US GDP contracted in May & June

As a follow up to my view that a double dip has started(if indeed the recession truly ended- I don't believe it did!). Courtesy of Gluskin Scheff's David Rosenberg, whose awesome daily publication is free(!!):

Our suspicions have been confirmed — the recession never ended. Macroeconomic Advisers produces a monthly U.S. real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008. The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the “build in” for Q3 is -1.5% at an annual rate. Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the M.A. monthly data, is still 2.5% below the prior peak. To put this fact into context, the entire peak to trough contraction in the 2001 recession was 1.3%! That is incredible.

As I stated in June:

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.

Now, I incorrectly thought that we would hit 950 in July (the lowest was 1010), but I have not changed my view about 850 by October as a recession becomes factored in as a possibility by the economists on Wall Street. Currently, they are bringing their numbers down to the slowdown camp. There are few forecasting an outright recession at this point, despite the fact that Q2 GDP will be revised down to 1.5% and Q3 looks even worse.

Now that Macroeconomic Advisers has put out a negative number for May/June, this lends credence to what I stated. The horrible economic data of recent weeks is also further confirming my suspicion that as is typical in a post-bubble credit contraction, the economy and the stock market peak at the same time. Using ISM as a guide for monthly GDP, it peaked in April. So did the S&P at 1220.

A double dip recession is by no means confirmed, but it is becoming more and more likely by the day.

Disclosure: Positions in HSD, SDS and related options

The "New Normal"

PIMCO has been saying that the economy is in a "New Normal" whereby the world economy will grow slower, be more regulated, have higher unemployment and continue to deleverage.

Earlier in 2010, when the cyclical rebound was in full swing, the New Normal was derided.

Bloomberg in January had an article featuring critics of the New Normal:

Christopher Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ in New York, who pegs potential growth at 2.6 percent. “We’ve had financial-market crises and big workforce changes before, and growth has pretty consistently come in around 2.5 percent over the past 50 to 60 years.”

I won't profess to know what the economy will do over the next 50 to 60 years. It is indeed possible that growth could come in around 2.5% or even better. What I do know is that the past 50 to 60 years have featured an incredible debt buildup, especially the second half of that period. If we do grow at 2.5%+, it will be not be fueled by bubble credit. That 2.5% will need to be based on a more sustainable and more efficient foundation.

The jist of Pimco's new normal is that the bubble credit that fueled growth the past few decades is over. The de-leveraging will lead to slow growth for at least 3 to 5 years. This is not your normal post WWII recovery (if it is indeed a recovery).

Is it normal that:

1) Nearly 3 years after the recession started, the unemployment rate is near 10%?
2) That trillions of dollars were used (wasted?) on quantitative easing (QE)?
3) That house prices and stock prices are 30% below their peak AFTER a one year rebound?
4) Interest rates are at zero and will likely remain there for an extended period?
5) Annual deficits are measured in TRILLIONS!? We used to shudder at a $200 billion deficit.
6) One year in to the recovery, we are contemplating a second trillion dollar QE?

And yet, despite these (and numerous other proofs), much of Wall Street plugs in typical 2.5% growth for the next few quarters and years, as if things are the old normal.

The debate about the New Normal will likely be resolved soon. Perhaps the economy will grow at 2.5%+ the next few quarters (I don't believe it will), but it likely will not be in the old normal way (where the recovery is self-sustaining). It would be based on more of the same short term solutions that will, at best, buy a little more time. The public is growing weary of these short term band-aid solutions that bankrupt the future for dubious short term gains (hence the Tea Party and plummeting Obama ratings). I believe that the November mid term elections may be very big this year, perhaps similar to November 1994.

Are Obama/Bernanke going to try to pull a few rabbits out of the hat the next few weeks in an effort to avoid a double dip and shore up the prospects for the Democrats? I believe that the American electorate is getting suspicious of the never ending stimulus, and this may lead to even greater voter anger in November. However, Obama seems to be in his own world right now, and sticking to his liberal agenda, despite the fact that US is not a liberal country.

Ultimately, another 2008 crash is coming, once the New Normal becomes the consensus, and we realize that all the gimmicks are not addressing the underlying cause of this mess (too much debt). Just not sure when that happens, but it is likely to happen around the same time as the public anger rises to a peak.

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

Black Thursday (1000pt down day)

While there were glitches on Thursday, I don't buy the trader error story to explain why Accenture traded at 1 cent or PG was down 37% intraday.

The Yen was up about 3 Yen vs the USD (and even more vs the Euro) before any crazy trading happened in New York.

There is a lack of liquidity as the huge government bond market seizes up, especially in Europe. In addition, the huge moves out of the Euro (I think bank runs are part of this) and into gold, USD and Yen, is also putting huge pressure on leveraged equity players and hedge funds.

The electronic trading and the few remaining players in the game are also adding to the volatility.

I believe that Black Thurdsday was not a fluke but a warning shot that systemic risk is very much alive. Listen to the market. It is not healthy at all.

