Double Dip Surprise

Posted by Ray on June 27, 2010 under Main | Be the First to Comment

How anyone is really surprised by the possibility of a further decline in economic activity is puzzling to me. Perhaps it is all the distortions in the data that is coming from the government supporting the economy. Maybe it is because their vested interest is to have you invest in their funds. Perhaps they just drank the Kool-Aid. No matter what it is almost a certainty, in terms of forecasting, that the economy will either stagnant here or decline.

The main indicator that has been telling us there were problems for some time now is the initial claims data and the lack of private payroll growth. Sure, we saw a bump up in payrolls with the 5%+ GDP print, thanks to inventory restocking, but 1Q10 GDP shows signs of significant weakness. What has held true is initial claims, first they got better with the big GDP print, but now they are soft with the constant downward revisions to 1Q10 GDP. The ECRI data also points to weakness in the economy as well which correlates with initial claims data. From my lens, employment is not a lagging indicator, I have been pounding the table on this for a year now, it is a leading indicator in a post credit collapse scenario.

Friday’s employment report is now being telegraphed by Bloomberg to be weak, -110K is the forecast, especially since the Census hiring is done and they are now laying off workers. All of this is not surprising if you track initial claims and use it as a leading indicator. To put the monthly initial claims data into perspective 1,850,000 are filing claims for the first time and that means there needs to be about 2M jobs created every month to offset the ones just lost and we also have to contend with population growth as well. To be blunt, full employment is a figment of one’s imagination at this point for at least the next 5-8 years. Unemployment will be our greatest problem for a long, long time and there is little the government can do since end demand is the issue.

There is simply no way the Fed can raise rates for the foreseeable future either since one of their mandates is full employment. Yes, I know they said they would raise rates before employment recovered, but they won’t for political reasons. Obviously, that might change depending on what happens in the future, but for right now there simply is no reason to raise interest rates, at all, from their perspective. Worse is the fact that the Senate did not extend unemployment insurance last week which means a million plus people will lose benefits very soon. After their drunken spending binge to bailout the banks after they created this it is beyond me how they would let a million people just wither and die. There are 6 people for every job opening out there so it is not like these people are actively NOT trying to find work, so enough with that whole theatrical display of utter idiocy. Keep in mind I am a deficit hawk, but there is a difference between government wasting money and government helping those who cannot find work.

The loss of those benefits will have a huge impact on the economy as a whole since that money will not be spent. Retail sales will continue to slide and foreclosures will continue to rise, how many of those million plus people are barely hanging on? I am not sure how so many people can claim that the unemployed are simply freeloaders looking to live the highlife on such a meager government stipend which is what you hear often on other blogs or by the ultra rightwing. Considering that there are so many people looking for work the competition for a job, any job, is extremely high which reduces the odds of a person actually getting a new job anytime soon. Not to mention that unemployment benefits are usually around $300 – $500 a week I find it hard to believe that anyone is living the highlife on such a low amount, but that is the case. I am sure that there are abuses, but this is one of those give me a break moments and I am definitely right of center.

The other reason many believe a double dip is out of the question is that companies have extraordinary amount f cash on their balance sheets. Well, all I have to say is how long has that cash been on their balance sheet and it has not gone to work yet? This is like the temporary employment is a bullish indicator, if it is not happened yet the odds of it happening anytime soon are dwindling. The cash on the balance sheet is also part of the deleveraging cycle as companies pay down debt and hoard cash. Perhaps the main reason that companies have so much cash on hand is they think that business is going to get very tough in the near future. After all, many of our best companies have roots going back beyond the Depression and they know the value of having cash on hand to make it through the storms. Of course, they could spend it all tomorrow, but I ask again, what are they waiting for and why hasn’t it happened yet?

The bottom line is that it is really shocking to see so many smart people caught off guard about a potential double dip recession. All of the signs have been around for a longtime that the thought should have entered their mind at some point in time in recent months. There is a chance that we could avoid it, but I do not see how. I should point out the fact that I never bought the idea that we actually made it out of the first one, other than a statistical recovery that is. Time will tell on this one, but if Friday’s report is worse than expectations we will be well on our way to S&P 900.

Confirmation of my thesis

Posted by Ray on June 24, 2010 under Main | Be the First to Comment

From David Rosenberg’s morning musing’s today:

“ In contrast, the Asian FX complex is selling off. Risk assets are not responding to this week’s apparent good news: the Chinese peg announcement (has anyone noticed that yuan forwards are actually …. weakening?)”

