Saturday, March 22, 2008

Financial Turmoil Raises Worries of Deeper Recession

It is funny to watch the masses turn to your view, over time. Last fall during the September/October "Fed will save us" rally I was typing almost daily that I had no idea why the market was rallying into the face of the coming financial crisis & recession. No investment bank economist even dared say recession until December 2007, and even then most pundits began the "2nd half 2008 recovery theme" all over the media. I shook my head through it all. Still do. I could STILL be wrong about a deeper, and more severe consumer led (regional) recession (first since early 80s) I see coming BUT some other minds are now jumping to my long held theory - joining Grantham, Soros, Robertson, Roubini, Schiff, TraderMark ;) (what a group!) [Feb 18: Jeremy Grantham has Some Sobering Words for "2nd Half Recovery: Crowd]

Now I must say, this is what the market SO difficult. Me, and my crowd above, could be dead right but it doesn't mean the herd on Wall Street will take the market down - as long as the HERD believes in the "2nd half recovery" and/or their constant commentary of "everything will be fine in 6 months" (a line they have been using since early August 2007) we will continue to get these Kool Aid rallies. And that is why investing is so difficult - you have to predict the herd... which is unfortunately (in the near and middle term) more important than reality of the longer term. So even if you are correct on the 2nd half being a dud, it does not matter as long as the herd believes it. And this is why we get such abrupt changes in the market direction - we deny deny deny... and then when something so huge hits that one can no longer deny we change 180 degrees on a dime, and panic sell. And keep repeating the pattern. Guessing when the mood changes from denial to reality is impossible. And it happens literally overnight.

Anyhow, in this article I was bemused to see the Greenspan comments. 4-6 weeks ago he had a 50/50 chance on the US even entering a recession - now he says "the current financial crisis in the U.S. is likely to be judged as the most wrenching" since the end of World War II."

See this is the way of Wall Street - until the bad stuff hits them square in the jaw, they deny deny deny. Everything is about hope. Because hope breeds more transactions and in the end it's all about a used car salesmen (see all those mortgage backed securities dealers) with MBAs selling stuff. It is hard to sell stuff when you bring reality to the table - so you bring hope... poor Alan doesn't even work on Wall Street but even he has been infected with the hope trade. Now, what I *can* see happening is this scenario - the "double dip recession" - the current recession (regional), and then the government stimulus plan bringing us back to positive GDP in 2nd half 2008 where every market pundit in the world will say I TOLD YOU SO! And then we move back to our normal programming of recession in very late 2008 and into early 2009. But again, I already called for another stimulus plan coming the minute the last one was announced, within a year... so they will continue to spend money to keep the business cycle from happening. So depending when THAT stimulus plan is sent to us, I will hold off on making any longer term predictions past Q3 2008. Maybe they will send us $400B in the next stimulus plan... I mean all it takes is printing money. That's not inflationary by the way ... and now that the Federal Reserve has put the world on alert its going to fight inflation, you better sell your gold. ;)

