Dominoes and Euro updated

Euroland crisis: I posted my target for the Euro in 2010 (1.15-1.25) back in December when the Euro was near 1.50. It seemed far fetched.

Now that we are at 1.38 2 months later, it doesn't sound quite so outlandish. Morgan Stanley was correctly bearish at the time, and now dropped their target to $1.24 from $1.32. They feel that the Euro is overvalued by 19%. An overvalued currency in the midst of a crisis. The Euro is currently oversold and could bounce at any time, but I believe we'll see 1.30-1.32 pretty soon. The Euroland crisis was discussed further last month and now, the PIIGS are in freefall and have contaminated risk taking and destroyed the US dollar carry trade.

This is in my investment outlook for 2010 (not posted) and will be part of the unravelling of the USD carry/reflation trade of 2009. Currently, I see the S&P bottoming around 990-1020 over the next few weeks before bouncing a little. The real bear action will likely take place later in spring. I believe S&P 666 is going to fall in the second half of 2010, with new highs in the US dollar index.

What does Greece have to do with the Dow? Nothing per se, but the whole world has too much debt (much of it US dollar denominated) and is long risky assets (emerging markets, commodities, stocks). Greece's coming default/restructuring hurts risk appetites and is hurting the Euro and strengthening the US dollar. Since there are too many people with US debt, the rising value of the US dollar hurts those long risky assets. They sell the assets to pay off debt. Mr. Margin doing his magic after taking 2009 off....

Vancouver the biggest bubble in the world.

A new report on world housing is out....

http://www.demographia.com/dhi.pdf

http://ca.news.yahoo.com/s/capress/100125/national/affordable_housing

Toronto housing severely unaffordable.

Montreal housing seriously unaffordable.

This excellent report uses housing prices to median family income as a measure. Now, I acknowledge that this measure does not take into account different tax policies, interest rates, demographics, weather, etc… However, big picture, this is an excellent tool to use.

In fact, Canada has poor tax policies, already rock bottom interest rates, poor demographics, tons of available space (we have one of the lowest population densities in the world), mediocre demographics, and poor weather in the opinion of most people.

If you adjusted these values to reflect these factors, our rating would be even worse. For example, the US has lower tax rates and a mortgage tax deduction, less available space, better demographics and better weather.

The report also has some unconventional thoughts on high-density versus low-density urban planning. This is beyond my area of expertise, so I will not comment, although I do like unconventional thinking, and moving back to the suburbs from the city, their arguments have a sympathetic ear in this blogger.

I take some issue with the report`s argument that the reason that many markets are unaffordable is land use policy (which roughly corresponds to supply). This is definitely a factor. However, the more important factor is that we are currently in a mammoth housing bubble. This bubble was caused by many factors, and land use policy is likely a minor factor in my view. The bubble was caused by a great credit boom that has spanned generations. Housing was (and still is, in Canada) psychologically deemed to be a safe investment that can not lose money. It is perceived to be the best investment class, despite little long term proof of that hypothesis. Over a decade or two, housing can be a good investment, but from today`s nosebleed levels, housing (or any other nosebleed asset class) is doomed to be a poor performer for years, and more likely, for decades.

By taking a snapshot at any given moment, we can make a determination (as this study does quite well) regarding whether housing is affordable or not. However, without the fullness of time or a full market cycle, it is nearly impossible to make reliable conclusions.

I believe that once the housing bubble in Canada deflates, it will bring housing prices back in line with affordability. In fact, periods of overvaluation are usually followed by periods of undervaluation. This same study done in 2000 or 2020 would yield very different results, and if it does, I doubt it will be because land use policies have changed materially.

I had suspected that Australia and Canada had the two biggest housing bubbles left in the so-called developed world. This report backs up this suspicion. Almost all other countries (UK, US, Spain, Ireland) have seen their bubbles deflate or start to deflate.

What do Australia and Canada have in common? Both are commodity countries.

The commodities and risk trade that reflated in 2009 (partly retracing the 2008 losses), has allowed Australia and Canada:

1. Strong export pricing which has lead to
2. Strong asset inflows and currency appreciation which has lead to
3. Low interest rates (as inflation is not an issue in this deflationary environment) which has lead to
4. “Relatively” mild recessions and relatively low unemployment which has lead to
5. No bursting of the housing markets (unlike the non-commodity housing bubbles)

I missed the call on Canadian housing in 2009, but I believe that both Australia and Canada will play catch-up in the coming years:

Why?

