Recession

Even though Portugal announced somewhat sparse details of a €78 billion IMF/EU bailout late yesterday, the market was only modestly impressed, and even though Portuguese CDS dropped 29 bps to 620, according to CMA at 10:10 a.m. in London, the country still saw the yield on its just issued 3 Month T-Bills surge to a fresh all time record. From Reuters: "Portugal sold around 1.12 billion euros ($1.66 billion) in three-month T-bills on Wednesday, above the indicative offer, with yields rising from an auction late last month even after the country said it agreed a 78 billion euro EU/IMF bailout. The average yield rose to 4.652 percent from 4.046 percent in an auction on April 20. Portuguese debt premiums in the secondary market had risen sharply in the past two weeks on jitters about a possible Greek debt restructuring and concerns about Portugal's own fate, but retreated after the bailout deal." And to confirm that the market no longer really beleives in the bailout fairy, the Bid to Cover dropped from 2 to 1.9.

There has been a LOT of talk recently on the rising price of gasoline at the pump, so much so, that Obama has now jumped in with both feet admonishing the "evil speculators" for causing such a burden upon the American public. Well, that and to promote a clean energy policy that is ill conceived, ineffective and grossly misunderstood...mostly by him. However, as in the famous words of Bill Clinton, "What is...IS" and what "is" right now is that gasoline is rapidly approaching, and has achieved in some states already, $4 a gallon. Therefore, that is what should be concerned with right now and when that additional drain on the discretionary income of the average American translates into the next economic recession.

And people made fun of Hank Paulson for threatening with eternal damnation if congress didn't stamp his multi-trillion blank check to bail out his former co-workers from Goldman. In a step that makes the Kashkari-Paulson threat seem like amateur hour, the teleprompter just received its latest high frequency directive from the Wall Street superiors, promptly delivering the latest MAD message to what continues to be perceived as an idiot audience: "Failure by Congress to raise the U.S. debt limit "could plunge the world economy back into recession," President Barack Obama declared Friday, and he acknowledged that he must compromise on spending with Republicans who control the House to avoid such a crisis. Obama urged swift action, saying he doesn't want the United States to get close to a deadline that would destabilize financial markets. He said he was confident Congress ultimately would raise the limit. "We always have. We will do it again," said Obama, who voted against raising the debt limit as a freshman senator from Illinois." The statement merely underscores that the president is now in contention for the Nobel Prize in hypocrisy: after all compare this statement to Obama's now supremely ironic remark from March 20, 2006: "The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better." They sure do. And in order to replace the current failed leadership, they will gladly start with a new president.

Some highlights from the just released Philly Fed president's speech, bringing yet more hawkishness into the equation:

• Says stronger rebound in economy, inflation may require aggressive policy action
• Must not be too sanguine in believing time to tighten is long way off
• Recovery will continue at a moderate pace
• US economy growing 3.5% annually this year and next
• Prospects in labour markets have improved in recent months
• Expects inflation to be about 2% over the course of 2011... so not the 8.3% which is the accurate number? Odd.

Case Shiller data is out, and it is as horrible as ever. The Home Price Index came at 140.86 compared to 142.42 previously. Basically the double dip refuses to stop, and that even despite yesterday's "stunning"(ly irrelevant) pending home sales number.“Keeping with the trends set in late 2010, January brings us weakening home prices with no real hope in sight for the near future” says David M. Blitzer, Chairman of the Index Committee at Standard &  Poor's. “With this month’s data, we find the same 11 MSAs posting new recent index lows. The 10-City and 20- City Composites continue to decline month-over-month and have posted monthly declines for six consecutive months now. “These data confirm what we have seen with recent housing starts and sales reports. The housing market recession is not yet over, and none of the statistics are indicating any form of sustained recovery. At most, we have seen all statistics bounce along their troughs; at worst, the feared double-dip recession may be materializing."

