Wednesday, June 30, 2010

Double Dip Recession likely has started

I believe that we are in the midst of a hurricane that will eventually take out the March 2009 lows, perhaps later this year or in 2011.

Since late April, the S&P has dropped about 15% from 1220 to 1030 at the close today. I expect that we will hit 950 by late July, and 850 or lower in August to October.

This started with Greece but is now much bigger than Europe. This is the market pricing in a double dip recession.

I believe that double dip has likely started. Yes, I know that economists have solid growth projected for 2010. I listen to the market, which is speakly very loudly right now. By the time, these bookish economists wake up, the S&P will be at 850.

As the great Bob Hoye has researched, in a post-bubble credit contraction, the economy and stock market often peak at the same time. The high in the 1873 and 1929 stock market was was September, and the respective depressions started in October and August respectively. In 2007, the stock market peaked in October, the recession started in December.

This clear peak in April, if it holds and if the stock market continues to sell off, likely means that a double dip has either started or will start very soon. Recent economic reports have been very bad (retail sales, housing, employment) and lend credence to this likelihood.

I will let John Hussman argue the case based on economic fundamentals:
http://www.hussmanfunds.com/wmc/wmc100628.htm

This double dip is being caused, in my opinion:

1) by the end of the natural cyclical rebound from the 2007-2009 GDP decline
2) the waning impact of a ton of stimulus and printing money
3) A slowing in European and Chinese growth
4) the reemergence of the underlying credit contraction that will take years to complete
5) the end of the US dollar carry trade that I had discussed for months

In 2009, governments were printing and spending money to no end. Now, in 2010, restraint (except in the US) is the name of the game. This restraint is ultimately healthy but will take years to restore government balance sheets. In the meantime, the natural rebound is winding up and the deflationary beast is back.

It is hard to predict how long this double dip will last, but my gut tells me about 12 to 18 months, therefore into late 2011. David Rosenberg has it right when he says that this depression will have a series of recessions. It appears that number 2 has started.

Disclosure: Position in SDS, Euro, US dollar

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