Economists are telling us that the economy is decelerating rather quickly. What does that mean for stocks, in either a recession or no-recession scenario? Jim Bianco was on Bloomberg Television yesterday with some insightful comments about stock valuations and economic cycles.

Bianco told Bloomberg that he believes the likelihood of recession in the US is greater than 50%. To his mind, this means getting defensive. What I found most compelling in his analysis was how he looked at consensus earnings estimates and what impact this could have on valuations.

He said:

Valuations look very good under one assumption – that the current estimate for earnings is going to become reality. If we have a recession or anything close to recession, history shows us that Wall Street can not only miss earnings when we have a recession, but be way off on earnings; 25%, 30%, 35% is not uncommon of a miss when we have a recession in earnings. So all of a sudden, an 1100 or 1150 S&P that looks cheap now might be expensive if we have a 30% hit on earnings.

This is exactly right. Profit margins are cyclically high right now. Profits were at record levels in Q2. I agree that a double dip recession is a major possibility irrespective of what happens in Europe. Therefore, I see a growth slowdown as a sure thing. To wit, analyst are cutting (earnings estimates and, therefore, also) S&P 500 forecasts like mad. There is every reason to get defensive. Lighten up on risk-taking now and don’t wait for October 1 as previously recommended” is how Jeremy Grantham put it in May.

And remember, this is still a secular bear market. That means P/E margins will continue to shrink as the market overshoots to the downside. We are a long way from bottom.

In the end, like Bob Janjuah of Nomura, Bianco sees a gold/bonds strategy as a good call here. He says overweight bonds if you are a value type but definitely look to gold if you are a speculative type.

Video below

This post originally appeared at naked capitalism and is reproduced here with permission.