Recession

Have you noticed that things have gotten eerily quiet in the month of October? For those that don’t want to believe that hard times are on the way, they can take comfort in the eerie period of calm that we are experiencing right now. What they don’t realize is that this truly is “the calm before the storm”, and the global economic crisis that is ahead of us is going to be far beyond what most people ever dared to imagine was possible.

The weakness seen in world economic activity is partly the result of the lack of a real purge of the financial system in 2008. It has become unimaginable to let entire parts of the system collapse, and the titling of some financial institutions as “systemic” is part of this logic. Policymakers attempting to keep unhealthy economic and financial institutions alive are making a mistake. The very essence of capitalism lies in the process of creative destruction. What we see here is not a way out of the crisis. Instead, we are on the edge of a new financial disaster.

"Investors are now facing the second most extreme episode of equity market overvaluation in U.S. history (current valuations on similar measures already exceed those of 1929). The belief that zero interest rates offer no alternative but to accept risk in stocks is valid only if one believes that stocks cannot experience profoundly negative returns. We know precisely how similar valuation extremes have worked out for investors over the completion of the market cycle, and those outcomes have never been deferred indefinitely. The only question at present is how many grains are left in the hourglass."

"During the third quarter, we determined that it was necessary to adjust our smartphone inventory primarily through the write-down of older generation phones, and via the acceleration of secondary market dispositions of excess phone inventory."

After a significant downward revsision to August's data (to -2.3% MoM), September Durable Goods New Orders dropped 1.2% (better than the expected 1.5% drop only due to historical revisions) for the 5th monthly drop this year. Year-over-Year, Durable Goods orders tumbled 3.6%, accelerating weakness from August amid major revisions. This is the 6th consecutive YoY drop, something not experienced outside a recession. Under the covers it was just as ugly with Non-defense, ex-aircraft orders dropping 0.3% (notably missing expectations) after a huge downward revision for August. What is most worrisome, however, is the collapse in Core Capex YoY down 7.9% NSA - the worst since 2009.

To the extent the Federal Reserve decides to increase interest rates, it should be apparent that such a move would be inconsistent with their prior actions. In fact, it may likely be a desperate effort to re-load the monetary policy gun as opposed to a signal of domestic economic strength. Not only is this a departure from the past, this would lead many to question the Fed’s motives. It is worth keeping in mind that blind trust and confidence in the Fed has propelled many markets much higher than fundamentals justify. The bottom line is that NIM and the Taylor Rule-adjusted curve are both flashing warning signs of economic recession, while the traditional yield curve signal is waving the all clear flag.

Having previously explained President Obama's recovery in charts, we thought words and pictures would be a better indicator of the dire situation facing so many Americans that get missed by the business media's spotlight. With 9.4 million more Americans below the poverty line than before the crisis, as The LA Times reports, it's disturbing to see so many people so destitute - even if they're working - that they've resorted to selling body fluids to make ends meet. The going rate for plasma donation, which can take a couple of hours, is about $25 or $30. But Octapharma is offering $50 for the first five visits, "when you get that $50, you feel good," one plasma 'seller' said, "I paid my gas bill."

Why is the deal particularly notable? Because Zell has traditionally had a very keen nose about such things as "market peaks": the 74 years old is credited with calling the top of the real-estate market in 2007, when he sold another of his companies, Equity Office Properties Trust, to Blackstone for $23 billion. Soon after, the commercial-property market crashed as prices fell and debt defaults surged when it became apparent that subprime was not contained.

The inherent problem of "eternal bullishness" is the "wilfull blindness" to the underlying data in an effort to chase short-term returns. This leads to the unfortunate problem of being "all-in" on every hand which has a devastating consequence when a mean reverting event occurs. In the end, it does not matter IF you are "bullish" or "bearish." The reality is that both "bulls" and "bears" are owned by the "broken clock" syndrome during the full-market cycle. However, what is grossly important in achieving long-term investment success is not necessarily being "right" during the first half of the cycle, but by not being "wrong" during the second half.

It was only a couple of months ago that a rapidly rising dollar was pushing the global economy closer to a new crisis. It seems unlikely that the conditions that made a rapidly rising dollar a problem in August have all been resolved by October. Those who bought stocks last week in response to hints of more easing from Draghi – and the rate cut in China – may find themselves in the same position as Pavlov’s dogs, wondering why no meal follows the ringing of the bell.

After earlier in the year exposing "the greatest shorting opportunity since 2007-2009" and trading it profitably through September with "front row seats to an imminent market shock," Billionaire Crispin Odey's flagshipfund has suffered recently. As Bloomberg reports, the fund plunged 16.8% in the first 16 days of October, after the fund profited in August and September from Odey’s negative view of the Chinese economy. Odey believes that the only way economies will be able to work their way through the next downturn is by writing off capacity. Therefore, with credit tightening as well, according to Odey, it’s a good time to be short...

"The end of QE mattered" admits BofAML, adding that "the impact was not replaced by BoJ or ECB dollars." It is this new 'hostile' investment backdrop as liquidity cheer swings to illiquidity fear (and two years of non-stop "pain trades") that has faith in the big three bull beliefs fading fast. October's "pain trade" has been a broad-based rally in all risk assets, but there are a number of factors preventing BofAML getting more bullish now that risk has surged.

"Investors should (and most don't) realize China is a credit bubble of epic proportions," warns an anxious Marc Faber during a brief Bloomberg TV interview. "China is not just a country, it's an empire," Faber adds, and warns that while some sectors may have growth ("just ask Yum Brands" he jokes), "but other very important sectors like industrial production aren't  growing at the present time." In fact, Faber warns "I don't think China's economy is growing at all," and while policy-makers may be able to "cushion the downturn somewhat," he warns that achieving any soft-landing will be "very difficult," even as he expects China to continue devaluing the Yuan.

"We can look forward... not precisely to a 1929-type depression, but to an inflationary depression of massive proportions."

"The ability of corporations to take a 1% to 2% revenue line [gain] and turn it into 5% to 6% profit growth is waning. They’ve run out of rabbits to pull out."