Recession

A fundamental investor's look at the macro picture and lodging earnings sees pretty much nothing but bad news. Apparently, the mainstream media doesn't take a fundamental investor's view. Retractions, anyone???

Raoul Pal, who retired from managing money at the ripe age of 36, after co-managing GLG's Global Macro Fund, and the hedge fund sales business in equities and equity derivatives at Goldman among others, and has been publishing the attached Global Macro Report since, has just come out with the most condensed version of truth about our economic reality we have read in a long time. The attached report provides the most in depth observation on the "future recession in an ongoing depression" which is arguably the best way the describe the current economic predicament. Raoul goes all out in describing he worst recovery in history, touches on he complete disconnect between the bond world and the imaginary equity surreality, provides countless evidence the economy has not only not left the recession but is getting progressively deeper into it, shares several trade recommendations, and on occasion swear like a drunken sailor. A must read report for everyone who is sick of the CNBC/sellside daily onesided propaganda.

I query, have we entered into a double-dip recession? I’ll answer my own question here, No! The positive GDP prints and “green shoots” were the direct result of government bubble (re)blowing through fiscal and monetary stimulus, culminating in QE v1.5. As the effects wear off, we start to see were the economy really stands - and which economically and consumer sensitive sectors are flying on borrowed time.

Just in case you needed that one final proof that Moody's is finished, here is a report by Moody's head of economic propaganda (at least that is our loose interpretation of the official title "Chief Economist" who also happens to be a permanent fixture on that other permaganda TV channel) Mark Zandi, in collaboration with Princeton's (yes, that Princeton) very own Alan Blinder, have come up with something akin to a research paper (we say akin because it surely lies in some abominable gray area inbetween coherent thought and logical discourse and a Las Vegas Ether-binge straight out of Dr. Gonzo) in which the intellectual titans confirm that not only the Great Recession is over, but here are the precise steps (a, b, c) in which it was defeated and forced to return slouching and grovelling to the vile communist, fascist, what have you, from whence it's sprung, unwept, unhonored and unsung, after president Obama came to the rescue (not to mention, literally, the $20 trillion of new debt in process of being incurred in the next 10 years). And just in case the administration needs an Assistant Head Of Money Printing, once Moody's is liquidated, Mark Zandi would be more than happy to proffer his Keynesian credentials to the administration, even as it itself goes down in flames courtesy of a general public of which 70%+ have said no more stimulus. Feel free to read this or to use it as a TP substitute. We are not sure what any self-respecting administration can do with Messrs. Zandi and Blinder but are open to suggestions.

As the prospects for a double dip recession in the US seem to increase by the day, just about every bearish market commentator has his or her reasons why we should beware the triumphant return of the Great Recession. Even though I am not usually one to follow the herd, in this care I figured I might as well join the party and discuss my 5 favorite reasons a double dip may be upon us.

The ECRI Leading Economic Index just dropped to a fresh reading of 120.6 (flat from a previously revised 121.5 as the Columbia profs scramble to create at least a neutral inflection point): this is now a -9.8 drop, and based on empirical evidence presented previously by David Rosenberg, and also confirming all the macro economic data seen in the past two months, virtually assures that the US economy is now fully in a double dip recession scenario."It is one thing to slip to or fractionally below the zero line, but a -3.5% reading has only sent off two head-fakes in the past, while accurately foreshadowing seven recessions — with a three month lag. Keep your eye on the -10 threshold, for at that level, the economy has gone into recession … only 100% of the time (42 years of data)." We are there.

According to the latest broad poll conducted by Bloomberg, Americans, except for those on Wall Street of course, have never been more pessimistic on the economy, despite the administration's efforts to push stocks to 36,000 by Halloween. In a nutshell, 63% of respondents confirmed things in the nation are headed in the wrong direction, 71% disbelieve Kool Aid pushers and say it still feels like the economy is in a recession, with 13% convinced a double dip is coming, and just 14% who see the economy as being on solid ground. And the result that should be very troubling to the Keynesian fanatics out there, while 70% say reducing the unemployment rate is a key priority, 28% say that reducing the budget deficit should be first and foremost for Washington.

Thus far, the NBER
has been unwilling to proclaim an end to the recession
that started in late 2007. This may partially reflect
the fact that the ratio of people employed to our total
population has fallen from 62.7% in December 2007 to
58.5% today. Although the recent low in this measure
was 58.2%, touched just a couple of months ago, our
present level is no higher than it was in 1983. This
measure is a proximate indication of our country’s
overall standard of living and interestingly over the
last twenty years has declined as the U.S. economy has
become more indebted (Chart 1). Although the four
coincident indicators that the NBER utilizes in judging
recession troughs have turned positive, two of them
(income less transfer payments and employment) have only marginally shifted upwards and are subject
to significant revisions. Thus, history may come to
judge that the NBER was very wise to hold off making
this end of recession call. Four major considerations
suggest that the past several quarters may be nothing
more than an interlude in a more sustained economic
downturn, with further negative quarters still ahead.
Such an outcome will suppress inflation further and
quite possibly lead to deflation. Thus, history may come to
judge that the NBER was very wise to hold off making
this end of recession call. Four major considerations
suggest that the past several quarters may be nothing
more than an interlude in a more sustained economic
downturn, with further negative quarters still ahead.
Such an outcome will suppress inflation further and
quite possibly lead to deflation." - Van Hoisington