Whether this is a real trend or not is unknown, but I fully expect the yuan to appreciate before it really falls anyhow, gotta get Congress off their backs for now. No matter what a strong yuan is not in China’s interests right now and China’s ruling party wants to remain the ruling party so are they going to fear Congress or a billion Chinese storming the Peoples House? You get my point.

To further make my point about the troubles in the EU and in China, moreover how this is a global issue now, Rosenberg went on to say:

“ There are all sorts of news reports in today’s FT discussing how the problem countries in Europe are in such bad shape that their banks are increasingly relying on the ECB for their funding survival. Portuguese banks reportedly doubled their borrowing from the central bank in May as a sign that this is not just a Greek tragedy. We have reached a stage where countries representing 18% of Eurozone GDP is accounting for 68% of the growth in ECB funding. Is that a currency you really want to own?”

What does all of this mean? It means big trouble and the markets are telling us that the problems from around the world are about to wash up on our shores. The irony is it is all coming full circle because we kicked it off with our credit induced sugar coma over a 5 year period which made risky paper seem safe and led foreign banks to buy it. Later everyone found out that safe paper was worth far less than the paper it was printed on and the write downs, globally, were enormous, with more to come. That triggered a collaborative global bailout of the entire financial system, but the ones who funded the bailouts are now in trouble and the recipients of the bailouts were never really in such great shape even after they received hundreds of billions in aid.
While we allowed our banks to extend and pretend, mostly because we have the luxury of printing our own money and we are the reserve currency, foreign banks bought seemingly safe sovereign government debt instead of treasuries, for the obvious reasons. Well, that debt became no good and we are where we are with a potential funding problem across the pond and a healthy exposure to European banks. We had exported our “safe debt” which ended up being toxic to the Europeans and they, more or less, did the same thing to us! Except theirs was disguised as safe government paper instead of CDO’s and CLO’s.

I believe the proper name for such a thing is “circle jerk,” but I am not 100% sure on that. Either way it is definitely heading this way and only a fool would deny that fact. In today’s world it no longer matters if a problem starts 10,000 miles away because everything is handled via the internet in microseconds and exposure can go from nil to billions in the blink of an eye. All this means is that we are exposed and the market knows this. Why else would treasuries be doing what they are doing while gold is rising and stocks are declining, the interesting thing is the stocks declining part is new and all 3 were once going up at one time, how odd. All 3 asset classes could not be right, but 2 out of the 3 asset classes were bearish for stocks so directionally speaking a downward move should not be overly surprising to anyone, but it is, interesting.

No problems here…

Posted by Ray on June 16, 2010 under Main | Be the First to Comment

SNL Financial came out with a report today that said 90 banks have missed at least 1 TARP dividend payment, that is about 11% of all TARP recipients have defaulted for those of you keeping count. Keep in mind that about 829 institutions received TARP funds and about 50+ have repaid TARP funds, mostly the big name institutions that we all know and love. What is critical to note is that the defaults, I would call missing a payment a default since banks call a borrower who misses a payment to be in default, are increasing, not decreasing, as we approach the 2 year anniversary of the historic TARP legislation.

What that tells me is that not everything is fine when we are 2 years into the largest bailout in the history of bailouts and we have banks defaulting, remember only the “strongest banks” were getting bailed out, and bank closures accelerating as well. All of this while the pundits talk about “the greatest V shaped recovery in history” which is laughable. If we were in recovery mode wouldn’t these banks be earning their way out of this mess? They have the greatest accounting gimmick, mark to model, at their disposal and they are defaulting and being taken over by regulators at an increasing rate, how can that be? Perhaps the system is not as strong as we are told, that sounds about right to me.

We have to face the facts and the fact is that the data does not lie, banks are defaulting and failing. Real estate prices, both residential and, especially, commercial are falling which means more problems for banks. The banking industry as a whole is much larger than Citi, Bank of America and JP Morgan, and I am hard pressed to make the statement that those banks are largely benefiting from proprietary trading, government bond underwriting and the ability to mark to model. In other words, the bailout failed with the exception of the too big to fails and, as we already knew, the bailout was really just a selective bailout anyhow. How could Bear, Sterns be allowed to be acquired, but Lehman fail? Just days after Lehman fails AIG gets bailed out, the proof is pretty overwhelming about the selectivity of the bailouts, in my opinion, and TARP was designed to make the big banks flourish and the rest of the banks, well who cares because no one cares about the rest of the banks. I mean, who ever heard of Midwest Banc Holdings anyhow, except for the depositors.