6. The commodity deflation and recession will restart in 2010 which will lead to lower export pricing and lower exports
7. Strong asset outflows and currency depreciation which could lead to
8. Higher long term interest rates as sovereign risk worries kick up (Not 100% sure about this one as the deflationary headwinds are quite strong)
9. “Relatively” severe recessions and relatively increasing unemployment (due to point 6)
10. A bursting of the housing markets as unemployment rises and personal savings increase and the same debt retrenchment that has happened in the US shows up in the Great White North.

The fact that Canada had a sharp recession in 2008/9 without its housing bubble and only a partial deflating of commodity prices is very worrisome for the next leg down.

Euroland Crisis

We had a mini-currency crisis in late 2008/early 2009, when many currencies (Canada included) dropped about 20%+.

This currency crisis turned out to be relatively benign in most cases, not all, since it was accompanied by a credit crisis. The deflationary impact of the credit crisis and falling commodity prices meant that this currency crisis was actually welcomed by many countries, as it cushioned some of the impact of deflation. The massive collapse in global trade meant that many countries welcomed the falling currency.

Take Canada: Our loonie dropped to 77 cents, approximately 20 cents down from its summer 2008 levels. The Bank of Canada and many exporters were happy with this currency devaluation since it gave a temporary cost advantage to Canadian exports. In a normal situation, a 25% drop in the loonie in 2 months, may have called for emergency measures, including rate increases and would have caused the inflation rate to increase.

Despite the worries about Greece, the Euro remains quite high at $1.45, off from its $1.60 from 2008 and $1.51 in late 2009.

Why do we care about Europe? Besides being a huge economy that rivals the US, depending how you measure it, it has another impact. The Euro is 57% of the widely followed US Dollar Index (this weighting makes little sense but I digress).

A large drop in the Euro in the summer of 2008 preceded the Crash of 2008 by about a month. The Euro fell and so did commodities (as they are often correlated). At first, misguided bulls claimed that this was good as they wanted $147 oil to come down and lead the way out of the slowdown (what recession?). The Euro was dropping like a rock (from 1.60 to 1.45 from mid July to Labor Day). Pundits at the time claimed that this was because the European economy was slowing and rates were going to fall. Whatever, the reason, the rise in the US dollar was powerful and part of a cycle of a rising US dollar and falling asset prices. There is a ton of US debt out there, and when the US dollar rises, it makes that debt more expensive. Especially in 2010, the US dollar is a funding currency with 0% interest rates.

I believe that the Euro currency never made sense but needed a crisis to show this. The logic of the Euro is the following:

The strong countries (Germany, France) benefit since they no longer have to worry about the so-called PIGS (Portugal, Italy, Greece, Spain) devaluing their currencies against them, which would hurt their huge export driven economies. The PIGS and others benefit since they can easily borrow in a stable currency, the Euro, and hence, at lower interest rates. Win-win.

The problem: To greatly simplify, the PIGS took advantage of the lowest interest rates in their lifetimes to run up debt and in some cases, pile into housing. PIGS have lower standards of living, higher debt loads and higher inflation and yet a one size fits all currency and interest rate structure was the prescription.

The less efficient PIG economies have no way out of the current recessions. They can't cut interest rates (they are already near zero), they can't devalue anymore and most importantly, they can't spend their way out (the EU has strict rules on deficits, and these countries have massive structural deficits and looming funding problems). They have to do the opposite: cut spending and get their house back in order, which is a sure-fire recipe for union troubles, riots and social unrest, not to mention instant dismissal at the polls. The Euro is very unpopular as the cost of living in Euros is expensive in these countries.

The EU is not a country and as such, there is no national identity, no mechanism for bailouts between countries nor are there any transfer payments between countries.

Greece will be the test case, as they need to borrow over 50 billion Euros in 2010 and it is possible that they will not be able to do it via the bond market. If so, they may need to go to the IMF or the EU. If they do, they will likely be forced to impose draconian (by European standards) cuts to social programs. In addition, they will set the precedent for the other weak links. Are hurting taxpayers in Germany going to send money to Greece? In a country like Canada, there is a system for transfer payments between provinces. The EU has no such system. An IMF bailout would be a big black eye for an EU country.