While today's consumer confidence index missing expectations (at 67.5 or the lowest since April 2009) was not a big surprise following our prediction of just that happening when we reported that the Bloomberg Consuemr Comfort index hit a 7 month low, what was very disappointing was that the Expectations component had its fifth largest drop in history, plunging from 72 to 58. This is a lower reading than that recorded when the "recession", according to the NBER at least, was still raging. As a reminder the recession ended with "expectations" at 70.

John Taylor, a long-time outspoken critic of flawed monetary policy appeared on Bloomberg TV in the aftermath of Trichet's press conference which had an extremely hawkish tone to it, implying that the ECB may hike rates as soon as April (indicatively, those who play the lottery have a better chance of winning than an ECB hiking any time soon). When asked about his opinion where the Euro is going, the manager of the world's biggest FX hedge fund said "Higher." Although not for long: he believes that the slowing of the global growth is "slowing more in Europe than anywhere else" and logically any attempt to cut off inflation will result in an even further slow down in the European economy. Specifically, Taylor believes the Euro will peak at 1.45 by June, at which point it will start drifting lower as the market realizes the European (read German) export miracle is over. As for the US, Taylor has nothing good to say there either: "We are going into a recession, damn it" - this will be due to the Fed hiking rates at the end of Q3 should the current phase of artificial expansion continue. Taylor predicts a 4,3,2,1% rate of annualized GDP growth by quarter: "by the time the fourth comes, everyone will be screaming - 'Jeez we are going into a recession'." As for the US stock market, Taylor predicts stocks will continue rising for another few months, at which point the "coming recession" will take over. Of course, Taylor's premise is based on the assumption QE does not continue into the end of 2011 and further. Which is a very aggressive assumption. After all, we have trillions in debt to be monetized by some central bank. Alas, it will have to be our own, as everyone will be busy doing the same to their own debt.

"The Lonliest Man in Davos" wrote a 28-page report foretelling a global recession by 2015 via a commodity debt crisis brought on by China.

Following in the footsteps of the recent fireworks of the Chinese SHIBOR market courtesy of the evaporation of virtually all interbank liquidity, we now get more indications that all is fine... no inverted... no fine in China. Per Bloomberg, Chinese corporate spreads have now inverted to a level not seen since pre-Lehman days: "The average yield on yuan corporate debt maturing after 2025 was 4.67 percent in December, compared with 4.97 percent for three to five-year bonds, according to Bank of America Merrill Lynch’s China credit indexes. The last time the gap was wider was on Aug. 13, 2008, when the spread reached 31 basis points, or 0.31 percentage point." And while corporate bond issuance in China, especially on the longer end, is still very scarce (and a reason why China still does not have a representative CDS market, something that JPM will fix promptly), this should be an indication that either things are very good or starting to get rather bad, as more are "rushing" to the safety of near-term fixed income on concerns of what may happen to the long end in the next few months.

Other than that, everything is great ...

"How can a 5% positive forecast coexist with calls for a recession, including our own?...Market oriented analysts point to the fact that positive wealth effect is more associated with house values not equities and that QE2 will not have the impact Bernanke expects – certainly the past 6 weeks lean that way. History shows that corporations will not spend their cash with capacity utilization this low. Because the Buy America Bonds were not included in the compromise, state finances should further deteriorate, by at least as much as the fiscal stimulus implied by the tax deal. Net-net, there is a strong argument that all four components of GDP will disappoint and that US growth will be negative or minimal for 2011. With equity markets and credit spreads priced for Goldilocks growth – cheap money is also key – the probabilities of disappointment are high. As any further fiscal push is unlikely in the US, and Europe is focused on austerity despite the collapsing euro-debt markets, asset prices cannot climb from here." - John Taylor, FX Concepts