So, as the ECB gets ready to release useless stress test results, which I am sure will show Greek and Spanish banks in trouble, but everything else hunky dory, consider the fact that our stress test and bailouts were completely and utterly useless. In other words, if you cannot trust our results, it has taken almost 2 years for the failures to show up, how can you trust the ECB’s results? Geithner knows this which is why he pushed for the stress test. He knew you can fool the markets for a little while with useless stress test and a seemingly huge bailout fund. However, the results cannot be hidden forever and our results are public, for those willing to look for the statistics, and prove that their strategy just kicks the can down the road and still leads to failure. Unless you consider accelerating defaults and closures a success, I am sure some talking head somewhere will see it as a stunning success, but in the real world most people see escalating failure for what it is, failure.

NY State to shutdown

Posted by Ray on June 13, 2010 under Main | Be the First to Comment

In another testament to the resilience of this V shaped recovery the U.S. is currently experiencing there is news that New York State might not pass the emergency budget, which has been keeping the state alive for the past couple of months, on Monday. For those of us who live in NY we know that they never pass a budget on time, this is not news and it amazes me that the same people always get reelected, but now this is a serious situation. If they do not pass the emergency budget on Monday the entire state will shutdown, everything.

First off, NY State is in rough shape and is going to go broke without a federal bailout, period. For all the talk about NY is going to make it, CA as well, is all wishful thinking. No one wants to make the tough decisions and because of that, and years of spending well beyond the states means, here we are facing a shutdown because of NYS fiscal condition. The deficit NY faces is huge and will only get worse because even in the face of everything going on no one wants to really cut spending which is a bit insane. Sure, they will make concessions here and there, but nothing really meaningful or that will improve our situation in the future. The worst part of it all is that if, that is a big if, things ever get back to “normal” the state will just ramp up spending again like nothing ever happened. Hey, if people will lend you the money, why not.

However, this shutdown is major and will serve as a wakeup call to most people in the state who thought this would/could never happen here. According to the Associate Press here is what is at stake in the shutdown:

What would a New York state government shutdown look like?

No one is sure. But they agree a shutdown, possible if the Legislature fails to approve an emergency spending bill Monday, would include:

-Suspension of lottery games, safety inspections of cabins for youth, and other nonessential services.

-Closing of parks and campgrounds, courts and unemployment offices.

-Businesses wouldn’t get paid for goods and services provided after June 13.

-Social service payments for children and family services including welfare and food stamps would be frozen.

-Schools wouldn’t get funding for education of homeless children.

-153,000 state employees wouldn’t get paid on June 23 as scheduled.

Prisons and state police patrols would continue, but likely with reduced staffing.

What is happening in Albany? Well, a couple of Democrat Senators are deciding to vote against the emergency budget which will cause the shutdown. The likelihood that they will actually follow through on their threats is minimal, but possible. The one thing you can count on about all politicians is that they like to be reelected and no one wants to be the one responsible for shutting down the state, but anything is possible. That being said, the list above is inevitable simply because there is no way the state can solve its fiscal problems and the debt markets, at some point, will demand a premium for the state’s debt to be issued.

I can attest that the population is already overtaxed and is unwilling to pay more in state income taxes, property taxes or sales taxes. What will happen is people will vote with their feet, they already are as illustrated by my daughters kindergarten class of which 1/5^th of the students are moving out of state for economic reasons. That is a huge number and this being my second child through elementary school, I can say that this is unprecedented in my experience. Businesses are not going to stay in NY because it is not a business friendly state from a tax point of view so there are layers of problems, not just that taxes are too high.

I await Monday’s vote to see the outcome, but rest assured the emergency budget will pass. Also rest assured that at some point the listed shutdown items above will be implemented because of insolvency because our elected leaders do not know how to manage money o government. It all goes back to my previous statement, politicians bribe us with our own money and we fall for it, not realizing we are better off if we say “no” to it so we are not taxed to pay for the bribe we just gave to ourselves.

Risk off, Risk On

Posted by Ray on May 10, 2010 under Main | Be the First to Comment

As I watch the pre-market activity and commentary from the airheads on CNBC it just boggles the mind. Last week these same people said the world is coming to an end, which meant buy to me, but today the “market is soaring.” Investors must get confused when they watch this porno for the mind as they flip-flop every day. Cramer says do not buy until Dow 9,000, but tonight he will say I told you to buy on Friday! He did not, he was a bear, which is why I thought I should buy. This market is bipolar and, to me, and the commentary you hear is insane. I am bearish on the market, but like individual companies.