I can't profess to know how this will play out. I do know that even if Greece dodges a bullet right now, there are too many holes in the EU dam that are leaking. Greece may be forced to go for some type of bailout as it would give political cover for the draconian cuts. However, it could start a run on other countries such as Spain (huge housing bubble and unemployment rate) and spill over to non EU countries such as Latvia. The EU could even decide to expel Greece if it deems that it does not have the ability to bail out member countries.

The timing is tricky (doesn't have to happen in 2010) but I don't think the Euro stays at its lofty levels. I believe that the Euro will not go away, but its luster will fade and investors will crave the security of the safe US dollar.

The next part of this bear market will involve currencies and sovereign debt concerns, I believe. And this currency crisis will involve the big guys (Euro and Yen- more on that one another day).

We are at a pivotal point for the US dollar and the Euro. A strong move that started 6 weeks ago, from 1.51 to 1.42 has now consolidated to 1.45. If the US dollar is truly in a bull market, it needs to move higher from here. Thus far, the S&P has shrugged off the higher USD, as it did for about 6 weeks back in 2008 before all hell broke loose.

My target for the Euro is $1.25 this year, but a move to $1 can not be ruled out if a 2008 crash develops this year or if we get some domino action (Greece, followed by someone else and with spillover to the usual suspects of Ukraine, Latvia, Iceland, Ireland, Hungary, etc...).

Disclosure: Position in USD, Euro, CAD

Helicopter had a “teaser rate” loan

From Time.com, the extended Bernanke interview.

Q: Do you have a mortgage?

Bernanke: Oh, yes, we refinanced.

Q: Oh, perfect. When?

Bernanke: About 5%. A couple of months ago.

Q: Good time.

Bernanke: Yes. We had to do it because we had an adjustable rate mortgage and it exploded, so we had to.
Q: So, did you get a fixed rate at 5%? I think this might be the most valuable piece of information.
(Laughter.)

Bernanke: Thirty years fixed rate at a little over 5%.

With short term interest rates at zero, how does an adjustable rate mortgage (ARM) explode?

It explodes when you get a teaser rate. So a few years ago, in the housing bubble, Helicopter Ben likely took out a teaser rate (low rate initially/high rate after teasing period is over) and gambled that since his house would appreciate in value, he could refinance at similar or better terms at that time.

Wrong! Just like subprime would be contained.

He refinanced at a 5% 30 yr, a rate that low because of the Fed’s one trillion dollar purchase of Fannie/Freddie junk paper at a premium.

He didn’t go with another straight forward ARM at 4% and then switch to a 30 yr if 30 yr rates go lower. He clearly thinks that the 30 year is going up. It probably will as the Fed is scheduled to stop buying the junk in March and if the 30 year treasury yield goes up, as supply overwhelms demand.

However, given Helicopter’s track record, is it possible that that his 5% 30 year is actually a high rate and that rates are headed lower still?

Not saying it happens, just asking?

The guy can't even get his own mortgage right. Why do we think that he can manage the world's economy?

HT to Minyanville’s Branden Rife for pointing this out.

Dominoes

The dominoes have started falling...

I don't expect them to be contained.

One of the amazing things to me is that after a ton of failures last year (AIG, Lehman, Citigroup, Merrill, Bear, Bank of America, Fannie, Freddie, GM, Ford etc..) and international disasters (Iceland), since March 2009, things have been very calm.

Until Thanksgiving weekend, when Dubai World basically announced a default prior to a four day Eid holiday.

Dubai World is technically not a sovereign, but basically the equivalent of a crown corporation of its government. The government of Dubai has stated that it will not bail out Dubai World. However, most reports have it holding the majority of Dubai's debt ($60 billion minimum of roughly $100 billion for the whole country- who really knows the true numbers?). Basically, a drop in the bucket in the grand scheme of things, but a possible domino in the interlinked global financial system. Losses in one asset class can lead to selling in other asset classes as leveraged investors sell good assets to pay for the losses, particularly in the case of those banks stuck with Dubai World paper.

My knee jerk reaction to Dubai (sorry, didn't get time to publish it) was that it would cause a short term sell-off until the "it's contained" bulls came out and bought. My thesis was that it would at temper the USD carry trade into risky assets by making people at least question default risk, especially in countries where the rule of law isn't quite as strong as in democratic countries. The market would then relax a little as long as the Dubai story stay contained.

And relax it did (much faster than I thought), and the USD completely reversed the flight to quality from Dubai. The S&P hit a new intraday high last Friday.

