asking, only half jokingly, if we would return to an agrarian society.

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