This is why I have written about Greece

I haven't had much time to write for my blog due to work and family obligations. However, most of what I've written has been about Greece and the Euro.

Why such emphasis on a country of 11 million (the size of Ontario)?

Greece is the fault line. I have believed that the impending default of Greece, despite a "shock and awe" bailout that I didn't think would happen, is the catalyst for:

1) the end of the tight credit spreads for most insolvent countries. This is consistent with the history of great credit bubbles. This means a Seinfeldesque "no soup for you" to the international bond markets for Greece and the rest of the PIGS. There is too much debt out there, much of it will never be repaid.
2) the end of the Euro as we know it, and a huge dislocation in currency flows
3) A relatively strong US dollar
4) The re-start of the bear market that was interrupted for 13 months.
5) Another banking crisis as all that government debt becomes devalued and countries pull out of the Euro.

It is difficult to predict the future, but I am very worried that a redux of late 2008 is back.

There are still way too many bulls out there who think that this will be contained. I now fear that we have re-entered the September 2008 to March 2009 playbook where volatility rules and anything is possible.

I now believe that a quick 30% from the highs is possible over the next few weeks and months (mid 800s S&P), as things can unravel very quickly if the Euro goes to par in that time, and if multiple countries default, with bank runs and a powerless ECB.

One of my weakness is that I often see things before they happen. I had been worried about a bear market for years (pre-blog). I warned prematurely about a housing bubble bursting in Canada. I have been bearish on the Euro for years. I wrote about a currency crisis in 2008 that didn't fully materialize. I was looking for a huge bear market rally a few months early in 2009 and then I turned bearish too quickly.

This time I fear that I am being too slow in that I have not fully positioned myself for a 30% move that could happen in weeks not months.

I am not predicting this just yet, as the reversal is still new, but one possible doomsday short term scenario over the next 2 months:

Euro to par, maybe in the next few weeks. (Note that we almost hit my 1.15-1.25 range yesterday)
CAD to weaken to 85
S&P to 850
Gold to 1,500
Yen not sure

Risk is very, very high right now.

Disclaimer: I am currently long USD and CAD, short Euro, long gold.

Another month, another Greece bailout

On February 11th:

“In theory, we will help Greece. But they haven’t asked for any money (wink-wink). Go about your business, quit speculating against Greece and let us get back to our bureaucratic plans to form a true European nation ”

Eventually, the market realized that this is just talk.

On March 25th:

OK, OK, we have a mechanism to bail out Greece and the IMF is involved, but we’re not giving you the EU taxpayer any details. And anyway, they haven’t asked for any money. There, that should end the matter!

On April 11th:

Alright then, you leave us no choice. Here are some details. We will sort of gloss over the fact that all EU members must approve this aid, and that it might even be illegal according to the EU charter.

That means that the German, Italian, Irish, Spanish and Dutch parliament (among others) must pass this aid BEFORE it gets disbursed. The IMF could lend without approval (meaning Canadian taxpayers are going to be involved) so perhaps the IMF would do the initial bailout and then the EU would kick in the rest. However, given my admittedly weak knowledge of the history of Germany, I have my doubts as to whether it would pass. What about the Irish parliament? They have taken draconian steps to balance their budget without a cent from the EU. Are their suffering taxpayers going to send money to the notoriously inefficient Greek taxpayer? All it takes is one government to reject the aid (think Meech Lake).

Greece said on April 11th:
The package “sends a clear message that nobody can play with our common currency and our common fate,”

Economic and Monetary Affairs Commissioner Olli Rehn:"There will be no default."

When Greece defaults, what will they say?

At this does is send a clear message that the EU, especially Germany, does not want to set a precedent here by bailing out Greece. It may have to, but it is scared. The IMF can do what it wants.

I believe that Greece will default and get an IMF (not EU) bailout. It needs to restructure its debt and then decide whether it stays in the Euro or goes back to the drachma.

Then the saga moves to Portugal…I am sticking with my 1.15-1.25 2010 target established back in December for the Euro. So far, the US dollar carry tread (negative S&P/USD correlation) has busted in 2010. Let's see if it continues if the Euro continues to sink.

Ironically, if Greece and other Club Med members left the Euro, one day (far, far away though) perhaps the Euro would actually be stronger.

Disclosure: Position in HSD.TO, SDS, EUO, US & Cdn cash

Little March Break

I have not been able to post of late, as I have welcomed a new member to my family, and I have been a little busy (and sleep deprived) of late.

I plan on posting again soon. My big picture view has not changed but I must admit that I am amazed at the resiliency of the bulls. We are yet again at a possible inflection point, where the market can either go up to S&P 1230 or retest the February low/start a new downleg. March is often a key turning point in the markets (2000, 2003, 2008, 2009) as we approach the equinox and the ides of March.

Thanks for all the flattering comments. One generous reader noted that the Tip Jar was busted. I have fixed it now.

All the best....