This week, Greece has been in the spotlight as it is basically running up too much debt after lying its way into the EU. Greece is another domino. Bigger than Italy, Portugal and Spain. The market now is pricing in a possible Greek default. It has a higher credit risk than Columbia or Panama. It is part of the Euro, so it can not devalue or cut rates to get out of its problems. Greece has to refinance or issue 47 billion Euros in 2010. Good luck with that! My guess is that the EU will force Greece to make massive cuts to its spending and increase taxes before even contemplating any bailout. The EU is reluctant to bail out Greece (and it has no official duty to do so) because it would create a moral hazard and the list for bail out candidates is very long.

Here is a list of other potential trouble spots:

1) Latvia is a small country, but it is on the edge of a devaluation of its Euro peg. Devaluation could spread to other Baltic and Eastern European countries, which have mindboggling debt loads. Where does most of the debt reside? European banks
2) Eastern Europe is a big mess. In the boom, credit was flowing to these countries (again European banks). Housing bubbles, euro mortgages for countries that don’t use the Euro, huge deficits. Ukraine may default and has a crucial election coming up in early 2010.
3) Spain has a bigger housing bubble than the US. It has likely yet experienced the worst of the implosion. Add Portugal and Italy to the list of suspects as well.
4) Ireland, the former Celtic Tiger, is in bad shape. It appears to be taking its medicine but you never know about aftershocks.
5) Dubai and the Middle East: Dubai has technically not defaulted, but realistically it has. It is the posterchild for debt excesses. If it can get bailout money from Abu Dhabi, maybe it can muddle through somehow. And all of this is with $75 oil. Imagine what happens if oil goes to $20!
6)Venezuela and Argentina are also possible trouble spots. According to the CDS market, they have a high chance of default.

Longer term dominoes:

1) China: I am not a believer in the China story. China’s economy is supported by exports and fixed investment. Exports are getting killed, obviously. However, consumer stimulus and fixed investment has more than picked up the slack. There is an investment bubble of epic proportions. Fixed investment is up 50% (!!!) over already inflated levels. Banks are lending with no realistic chance at a decent return. I see a lost decade coming for China at some point. With a rapidly aging population, China is rapidly becoming yesterday’s story and not tomorrow’s as 99.9% of the mainstream media would have you believe.
2) Japan has almost 200% government debt to GDP and is locked in the throes of severe deflation. It has been saved by rock bottom interest rates. If the market ever gets scared that Japan will not be able to pay its debt, interest rates would soar, making Japan’s debt load completely unaffordable. Japan has a ton of domestic savings, you say? Yes, it does, and that has saved it thus far. However, savings are dropping to near zero as its population ages while debt grows exponentially. This is a longer term domino but worth keeping in mind.

3) UK is in bad shape right now. If you get another financial crisis like 2008, good luck!
4) In the US, there is a huge reset in Alt-A and Option-ARM mortgages that is JUST STARTING. Combined with 10% unemployment, I expect foreclosures and defaults to soar in 2010, and house prices to continue to fall. Commerical real estate is a big mess. Budget deficits and growing intolerance for any new bank bailouts are going to make 2010 challenging for the bailout kings if things unravel once again.

Most of these dominos involve the same story. Too much debt, not enough savings.

What does this mean for 2010?

I have been looking for trouble abroad to be the next catalyst. I have laughed at those who have blamed the Americans for all of the world's problems. I even heard one analyst in Dubai blaming the US as the originator of the world financial crisis that has now washed up on its shores. Gimme a break! Dubai has built up a fantasyland in the desert with excess leverage. It was bound to fail eventually.

These dominos are likely to strengthen the US dollar especially versus the Euro, and tank commodity prices and stock prices as we go forward from here. I expect many sovereign defaults in 2010/2011 in addition to big problems with provincial and state debt loads in Canada and the US.

I am not sure how it plays out but I suspect that credit spreads are going to widen for most countries and it could even infect the safer credits of Japan, the UK, Germany and the US. The Dubai and Greece experience are going to make many bond investors look at the details of what they are holding (not sure why the experiences of 2007/08 didn't do that, but I digress). In addition, credit losses on defaults are going to hit, what else, the financial sector, with unknown further dominoes, including derivatives and/or bank runs.

