Recession

How’s that recovery going for you? Here’s the latest data point from the ongoing oligarch crime spree shamelessly marketed to the masses as an “economic recovery.”

The US and world economies are drifting inexorably into the next recession owing to the deflationary collapse of commodities, capital spending and world trade. These are the inevitable “morning after” consequence of the 20-year global credit binge which has now reached its apogee. The apparent global boom during that period was actually a central bank driven excursion into the false economics of household borrowing to inflate consumption in the DM economies; and frenzied, uneconomic investing to inflate GDP in China and the EM. The common denominator was falsification of financial prices. By destroying honest price discovery in the financial markets, the world’s convoy of money-printing central banks led by the Fed elicited a huge excess of financialization relative to economic output.

"The helicopter. Rather than buying assets, central banks drop money on the street. Or even better, in a more modern and civilised fashion, credit our bank accounts!" Yes, "even better!"...

Having government control over the levers of the economy can have advantages. For example, by taking prompt action, the Chinese government was able to pull the economy out of the recession remarkably fast, basically by fire-housing the stimulus package that was equivalent to 12% GDP. That’s the advantage. The only problem is that these kinds of short-term advantages come with long-term, painful consequences.

Saudi Arabia’s competitors from the Gulf cut their prices last month, forcing the largest OPEC producer to follow suit. Although there was little expectation of a shift in strategy, the price cut highlights Saudi Arabia’s determination to continue to pursue market share by keeping production volumes elevated. On top of that, October could be a crucial month for struggling drillers. With drillers undergoing credit redeterminations, October could see a wave of debt restructuring and cuts to credit lines, potentially forcing deeper cuts in the shale patch.

What most investors do not realize currently is they could go to "cash" today and in five years will likely be better off. However, since making such a suggestion is strictly "taboo" because one might "miss some upside," it becomes extremely important for measures to be put into place to protect investment capital from the coming downturn.  Of course, since Wall Street does not make fees on investors holding cash, maybe there is another reason they are so adamant that you remain invested all the time.

For SocGen, as a result of a rather unfortunate credibility-losing accident, the Fed will not be one of the two major factor that will drive markets in the fourth quarter. So what will? According to the French bank, it is all up to China and Earnings now.

"Our model indicates the US equity market could potentially drop by 30% in the event of an ‘EM lost decade’ and by 60% in the event of a China hard landing (i.e. S&P 500 back to its lows)."

"The strong stock market rally during the last few days has pushed the S&P 500 near its highest closing level since the correction began in late August. This has boosted optimism that the recent selloff may be ending. While this could certainly prove to be the case, we remain less sanguine that the vulnerabilities, which initially produced this correction, have yet to be resolved. Ultimately, we expect a more fearful investment culture suggesting a final capitulation and more importantly, a lower stock market valuation level able to withstand a less hospitable recovery as the economy nears full employment."

"This is a real war on Sunnis, their countries and their identities. Join a jihad against the enemy of God and your enemy and Muslims will back you every way they can."

Most Americans can see the spoiling incongruity of his grandeur. He claims, somehow, to defend monetary policy as it supposedly removes and prevents all the really bad downside at the same time the world is still rebuilding from the last one while seriously contemplating the next one. As 2008 proved, timing was never his strong point; as his oped proves, duplicity is.

According to several trading desks, the pre-war jitters in (and above) Syria are finally catching up to some, and there has been a distinct geopolitical-risk oil bid in the past two hours, on concerns the proxy war involving the US, Russia and, increasingly, Saudi Arabia and Iran, will finally spill over leading to forced supply cuts by middle-east nations, and a sharp, if transitory, spike in crude oil prices,

Heroic efforts are being made to cloak the stagnation of the U.S. economy. One of these is to shift the unemployed work force from the negative-sounding jobless category to the benign-sounding Not in the Labor Force (NILF) category. But re-labeling stagnation does not magically transform a stagnant economy. To get a sense of long-term stagnation, let's look at the data going back 38 years, to 1977.

Overnight Barclays looked at the link between the current state of corporate profits, plunging by 60bps, and the broader economic cycle. It used data set stretching to the last seven business cycles, dating back to 1973, and found that on 5 out of 6 occasions, such a drop in margins resulted in a recession. In Barclays' own words: "the results are not encouraging for the economy or the market."

The popular belief that the U.S. economy has been steadily recovering has endured months of disappointing data without losing much of its appeal. But the downright dismal September jobs report that was released last Friday may prove to be the flashing red beacon that even the most skilled apologists can't explain away. But rather than questioning the Fed's credibility in missing another forecast, most economists are lauding it for supposedly seeing weakness that others missed, which allowed it to wisely do nothing in September. But this is simply a continuation of the Fed's long-standing playbook: Talk the economy up through optimistic statements while continually holding off an actual rate hike that the Fed is concerned could undermine an economy teetering on the brink of recession.