In a rare dose of realism, Reuters reports that the BOE's Monetary Policy Committee member Adam Posen said there is a distinct chance the UK economy could slip back into a recession. Not surprisingly, the BOE member said eurozone public sector cuts would add as a drag on the UK economy. He also added that he hopes the recovery would continue but it can not be guaranteed. As the BOE has demonstrated no problems in the past with activating money printing QE episodes, is this merely a preamble to yet another round of English quantitative easing? As was pointed out on Zero Hedge over the weekend, recent changes in excess reserves in the US have provided the implicit benefit of nearly $200 billion in new Fed money entering the pursuit of risky assets, and everyone knows that the ECB is now on crash course with Germany over its own most recent monetization regime. It should thus come as no surprise that the UK feels alone and will likely do all it can to pursue the same currency devaluation techniques that seem to be prevalent across the globe, and not be left too far behind.

Goldman outdoes itself again. After Jan Hatzius has been banging the economic slowdown drums for days now, the firm's other prominent economist Andrew Tilton is out with a new report "Recession Forecast Models Back in Vogue", according to which the firm plugged in a few numbers into an overclocked iMac (appropriately equipped with the No Recession Ever ap), asked if there will be a recession, and the result was, stunning, "no way in hell." Most hilariously, the report contains the following stunner: "Typical recession forecasting models estimate a near-zero likelihood
that the economy has entered recession again, or that it will in the
near future... The best news first: the model shows essentially zero probability that the economy is currently in recession.  Payrolls have generally been expanding in recent months and the unemployment rate has actually come down slightly.  This is unlikely to be a controversial conclusion for most market participants and so we will not dwell on it further." In other words, because everyone knows that there is really no trouble in the jobless arena, aside from some rumblings in the periphery that the real unemployment rate is, oh, 16.5%, Goldman sees no need to discuss this data point, as it is really completely irrelevant. Oh yes, and the model refs out if you assume in negative input. Moody's coupled with a dash of European stress tests anyone?

Yesterday, NY's pension fund sued BP for having the temerity to see its shares drop. Today, the Democratic candidate for Texas  AG has filed a Legal Complaint and Legal Brief against Goldman Sachs et literally al for "causing financial crisis and physical harms; recession; unemployment;
home and wealth loss; forced cutbacks in a wide variety of critical
areas, including medical care, social services, and environmental
protection" and pretty much everything that is bad in the world. Tomorrow, one million Americans file a class action lawsuit against E-Trade for experiencing a downday.

From Mauldin to BCA Research to Ned Davis Research: everything you want to know about the odds of a recession but are afraid to ask.

It's getting close: the fabled -10% annualized change (see David Rosenberg) which guarantees a recession is now just 3.1% away, which at this rate of collapse will be breached in two weeks. The ECRI is now at December 2007 levels, the time when the last recession officially started. The index dropped from an annualized revised -5.8% (previously -5.7%) to -6.9%. As a reminder, from Rosie, "It is one thing to slip to or fractionally below the zero line, but a -3.5% reading has only sent off two head-fakes in the past, while accurately foreshadowing seven recessions — with a three month lag. Keep your eye on the -10 threshold, for at that level, the economy has gone into recession … only 100% of the time (42 years of data)." We are practically there.

Gone are the days when "green sh#%ts" was bleated daily on CNBC amongst a chorus of permabull snorts. Even the experts now recognize the recovery as a BLS swindle, and it is important to reintroduce the possibility of not only a low growth future, but one of outright and persistent contraction.

Albert Edwards, one of the most prominent uber-bears just got even more bearish: "Our view that this economic and market recovery will collapse like a pack of cards as soon as the steroid-like stimulus is reduced is gaining ground. Most forward-looking leading indicators now signal some sort of second-half slowdown. The only area of debate now seems to be in its magnitude. By the end of this year, I believe we will be back in recession." Albert's vision of a deflationary collapse, following by a reactionary episode in which the Fed (in typical reactive fashion) ends up printing tens trillions in one last attempt to restimulate the economy, resulting in hyperinflation, is well-known, and conforms with our view. As for the turning point, it is still anyone's guess: as today's Freddie record low mortgage rates demonstrates, deflation has now firmly gotten the upper hand. The Fed has can not afford to wait and see how this plays out. Obviously, with ZIRP here at least through 2013, if not much longer, the only true recourse is another failed monetary stimulus. However, with the president's rating in shambles, and any form if stimulus,montary or fiscal, likely guaranteed to bite another 10% at least from his plunging popularity rating (see latest Gallup numbers here), Bernanke likely has his hands tied at least until 2011. Which is why deflationists are likely safe for at least 6 months, assuming of course the forward looking credit market (not stocks, stocks no longer reflect anything except for the latest latency arbitrage available to those rich enough to afford the latest and greatest Routers) does not begin to price in the hyperinflationary episode sooner. With 30 Day Bills near zero, there is little to worry about... for now.