In recent days, the US dollar has strengthened due to this return to risk aversion (and a strong employment report on Friday). The US dollar is the most hated asset class and everyone thinks it is going down. I think the dominoes are likely to send the Euro down to par over the next few years, and the US dollar is likely to be very strong in 2010 (target 1.15 to 1.25). This will unwind the carry trade with a steep drop for stocks and commodities. In addition, stocks are overvalued so a move to new lows in 2010 is very likely.

This does not even factor in the effect that an Israeli attack on Iran would have. That has a much higher chance of happening in 2010 than most are contemplating, I believe. (I will need to cover this in further detail at some point).

I suspect that with only a handful of trading days left in 2009, the bulls will keep things afloat for year end bonuses. Perhaps a move to new highs in January even. I fear that 2010 is looking to be a repeat of 2008.

Meanwhile, the useless mainstream economists (not Rosenberg or Krugman) will tell you that it is going to be a slow but steady recovery with GDP growth in 2010 & 2011 of 2 to 3%. When the catalysts hit, they will say "no one predicted X, no one could have seen Y" as their models can't cope.

Winds of Change in USD and SPX?

I have warned about premature celebration regarding the economy.

What does this mean for an investor or a trader?

It is not crystal clear yet for me.

Personally, 2008 was relatively straightforward. As I warned many times over 2008, we were heading a lot lower. However, by late 2008 and early 2009, once we had crashed, the future was looking a big murkier to me. The problems are still there, but a 60% move in 17 months means that at least some of it was priced in. I correctly saw the potential for a bear market rally but I completely messed up the trading of it and did not allow the rally to run its course.

In recent months, now that the “easy" money (it is never easy) had been made on the short side in 2008, I realized that I needed to adjust my approach.

I began to distinguish my intellectually bearish stance (where I believe this entire rally to be false and doomed to fail) from trading on the bear side. Since August, I have been a lot more selective about waiting for confirmation of the bearish case to show up. I believe we at least have a bearish set up here and I am trading quite heavily from the short side (note that my stance could change tomorrow).

Since the September 23rd Key Reversal Day and more recently, the October 21st Key Reversal Day, the market has looked toppy. A number of technical indicators are at least flashing caution, and since September 23rd, I have played the short side carefully, with small positions and with small gains. We have had a bunch of double tops in key indexes (transports, Russell, SOX) and poor action in key sectors such as financials and homebuilders. Good news is no longer leading to gains, and bad news is met by selling. Volume has been heavy on down days and poor on good days.

In the past week, I have ramped up my short positions as confirmation of at least a correction have shown up. We may be in a selling stampede (Jeff Saut’s term) that normally last 17 to 25 days, and are interrupted by 1.5 to 3 day countertrend moves. By my calculation, we are likely in Day 12 on Thursday, and today’s FOMC reversal might have been the end of a 3 day counter trend move.

The setup is here, and I believe a move below recent lows of 1029 should lead us to 950/956 by around November 20th.

The bull case, in my opinion, is that we bottom around those levels and then rally back by year end or early 2010 to 1100 or higher.

The bear case is that we are going much lower than 950 and will take out the March lows, albeit not in 2009.

I believe in the bear case, but if we get to 950ish, I will pause and see the quality of any rally that develops.

Everybody is now discussing a new US dollar financed bubble (we covered this 2 months ago). If the dollar soars, as I think it might, S&P 950 is a slam dunk. However, to get the bear case to actually happen (beyond the current move to 1030ish), the US dollar needs to take Tuesday’s spike high and take out 77. A USD spike should kill the resilience that commodities have been showing and shave points off the TSX and S&P.

In addition, we need to see further strong selling (similar to what happened between 3pm and 4pm today) show up again this week. That will confirm to me that we are in a selling stampede that is about to get really chaotic.

Note that gold/silver, credit spreads, US long bonds and weakness in financials are all potentially warning of coming problems. Offsetting those signs are resiliency in oil, commodities and China.

I suspect that the market will decide this very soon. If we don’t go sharply lower soon, I will probably have to put away the bear case (again).

Positions in USD, CAD, Euro, QID, SKF, HMD, JPM, BMO, CM

While you were out celebrating the end of the recession…

There have been a series of articles touting the end of the recession this week.

ECRI calls it the giant error of pessimism (the pessimism prior to a recovery)

ECRI and pretty much everyone now, thinks that we are going to see a stronger than expected recovery and that the recession is over. Q3 GDP came in at 3.5% (caused 100% by government spending, per Dave Rosenberg and others) and I would not be surprised to see positive Q4 GDP. However, this is not enough to declare an end to the recession. A quarter or two of positive GDP, especially with an avalanche of government stimulus, is not enough. The key, in my opinion, will be Q1 2010.

