Embracing the W - the Double-Dip Recovery

“Obama, Pelosi and Reid are drafting a new stimulus bill that White House says could have twice the number of non-existent jobs as the last jobs bill.” - Jay Leno

Mother Market has built in a sharp V-shaped recovery (to justify current price levels, the P/Es need robust earnings in 2010). In the Great Depression we never had negative earnings across the whole index, but we did last year. US industry has now cut costs enough that in Q3 earnings have exceeded expecations on lousy revenues. To keep this up, we now need growth. The amount of growth requires a V shaped recovery - a sharp rise next year of at least 5%. 

Today's downgrade of Q3 GDP from 3.5% annualized to 2.8% raises the spectre of a slower U-shaped or a jobless L-shaped recovery, yet the market barely reacted.

The NYT ran a piece on the recovery, and provided this first chart showing projections of some economics firms. Of course, this sort of thing has about the same predictiveness of the embarrassing unemployment projections of Obama with and without the stimulus. I assume the NYT dropped this in as part of a broader campaign to justify a new stimulus, since it is supposed to show how much worse we would be if there had been no stimulus. After the JobsGate scandal of ludicrous claims of how many jobs were saved or created by the stimulus, a new stimulus will need better support than this. (How much we should accept Moody's analysis is also unclear, given how badly they did their ratings job during the bubble. This may be another example of feeding results to an audience that will pay for positive predictions.) Nonetheless it supports the conventional wisdom, which has been summarized on Bloomberg TV as "70% expect a V."

When I scan the pundit-sphere, I grow concerned of a confirmatory bias in their predictions. Those who bash Obama see the U; those who gush see the V. More perverse, those who want a big jobs bill push the L to justify more stimulus (Krugman? Krugman?).

Yet it seems Mother Market still sees a V, at least in the short run. It could just as well become a W, a double-dip, in the long run. Let's see if we can support the V, and estimate when it becomes a W.

Some economic news shows recovery. Global trade has ticked up (see chart). The much watched Baltic Dry has shown a rise in rates (possibly because so much container capacity has been mothballed). Trucking fell slightly in Oct, but has been on an uptick. Rail data shows a bottoming but hasn't ticked up much yet.

Charts of US GDP show a V, even with the reduction to 2.8% annualized, from a bad Q1 at -5.7% (this is a revision up from prior reports). Although holiday shopping surveys say watch out for Q4, they also suggest a flat to slightly up season, year on year. So far this week has started up, boding well for Black Friday. Surveys also indicate that this season will be late and value-driven, meaning people will wait for sales, so there may be upside surprise come the day after Xmas.

Some data is mixed. These four charts show various US indicators (as of Sept.) that are bottoming or have bottomed. The LEI has been in a V up for months, and continued up in October. ECRI also expects continued recovery despite a weekly blip down last week. Of most interest is industrial production, which is ticking up. Unfortunately, the Oct results were poor, with industrial production growth slowing to 0.1%, a four month low increase, and housing starts a six-month low. The industrial production flatness is lively a hangover of cash4clunkers plus prior inventory rebuilding, hence more likely a pause before an increase, not a change of trend.

One of the odd side consequences of C4C was an increase in imports of autos. The GDP revision down was partly due to this (more imports lowers GDP). Northern Trust expects a drop of such imports in Q4, which will lift GDP.

My conclusion is that Q4 will beat expectations, and will beat Q3, perhaps even get to 4%. After the revision today, expectations faded from a 3.3% range down to a piss poor L shaped pace:

Economists see the economy growing at a pace just above its long-term trend. They expect GDP to grow 2.5% in the fourth quarter, 3% in the first quarter of 2010 and 3.5% in the second quarter. That's a far cry from the 6% growth seen in typical V-shaped recoveries, but it's better than a poke in the eye with a sharp stick.

These expectations will likely meander upwards as retail data comes in, albeit it will largely be later than past history and driven by promotions and discounts. This should not surprise, since we are in a New Normal where past patterns do not predict behavior; yet it will likely fool the pundits and forecasters until the data pikes in. 

Hence I expect a V-like recovery for several quarters out.

The problem is what happens after. This recovery is largely an artifact of government stimulus and gimmicks like C4C and the first time home buyer credit. We need to see the real economy begin to emerge. On this score things are troubling. 