But don't worry folks, the unemployment report (per our government) says things are fine - heck below 5% - I have no idea why people in their 40s and 50s need to move back home with their parents in unprecedented levels (let me assume their parents grew up during the Depression and have their home completely paid off - unlike their overconsuming kids who spend 110% of their income each and every day because they "deserve" it.)
  • It's been almost an article of faith: Any recession this year will be mild and brief. But now the stunning meltdown of a top Wall Street investment bank and stubbornly persistent financial market turbulence has called that into question, raising fears that severe problems in housing and the nation's bedrock financial system could cripple the economy and wallop many millions of Americans. (no the first article of faith is there will be NO RECESSION, this is just a financial issue that will solve itself with a few write - offs; only in the past 2 months have we moved to a "mild and brief" recession and "everything will be fine in 6 months". But the word FAITH is accurate - instead of using logic, if you use hopeful wishing, people in NYC hope they can get their desired result)
  • No less an authority than former Federal Reserve Chairman Alan Greenspan wrote this week that "the current financial crisis in the U.S. is likely to be judged as the most wrenching" since the end of World War II. (He sounds like he is stealing direct from George Soros)
  • Other noted economists are also sounding alarms. Harvard professor Martin Feldstein, the former head of the National Bureau of Economic Research, said recently he believes the country is now in a recession and it could be a severe one.
  • A growing number of private economists already have a downturn figured into their forecasts. They are generally calling for a mild recession that will end this summer when the economic stimulus checks going to 130 million households start getting spent. But the severe credit crisis that erupted last August -- and claimed its biggest victim this past weekend with the forced sale of Bear Stearns Co. -- is raising doubts about those mild forecasts.
  • More turbulence is expected in coming weeks because there remains a great deal of uncertainty about how many more victims the credit crisis will claim. (I believe the next wave of damage will be the hedge funds - this volatility we've seen the past few weeks is the type that will knock out over levered funds left and right; we've seen a few go out lately like Carlyle Group and Peloton Partners; even Goldman's flagship Alpha fund is having a terrible time of it - if the smartest guys in the room struggle, a lot of "me too" hedge funds must be getting smashed - especially as the commodity trade they piled into blew up on them last week - they are nothing if not momentum chasing locusts. But don't worry folks, and please don't shed any tears - these failed hedge fund managers will get a new round of money and they can start anew in 2009. Because they are just that smart - after all this was a once in history event - just like the last bubble, and the one before that, and the one before that - could never ever happen again. Until 2013)
  • "We can't afford to stagger from one day to the next without knowing what large financial institution might be the next to go down the tubes because of a lack of liquidity. That is way too dangerous a game," said Lyle Gramley, a former Fed board member who is now an economist with the Stanford Financial Group. "It is possible that we could be entering the worst recession of the post World War II period. The threat is certainly there."
  • David Wyss, chief economist at Standard & Poor's in New York, said he now has a worst-case-scenario in which the country could endure a double-dip recession in which the economy would briefly recover this summer, helped by the $168 billion in tax relief, only to quickly slip back into a downturn. Under this scenario, the economy's total output, as measured by the gross domestic product, would drop by 2.2 percentage points, making it the third worst recession in the post World War II period. (Agree!)
  • The worst recession in recent decades, in terms of lost output, occurred in the 1973-75 period of oil shocks, when GDP fell by 3.1 percent, followed by the 1981-82 recession, when GDP dropped by 2.9 percent.
  • By contrast, in the last two recessions output fell by 1.3 percent in the 1990-91 downturn, and a tiny 0.3 percent in the 2001 recession, making that slump the mildest in the post-war period in terms of lost output.
  • While they are developing worst-case-scenarios, Wyss and other economists said they still believe the balance has not tipped from their more benign main forecasts. One thing that gives them hope is the expectation that Congress and the Bush administration, having acted so quickly to pass the first stimulus package, will move quickly, especially in an election year, to pass a second package if needed. (Bingo again guys - I see a lot of people have been reading the blog hah)
  • Also, analysts said the Bear Stearns crisis, which has already prompted the Fed to move more aggressively, will also probably trigger a bigger response on the part of Congress and the administration in offering help to homeowners to keep them from losing their homes because of mortgage defaults.
All these variables make it hard to predict the future economy - as I said, with all the King's Horses, and Men passing future stimulus plans and buying up mortgages direct, we could have a very different outcome than I state now. After all, when the tax payer takes all the losses (or the taxpayers grandchildren I should say) we can keep kicking the can down the road....forever? Or at least until foreign governments stop buying our Treasuries. But maybe we can keep doing this for another full decade. Or at least until the next crisis in the middle 2012-2013 level where we will blame the policies of today for that unraveling. And issue more paper currency to bail us out of that crisis.

Notice a pattern folks? As Ron Paul says... we refuse to take our medicine. So the inevitable day when the medicine must be taken, I hope we are not giving those drugs to a cadaver. Each iteration of the disease takes even larger amounts of drugs. Eventually the level of needed "treatment" will kill the patient. But let's keep kicking that can down the road. And trust me, all this will be forgotten in Q3 2008 when the GDP bumps due to the rebate checks... because ignorance of long term issues is the way to play - just keep kicking the can and keep creating paper money to solve all our problems.

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