"Federal Reserve Chairman Ben Bernanke said in a recent television interview that economic growth was not “self sustaining.” This description also applies to an economy that is in a classic growth recession. A growth recession is characterized as an economy where GDP grows but the unemployment rate also moves higher. A close look at the U.S. economy bears out Chairman Bernanke's description. The economy has been expanding for 17 months, yet both the labor force participation rate and the employment to population ratio stand at new cyclical lows and beneath the cyclical lows of the prior expansion. This is an unprecedented development (Chart 1). For the past 19 months, the unemployment rate has been above 9%, underscoring the harshness of labor market conditions. The employment to population ratio, which is a better measure of labor market conditions than the unemployment rate, was at the cyclical low of 58.2% in November, matching the lowest reading since 1984." - Van Hoisington

John Taylor appeared earlier on the 2011 Reuters Investment Outlook Summit, and among various interesting things (namely another call for EUR-USD parity, and that he would "love to be owning gold right here"), he said that the US is imminently headed for another recession, a development that will boost the USD and weigh on commodities. Yet what is more interesting is that in his latest "Chairman's View", Taylor put down a specific date for the end of the recent recovery in European currencies: the date is tomorrow, the day of the Irish Budget decision, and also the day when Europe may see a coordinated effort for a bank run. Taylor also notes that "the narrowing of credit spreads between these countries and Germany is unlikely to persist for very long without further action by the European leaders." Hopefully the Eurozone meeting taking place right now will result in something more than just more hot air. For those who trade FX, Euro sov bonds, or are just generally interested in the views of the manager of the world's biggest FX hedge fund, we recreate his latest thoughts below.

When reading the otherwise rosy stories in the mainstream media, the most glaringly simplistic and attention grabbing subsegments of which continue to proclaim the recession over, while conveniently ignoring that despite $4 trillion in monetary and fiscal stimuli underemployment is at 17%, foodstamp recipients are at all time highs (but who cares about that social stratum), discretionary purchases are continuing to be funded primarily from millions of delinquent homeowners who refuse to pay their mortgage (now on average between 18 and 24 months behind), companies are refusing to hire, capex spending is at all time lows, banks are hoarding cash for the imminent perfect MBS putback storm, commodity price inflation is threatening to collapse profit and net income margins, half of Europe is locked out from capital markets, rampant Chinese inflation is threatening to recreate Tianenman square, investors are pulling cash from markets for 29 weeks in a row, hardship withdrawals from 401(k)s surging, and the muni mess is one political decision from an avalanche of city and state defaults, one may be excused to have a comparable simplistic perspective of the economy. After all stocks are up. Which of course is precisely the response that Bernanke is hoping to elicit from these same simplistic interpreters of economic and market data, who are next supposed to take money procured from selling newsletters and other top and bottom-line declining products, and buy (Chinese) trinkets they don't need. It is these same people who will also conveniently ignore the sad reality that America's small business find themselves increasingly in: and for the most vivid example of this is the latest Reuters report which informs that small business are now calling of Christmas en mass. "The 2010 holiday season represents the worst
slump since the firm began polling 22 years ago, she said. Of 103
leading businesses queried, those holding a celebration of any kind fell
to 79 percent, down from 81 percent both last year and the year before,
during the height of the economic recession." Obviously Wall Street is not among those polled: the country's bankers are preparing to spend over $140 billion in compensation this year. Good luck booking a restaurant, club or lounge in New York in the next month.

The top 20% are prospering and spending money; the bottom 80% are not, but thanks to vast wealth disparity, the top slice of households can keep consumer spending aloft. This provides an illusion of "recovery" that masks the insecurity and decline of the bottom 80%. There is statistical and anecdotal evidence supporting both a "we never left recession" and "the economy is recovering" interpretation. The key to making sense of the conflicting data is to understand that there are Two Americas. Roughly speaking, we can divide the U.S. economy into "Wall Street"--the financialized part of the economy which encompasses the FIRE (finance, insurance and real estate) economy and its bloated partner in predation, the Federal government--and "Main Street," the looted, overtaxed remainder of the "real economy" which isn't a Federally supported corporate cartel (i.e. the military-industrial sector, the "healthcare"/sickcare sector, Big Agribusiness, etc.)