Bernanke and his clueless cohorts continue to cheerlead the recovery from a recession that they did not see coming.

Call me a realist.

I am wondering, where is continuing growth going to come from? The stock market is not always good at giving us guidance on the economy but in a post-bubble credit contraction, when it turns down or up, it can give us immediate clues to the health of the economy. In October 2007, the market topped and so did the economy a month later. In September 2008, the market tanked and so did the economy. Remember, until that point, all the so-called experts were not even conceding that a recession had started! In March 2009, the market rallied and the economy began to improve from a -6% clip to 3% in Q3 2009.

The same thing happened in 1929 when the economy shrunk in August 1929 and the stock market peaked in September 1929. Ditto for 1873 (hat tip Bob Hoye)

Let’s look at some important sectors that are not joining the celebration:

1) Restaurants: Most US based restaurants bottomed ahead of the market in November 2008. They led the rally since March. Many are down sharply in recent weeks. McDonalds, which is doing well and benefitting from the dropping USD, has said that customers are in retreat mode.
2) Housing: Sure, Case-Schiller is up for 3 straight months. Then why are housing stocks down almost 20% in the past month. There is a ton of foreclosed housing that is not even on the market yet. I believe that this recent rise in Case-Schiller is a blip.
3) Semiconductors: Again, another leading group that led the rally this year. Down about 12% in recent weeks.
4) Transports: A key sector, that has really stunk it up in recent weeks. Down 12%.
5) Russell 2000: Down 10%. This represents smaller companies that have little international exposure, and therefore, a good proxy for the US economy.
6) Financials: Key financials such as Bank of America, Citigroup, Wells Fargo are down over 20%. Also, credit continues to contract at alarming rates as consumers pay down debt and banks cut credit. Again, this is not your father’s typical recovery playbook.

Hat tip to Smita Sadana of Minyanville.com who has been tracking these groups.

So what is holding the market up here in the stratosphere?

1) US dollar. The sinking greenback has been giving fuel to commodities and the large sectors in the S&P. In addition, it props up the earnings of the multinationals that dominate the Dow and S&P. Finally, it is the fuel for the carry trade in which traders borrow USD at near zero and invest it is risky assets. In particular, corporate bonds have done very well, and I suspect that if the USD has put in a bottom, look out corporate and junk bonds. If the credit markets go, so will the stock market.
2) Large cap tech. Apple, Google, Microsoft and Amazon have had great runs of late keeping the Nasdaq strong. Any breakdown in the overall market will force these names to play catch up to the downside.

What is going to lead the recovery?

It does not look like restaurants, housing, rails, semis, domestic companies or the banking sector are going to lead 2010 growth, at this moment.

The sectors that are still holding on?

Energy/Commodities?
Multinationals?
Tech?

If the US dollar has put in a bottom, then I would expect commodities, multinationals and tech to enter a downleg, as revenues would fall and cost-cutting will not generate a recovery.

How about pharmaceuticals? These are a fairly steady sector of the economy that is unlikely to generate a strong recovery or start a recession at this time.

How about manufacturing and autos? Boeing and the automakers are struggling and don’t see a big near term pickup. This leaves the 3M, Duponts and Caterpillar. Jury is still out on these, and if the US dollar turns, good luck!

How about the consumer (70% of the economy)? See comments above on restaurants and hosuing. Unlikely, that retail will lead with housing and credit very tight and 10% unemployment.

How about government? This has been the single largest contributor to growth as stimulus and printed money have found their way in to the economy this year. Sustainable recoveries need more than government spending. And with $1.5 trillion dollar deficits as far as the eye can see, even if the Obama administration is somehow able to cobble another stimulus package for the economy, I believe investors are not going to be fooled again.

For a recovery to happen, you will need some participation from retail, banking and housing in my opinion.

Conclusion:

I understand the logic of ECRI's giant error of pessimism. I also understand the logic of the message of the stock market and the logic of an aging undersaving, tapped out consumer who is getting foreclosed. I also understand the logic that there is too much debt out there that needs to be extinguished once the banks "extend and pretend" shenanigans are "discovered".

If the US dollar has bottomed and the stock market has peaked, then I believe it is telling us that there was no sustainable recovery. Canada and the UK’s recent disappointing GDP reports only further confirm my suspicion.