The Double Dip Threat

Tyler Durden's picture

Without doubt the two biggest issues before the US economy are the threat of a double dip recession and what happens when the massive liquidity pump is i) stopped and ii) put in reverse. And of the key macro economic indicators, deflation is by far the biggest bogeyman (and wildcard). Even in the context of so-called better than expected economic data, i.e., the growth in GDP, a more exhaustive dig through the deflator for gross domestic purchases reveals that deflation has still firmly gripped the economy. Yet price perceptions, which have an impact on the consumer saving and spending rate, while critical are merely one of the numerous indicators that one has to keep an eye on. The group of the four horsemen portending the shift from a recession to a depression also includes overall systemic leverage, the availability of credit, and unemployment.

A useful chart to visualize these trends is presented below.

So while the administration has released unprecedented fiscal stimuli, which are already waning, with Obama's stimulus package expected to have no marked beneficial impact on GDP past the third quarter (and in fact to extract from growth in future periods), the question is how monetary intervention will be adjusted correspondingly to fit in with what the talking heads have already pronounced has been the end of the recession. In this vein, the overall market reaction provides a useful test of how the bulk of Obama's and the Fed's intervention has impacted the economy.

Yet the real challenge for investors is digging through all the data and determining what is one-time in nature (ISM spike) and thus subject to a prompt reversal once either fiscal or monetary mechanism exhaust their impact, and what has s long-term systemic benefit. If one listens to Bernanke (and Bill Gross), the economy could easily be overheating yet Fed Fund rates will likely hug the flatline well into 2011 (and certainly will not be increased before the current and any future quantitative easing episodes are used up). Will Bernanke's policies lead to a much worse credit bubble than Greenspan? The answer is probably yes, as even the Fed chairman has trouble discerning at this point the non-recurring versus the traditional economic trends, ergo the double dip threat. It is a virtual impossibility at this point that the same Federal Reserve that was blatantly ignorant of so many indications in the 2002-2007 period which were screaming for a rate hike, will have the foresight to know not only when to reverse the liquidity stream, but which key milestones to use as an indicator of frothy liquidity.

And with regards to equities, the conundrum that has speculators scratching their heads is whether the nearly inevitable double dip will in turn result in a hyperinflationary episode, which will likely push equities into the stratosphere for a brief parabolic flash before everything comes crashing, ala the Weimar Republic, or if the market will by then be rid of day-trading speculators who see beyond the hype and decide to be the first to get out of the game of Ponzi musical chairs.

One thing is certain - Chairman Ben's life over the next year, and for the duration of his second term, will be filled with numerous exciting (and by all counts, wrong) decisions. And as the market now is priced to perfection, one wrong choice and it will all come crashing down, compliments of the market now being a house of cards built upon complete economic disconnect. Alas, based on the Chairman's track record of being pathologically behind the curve, the future looks bleak indeed.

Charts from Morgan Stanley

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RobotTrader's picture

Retail stocks flying to new highs....

 

 

Anonymous's picture

"And as the market now is priced to perfection..." Yes, we've all seen this before, and we know that when Goldilocks finally thinks she's found the perfect bowl of cereal the end is near.

ED's picture

I'd get a new harem, Robo. This one's got bad habits.

Talking about bad habits: double dipping = callous disregard for law abiding believers

JohnKing's picture

Kamikaze Ben. Screw the helicopter, I'm taking everything down.

More than 35 million Americans received food stamps in June, up 22 percent from June 2008 and a new record as the country continued to grapple with the worst recession since the Great Depression of the 1930s.

Food Stamp Green Shoots

ED's picture

How ironic. A bubble in food stamps. Whatever next?

hardball22's picture

I hear from the Street that Goldman's vamp squid has a tentacle in the foodstamp market. They're redeeming foodstamps for cash, hoarding the national supply, then unleashing when pent-up demand pushes the food stamp to food price ratio north of 1.

Anonymous's picture

The great liquidity pump will not go into reverse. CB's are all working together now in a global coordinated expansion of the money supply.

"Reversal" is a propaganda concept which goes hand in hand with the "strong dollar policy".

The pump is forever.

ZerOhead's picture

The Pump is King!

Long live the Pump!

gookempucky's picture

Totaly concur as America bleeds trillions.

Look for the Unfunded liabilities to breach 59 trillion tomorrow around 8 pm central----our burn rate is running at a 1.2 million per minute clip/ 4 billion per day.

Look for the National debt to breach the 12 trillion mark in 33 days Oct 6 2009--burn rate is running 1.7 million a minute.

To have unleashed the Kracken is a total understatement-what we are witnessing is the death star and there is no toggle joint.

Welcome to the universe of discourse

 

Ned Zeppelin's picture

Sayeth the Bard: "The Pump don't work cause the vandals took the handle."

Fish Gone Bad's picture

Double dips is right - Bernanke and Geithner.

lizzy36's picture

Looking @ PIRA seasonally adjusted North American power consumption on a y/y basis and not seeing ANY postive trends. 

Aug: -4.6%

July: -6%

June:  -4.8%

May:  -5.5%

April:  -4.75%

March:  -4.75%

February: -2.95%

January: -3.4%

*note in this case,seasonally adjusted smooths out weather fluctuations.

