One of the most idiotic decisions of 2010 will be the NBER's choice to pick the summer of 2009 as the end of the recession. As every upcoming quarter will confirm, GDP will decline more and more, and previous GDP numbers will be revised lower and lower, until it is confirmed that not only was the Q3 GDP substantially lower than expected (as the inventory boost is revised markedly lower), but that future periods will see flat if not negative economic growth. But even if one does believe the GDP number (which most do not, and certainly not David Rosenberg... who, nonetheless, does give credit to the PCE deflator...hmmm), the reality is that even at that growth rate, the current "recovery" which should now be 1.5 years in, is underperforming the average 2nd year recovery by over 50%. In other words, we continue to exist in a no-man's land of economic development, in which an outright collapse is solely prevented by the $3 trillion in monetary and fiscal stimuli to date, which tomorrow will grow to over $4TR. The second this Keynesian heroin is taken away, it is guaranteed that the economy will crash and burn, and the true GDP will manifest itself as it promptly catches up to where it should be: roughly 5-10% lower... and if the contraction in the shadow banking system persists, all the way up to 30%. Watch out below.
From Breakfast Wiih Rosie (Gluskin Sheff)
THE NEW ABNORMAL
We are definitely in an abnormal economic environment. We just came off a 2% real GDP growth performance in a quarter — the fifth in this nascent recovery — where the economy is usually humming along at a 4.3% clip and on a lot less government stimulus. Make no bones about it, heading into year two of the post-recession recovery, the pace of activity is usually accelerating, and doing so at a 5% rate. Meanwhile, look for the Fed to cut its macro call yet again tomorrow — for the fourth meeting in a row. This is what is so fascinating and frightening, simultaneously. Just as the market became a feeding frenzy after the Fed began to aggressively cut the discount rate in August 2007, few people are focusing on the reasons why the central bank is being so pro-active. The Fed just may well be seeing something in the economic outlook that has yet to fully register with Mr. Market.
But one thing is for sure, the fact that the stock market could sustain momentum after that rock-and-rolling ISM report yesterday is a tell-tale sign that all the good news is priced into asset values. Just as the bad news was priced in when the ISM was heading to 30 at the lows nearly two-years ago and the selling pressure in equity-land began to lose momentum.
One thing we can say is that the sputtering Financials sector is giving us a lead on what to expect. The Financials peaked in February 2007 and the overall market did a double-top in July and October of that year. It’s all about lags — sorry, but the materials and industrial sectors could only carry the overall market for so long without the financials playing a leading role. Look at the similarities now — a failed attempt at a new peak in the S&P 500 at a time when the Financials are still languishing 15% below their nearby highs.
It all sounds so, so familiar. Including the “bullish” (read: complacent) results from Barron’s Big Money Poll. Go read the one from this same time three years ago and read the current edition and tell us you don’t feel a chill up your spine!