We went from market crashing last week to the market is the place to be, today at least. I think this is a strong bounce rally before it declines more, I would not commit new money today or yet unless you are renting this market. The only reason we are getting a bounce today is because of a $1T bailout of Europe, ouch! I do not believe this is a real bounce and volume will be pitifully light, as all up days are, and this market is really just responding to short-term oversold conditions. This will be a good time to de-risk ones portfolio, IMHO.

The problem in Europe is not resolved, anyone who thinks it is needs to check their meds, as the funding package is merely treating the symptoms of the crisis not the source of the problem. Essentially, the bad behavior of the PIIGS is being rewarded, but they should be punished, and all the ECB is doing is taking the risk off of the speculators, rewarding their behavior as well, and giving that risk to the central bank. On top of that, the number should be shocking to the markets, $1T is a very large number and above where most people saw it. Not to mention, a good chunk of that is coming from the IMF, a.k.a. the U.S. which is the top funder of the IMF.

The U.S. is broke and borrows all of our capital, like most countries nowadays, so we are simply bailing out debt by issuing more debt. Who does that make sense? It does not. This bailout will not fix the problem long-term and merely kicks the can down the road for a little while. It will blow up at some point and now the bond vigilantes will look at other countries, i.e. the UK, U.S. or Japan, IMHO. They should have left the situation alone and let the PIIGS default to introduce a mechanism to kick them out of the EMU, but no, we are going down the bailout route, again! Not only that, but they are spreading the risk around to other countries now, unreal.

But the fundamentals of the U.S. economy are strong, say the bulls, which is why the market will scream today. Well, I will say things are much better, but not enough to justify the markets run-up and not strong enough to send the market up whatever percent today, this is a technical rally based on some, IMHO, troubling news. I look at the NFP figures from Friday, which I called a fraud and I stand by that comment since 188K were “made up estimates” from the BLS. When one subtracts out the 188K birth/death model figures, which NO commenter on the TV is talking about, except Rick Santelli, we have a figure of +102K. That is a great number right? Not really. Consider this, if we back out the 188K make believe BLS numbers, remember the birth/death model is responsible for the BLS revising unemployment up by 800K in February. We have a baseline number of 102K. If we subtract out government jobs, which are most temporary as well, think Census, we are down to about +48K. You could subtract out temporary hiring as well, but they are jobs, just not permanent, IMHO. No matter how one looks at it, except for CNBC, the ADP figure was accurate and the employment report was less robust than most think, but hey, let’s not let the facts get in the way of buy, buy, buy.

Overall, I fail to see how many classify this as a strong recovery after we spent trillions and 2 years later we are still at 10% unemployment and we have an anemic recovery at best. I am not saying things are not getting better, rather I am saying we have stabilized for really bad to just less bad. I believe a double dip is coming and this market is so not priced for a double dip. If we add in the Europe craziness the market is much less attractive, IMHO. The $1T, which should scare you in the U.S. as you are on the hook for a large portion of that because we are the top funders of the IMF, is a huge number and underscores how bad of shape the EU is really in. We have merely are fighting a debt crisis with more debt, sure there are austerity measures, but they are not going to fix the problem and the Greeks are apparently great at hiding assets.

Yet again, we are socializing the profits of speculators which were lambasted in the European media via the governments over the weekend, unreal. Instead of bailing out the PIIGS they should have instituted an ejection mechanism instead, that would save the Euro, but now they kicked the can down the road and are making other countries issue debt to fix the debt crisis, no sovereign country has cash on hand so they borrow it, see the problem? Austerity measures or not, it is a problem that will be with us for a long time. This is a reflexive rally built on a news event which was actually bad news. How does one support its currency by issuing a slush fund for bailouts? You can only defend a currency through higher rates or taxation, that really is not the case here as Greece will still have debt-to-GDP ratio of 150% by 2014, or there about.

This rally is somewhat justified, but I would be extremely careful with buying into this. Tonight Cramer will revise his call from Friday and Kudlow will continue with his “V” shaped recovery nonsense, but the problems are still there lurking in the background waiting to reappear. Buy gold because this is not over and what the EU did was inflationary, when that inflation will hit, I do not know, but it will in the EU and in the U.S. The other issue is, where will the vigilantes go next? The UK, U.S., Japan or will they stay in the EU? At the end of the day it was probably best to let the PIIGS default so the market can clear the bad debt, but let’s not have the market solve the problem, let’s tinker with it so another bomb can blow up somewhere else.

Oh, let’s not forget one of our GSE’s, which are “sound,” requested another $10B from the government. Yup, a sure sign of how strong things are.