Real estate normally leads out of a recession. Not existing home sales, but new home construction, which drives growth across many sectors of the economy (new house, new appliances, new furnishings, etc.). Despite the big Oct jump in existing home sales, new home sales are in the dumpster. This chart from CalculatedRisk shows how dramatic the gap is. A slight uptrend over the summer is now fading in the winter.

It may be too much to expect a large shift to new homes until the massive overhang of existing homes is worked off. The second chart compares vacancy rates to new home sales. Another huge gap. 

Private Investment is a second driver of growth, and is reflected in bank lending to business. There are lots of charts showing a simple reality: banks are still cutting back on loans to business. Until that changes the private economy will be moribund and the V will be largely a concoction of government stimulus. 

Stimulus will turn relatively negative late next year, and worse in 2011 when the expiration of the Bush tax cuts turns into a large tax increase.  The impact of real estate and private investment does not seem likely to change appreciably in the first half of 2010. Hence we may see the start of the W in 2H10.

The negative effects of diminished stimulus can be seen in this Goldman Sachs analysis of why we won't have a V, at least not past the first half of 2010:

Despite the sharp pickup in real GDP growth since the dark days of early 2009, we estimate that real final demand—net of the boost from fiscal policy—is still contracting at an annual rate of around 1% in the second half of 2009.  Although we expect a moderate recovery of around 2% by the second half of 2010, such a 3-percentage-point improvement would be insufficient to offset the loss of 4-5 percentage points of stimulus from fiscal policy and the inventory cycle.  Hence, real GDP growth is likely to slow anew to a below-trend pace

Their chart shows we were in Peak Stimulus in Q3, a point I made several months ago, and with inventory rebuilding adding to a peak overall stimulus in Q4. 

Hooverism may be the ironic response of Obama. He has already proffered a dangerous thought, that deficits could cause a double dip recession. (Krugman's response: "What? Huh?") He may push for accelerating the end of Bush tax cuts, replicating one of the huge mistakes of Hoover, to push for a tax increase in 1932 to help balance the budget. We had been coming out of the Depression, and promptly sunk back in. Something similar happened again in 1937.

The first rule of Recession Club is: you don't raise taxes in a recession

Obama has also begun the siren song of yet another stimulus, now a "jobs bill," a belated recognition of how awful his Porkulus first Stimulus was. I suppose if he were to retarget existing stimulus and the remaining TARP money and avoid increasing the deficit, he might be able to help extend the period of government life support to prop up the economy and push off the W.

All of this will be tragically ironic, because he will be hoist by the petard of Keynesian economic revisionism: that Hoover was laisse faire and did nothing, and FDR did something to get us out of the Depression. The victors rewrite history, and the post-war economic writers like Samuelson sure did a number on Hoover.

Look at the chart of Federal spending vs GDP. Hoover ramped it up, and FDR sustained that level until WWII. It was Hoover who first tried a massive stimulus to boost the economy, running up spending to 20% of GDP in his final two budgets (FY32 and FY33). FDR did not do a Krugman-like stimulus beyond what Hoover had already done, and indeed when he met Keynes in 1936, it was reported as a poor meeting. Rather than follow Keynes, one could say FDR followed Hoover. Heresy I know, but historically closer to the truth. How will history rank Obama, who so far has largely followed the path Bush first set?

Obama would do better to postpone his progressive causes (climate change, healthcare reform and social justice) and first fix the financial sector (real estate, business loans, consumer credit) to get the private economy back on its feet. But it appears he would rather drive us off a cliff, albeit inadvertently through his apparent economic illiteracy.

All of this is why I say to embrace the W. Expect the V over the next few quarters, and watch how misguided government policies throw us back down again.

Comments

[Bird]

Yelnick, good post. But your bias in the ending swipe re economic illiteracy weakens your point. Obama is no more illiterate than Bush, but finally the issue is between Keynesian stimulus or letting the water more quickly seek its own level. If you were president would you have opposed the authority of Bernanke, Paulson, Geitner?

Is the Keynesian model wrong? Perhaps. But I wonder whether the risk of a total collapse of the financial system, which one could argue has been thus far avoided, digs a deeper whole to climb out of than the re-inflating of the credit bubble through stimulus spending.

In the end, there may be no way to avoid paying the piper, in which case, at least we have had a little more time to contemplate our demise.

[twitter.com/DrBubb]

Why do we see so little intelligent analysis in the Media about where the job losses are, and what caused them?