Ned Zeppelin's picture

That's just all those Stimulus provided fluorescent bulbs and window caulk.

Anonymous's picture

There will be no double dip.

We may have a positive GDP quarter in Q3. Thereafter, we will continue our downward spiral, which will accelerate once crimps are put on Federal and state spending.

This is one continous drop in economic activity. The NBER, which officially calls the start and stop dates, will not opine on the end of this until the coast is patently clear. Their criteria are establishment employment, industrial production, real wholesale sales, and real disposable income. Only one, arguably -- industrial production -- is showing any signs of life. And that sign of life will extinguish as the year goes on.

'Double dip' will disappear from popular lexicon in a few months.

Project Mayhem's picture

Excellent article

 

I think we will have deflation + currency crisis.  I think M3 might actually start contracting in 2010.

 

Also I don't think the move in gold can be considered 'confirmed' until the price stays above 900$ during an equity crash.  I think either this is to wash out leveraged spec longs or else gold smells war./bankfailure/etc

Gunther's picture

Up to now the move in gold is nice but viewed in isolation not really important.

What is new since a while in gold and silver that after a sharp price drop the price comes back fast, like what I would expect if a big and smart player is building a position. That makes the price move a bit more important, but still the old highs at 1007 and 10033 need to bee overcome.

In yen and euro the move is at the high of February respective April and in both cases farther away from the all-time highs. In that sense the move needs to get bigger to be important.

Anonymous's picture

I think gold could go to 1500 and not be particularly meaningful in the whole scheme of things except for gold of course. I think demand could drive the price to these levels while the USD deflates at the same time. Gold awareness by the masses and China could be the culprit, not inflation. Lord knows it is not without effort from chopper ben and timmy gotta get get geithner.

aus_punter's picture

AGREE - WHEN GOLD IS ATTRACTIVE TO THE UNLEVERAGED INVESTOR IT WILL BOTTOM

Cheeky Bastard's picture

a question; has anyone else hear anything about Banco Santander and the potential default of the same ? I ask, because there are some rumors going around that Banco Santander is on the verge of default because massive amount of RE and CRE loans have been, are, and will be in default. If someone here knows anything about it; i would appreciate it if he/she leaves a response under this post. Thanks

Project Mayhem's picture

There's been rumors of a big bank default all week -- some actually came from floor traders apparently.  The most credible  I heard was that the bank was in Europe -- perhaps one of the club med countries.   Banco Santander fits with some off the rumors I have heard -- which were that a large bank was on the rocks in  Spain.   Unfortch  these are just rumors I wouldnt bet on them.  We've been hearing about 'a large bank is going to fail' for like 6 montths heh heh.   But who knows -- something wierd is happening with gold, either JPM and HSBC are washiing out spec longs  or there are fireworks ahead

Cheeky Bastard's picture

yep yep; thanks PM; i should've structured my question a bit better; but nevermind that.But as i look at gold chart almost daily; some weird shit is going on; if considered as a hedge; dollar will drop like a rock soon; if as a store value; the same; and if the recent move in gold is defined by potential of a large player going down i would put my money on Banco; considering the size of destruction Spain took in 08 and 09 in CRE and RE sector; to which Banco was a major lender. Thanks for the answer man. Its good to know that the rumor is not pure BS.

Project Mayhem's picture

By the way where'd you go?  Find a Croatian girl or something?

Cheeky Bastard's picture

yes, i had some company for a few days; and was doing some financially unrelated research. 

Joe Sixpack's picture

Fits the profile, because in reecnt months the financial press has been talking Banco Sant. up a bit, even propoting themas a buyer for American large banks, if I recall propperly.

Steak's picture

There were rumors flying around from all corners yesterday about a bank default brewing *somewhere*.  One of the PIGS seems a logical choice if I knew there was a default coming from a random corner of the globe.  So I believe whatever you might be hearing is just an echo from that.

Regarding STD specifically tho, this is all i've found from the past couple days

They delayed redemption of a Tier 2 bond till December: http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSL1319720090901

And had a chunk of their auto loans downgraded with others put on negative watch:      http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=200909020708dowjonesdjonline000382&title=press-releasefitchsantander-consumer-spain-auto-06-notes

Project Mayhem's picture

wow,good finds.  thanks

Cheeky Bastard's picture

i also heard that the big defaulter could be Corus; but that does not make any sense to me; since that is known for months now that Corus is practically bankrupt. PIGS are in danger, specially Spain and Italy ( <------ exposure to Eastern Europe ). Also i don't think a bank failure in Portugal or Greece would be considered as a major default; since those banks play no major role in the general order of things in EU banking sector; but on the other hand they could behave like a first domino. Thanks for the links Steak; the second one is specifically valuable; considering the rare nature of the move.

Anonymous's picture

The death of Corus is not a rumor but an event in progress; the only uncertainty de jour is whether a sucker has been found yet to take it over or the FDIC will have to do it.

Project Mayhem's picture

the Santander bond in question is large (500million Euros) but it was a call options, so it's not like they missed an interest payment.  Seems they need the cash...  I don't think its them but if they do its big news, they are Eurozone's largest bank I think

Steak's picture

STD is def in Europe's top 10.  But i tell ya its hard for me to imagine an "unexpected" bank failure in the near future.  When the FDIC allows some banks to remain open even when posting negative Tier 1 and we can have Fannie n Freddie ex/imploding in superslow motion, it seems any institution of size could be papered over.

Just this guy's opinion but I think the tipping point will come not with a pearl harbor style big bank collapse but with an arch duke ferdinand style minor event that spirals out of control.

Steak's picture

Thank you basterd...what was your extracurricular research topic if ya don't mind me asking, i've taken up electrical engineering in my free time :-) good to see you back around btw

Cheeky Bastard's picture

i was reading Grothendieck's Elements de geometrie algebrique ( the ones available that is ), something about Riemann hypothesis and wrote a few articles in mathematical philosophy. 

Engineering is an awesome thing; the bad thing is; I'm an absolute moron when it comes to it.

ShankyS's picture

This comment string is as good as the post. Thanks to all and nice to have you back CB.

Anonymous's picture

hey CB, good to have you back. i don't know if you have read this but it is a good bet a spanish bank goes down. i was there recently and they are hurting.

http://globaleconomicanalysis.blogspot.com/2009/09/deflation-is-bitch.html

lizzy36's picture

Tyler, did GS leak the real NFP # again this afternoon and i missed it?

Miles Kendig's picture

The whisper from Morgan - Keegan this PM is 228... Just to pass it along

Anonymous's picture

we are not in the grips of price deflation....real estate and stocks are not the full story......cpi is still going up - even if more slowly than last year it is still climbing and i don't care what the official numbers state....

the currency is still being debased and that means monetary inflation coupled with price deflation....

collapsing real estate and equities are a sign of depression and credit collapse - not of monetary or price deflation....

ghostfaceinvestah's picture

Liquidity will never be extracted.  Why should it, it is only paper money anyway.  Expect QE in MBS land to continue indefinitely.

The real question is, what will those USDs buy in a year?  My guess?  Not much.

SteveNYC's picture

Destroying the currency of a persecuted Zimbabwe, or a weakened Weimar, is one thing. Destroying the currency of a 300m plus resident country, where residents are armed, and are used to a decent quality of life, is another.

If they take down the dollar, blood will flow in DC.

Veteran's picture

I have a lot of secret squirrel buddies and they know how bad it is in civilian US of A.  To a man they've told me they will side with America vs the gubment should it come down to it.  Can't speak for Blackwater, but think for the most part the military will side with the people  

Miles Kendig's picture

The "White House" of N.C. and its peoples are mos def in agreement with your assessment Veteran.

cougar_w's picture

Will not. We are two full generations away from having those kinds of balls again. Everyone alive now is either too fat, too brainwashed, or too drugged up to do anything other than vote in the next rigged election.

50 years of deprivations, however, will fix all that. Yup.

cougar

thegreatsatan's picture

I'd have to echo this sentiment. Other than those veterans under 28, the vast majority of the current generation has more hands on experience with a Nintendo Wii than they do an actual weapon. Not to mention, the appear ot have the spine of a sea cucumber when it comes to confrontation. Does someone under 30 who voted for the Obamamessiah have the mental capacity, or will to fight the power? Its a generation of proles who have never had to work for much of anything. They didn't live through the cold war, never had to duck and cover, and other than the last year, have never known anything close to fiscal hardship. Heck I doubt more than 5% would know how to clean a fish, let alone field strip a deer.

cougar_w's picture

It's too easy to frame the problem as "young people these days are useless" which btw has been done to each new generation by the prior generation since the dawn of time.

My theory is now that nobody alive today (of any age) is up to what it takes to take back our government. We've been disengaged for 100 years, and I'm very sorry but personal participation in the [pick one] War does not qualify one as a patriot. Thomas Jefferson was not a veteran of any war, but he was a patriot and he could tell you why.

That said, the day may come when patriots-by-neccesity will find themselves standing in the streets, facing their doom willingly to salvage democracy from the clutches of the powerful oligarchy. On that day, perhaps, we can stand together.

cougar

thegreatsatan's picture

I don't think there is a lack of willingness to stand, I would pull a Spock tomorrow if it would fix all this shit. What I do see is a power structure that far surpasses anything King George could throw at us. Lets face it, the political and power class doesn't fear us. They certainly don't respect us or listen to us.

As sad as it may seem, I don't see much hope for America, and that saddens me tremendously. Sure, we can limp along for the next few decades, maybe even eek out a century, but its not the same country I was born in. Obama's election is proof enough.

The best I can hope for, is to find someplace else to move my family when the time comes, because I'd rather pull a Mosquito Coast than stay here and watch this place turn into other shit as the looters and moochers have their way. Lets face it, there is no John Galt to save us. Call it dispair if you must, I guess I'm just too beaten down to care much anymore.

ShankyS's picture

It is gonna be bad, and I don't really see any way out of it esp at this pace just reinflating delaying the inevitable and throwing good $$ in a hole. It surely won't be the same country coming out as going in.