Of course, many job losses were due to a slowdown in consumer spending. But I dont see that as a bad thing, consumers were spending too much, and not saving enough. So a slowdown tin their spending is really a good and necessary thing. A large reduction in expensive consumer debt is part of the genuine cure to this recessionary depression.

The area that has not been adequately discussed is the loss of jobs due to meltdown of the fictitious economy that grew up around speculative bubble related activities, like: property speculation, building of surplus homes in the outer rinf suburbs, mortgage banking, and activities that helped to finance the housing bubble, like CDO securitisation. I don't think that a loss of these jobs that never-should-have-been, can be regarded as a bad thing. Important parts of 2002-7 growth should never have happened, and so I call it fictitious. If that is the major part of job losses, it is healthy. Good riddance to all the jobs that were directly related to malinvestment.

Another area that is badly in need of shrinking is in the public sector, and in sunset industries like auto manufacturing. The state sector was swollen, by the mistaken assumption that the fictious wealth generation of 2004-7 was real. Taxes collected from blowing up the debt bubble led state, local, and national governments to expand, thinking they could rely upon a bubble peak level of taxes. The disapearance of the bubble jobs in the government sector is another good and necessary thing.

What ever happened to infrastructure spending, and all those "shover-ready" projects? It seems that Obama cheer-led the approval of a stimulus program, and real pork fest, that was designed by Pelosi and her cronies. But that reckless and huge spending has created few decent permanent jobs.

More intelligent thought needs to be put into stimulus program #2, if these is going to be one. Maybe genuine recovery will come sooner, if there is no second stimulus program, and the zombie parts of the economy are allowed to die a natural death.

[twitter.com/DrBubb]

"Deficits could cause a double dip recession. (Krugman's response: 'What? Huh?')"

No surprise there. A typical Krugman response to the intrusion of reality in his fantasy world.

When Prof. Krugman was awarded a Nobel prize, it did not raise his prestige, rather it cheapened the Nobel prize.

On my GEI website, Krugman is regarded as a villain, alongside: Greenspan, Gordon Brown, and the pink dinosaur, Barney Frank. I have loads of time for anyone who rubbishes this 'orrible gang.

[ron12paul]

GEI website?

[TC]

The majority of the Stimulus Package is back-end loaded and won't be executed until 2010. Why is it that no one seems to understand this?

A second stimulus package is fantasy.

[joe]

Looks to me like the bond markets are on the same page as you Yelnik. You see the bid to cover on the auction today? Pretty amazing - three straight auctions here all over subscribed.

Joe

PS - you were right about dollars - they actually did hit 74.50 (a little lower) - I doubt it stays there over Thanksgiving holiday though. We are looking at the same charts - that break should become support now.

[DG]

The majority of the Stimulus Package is back-end loaded and won't be executed until 2010. Why is it that no one seems to understand this?

Great, another post where the poster seems to think only he is intelligent enough to understand the current situation.

http://lmgtfy.com/?q=sprott+capital+peak+stimulus+gdp

Chart A will put you some knowledge.

[joe]

Yelnik - you are engaging in revisionist history with respect to FDR and Hoover. The main problem the revisionists run into trouble with is simply - how is it that FDR got elected to 4 straight terms if the "new deal" was not working for the "economy" of the people at the time? And who was in position to judge the result best - the people that lived it or the latter day revisionists?

FDR simply continued Hoover's policies - come on.

Joe

PS - some group bought 28,000 vix calls this AM for either December or January - I was half asleep when I heard this on CNBC - does anyone know more about this?

[joe]

Yelnik – maybe you can do a post about that market action today? I’d be really curious as to what people think about this situation. Dollar sure smelled like a blow off, the equity market sure didn’t follow and I have doubts that the auction today alone led that drop in T-Notes here. And I would love to know who in the heck bought all those vix calls – December or January - you know, short term calls. Also, isn’t the S&P due for a cycle low shortly (I think)? Frankly, Prechters call makes an awful lot of sense to me here.

Here is a question about dollar – if you were short dollars and you got that windfall especially today, wouldn’t you protect that on Friday-Monday? Wouldn’t there likely be a fairly strong rally in dollars coming here?

Joe

[TC]

"Chart A will put you some knowledge."
- - - DG

Perhaps you can post a chart of the S&P and let us know how your shorts are doing.

[Hockthefarm]

"Obama is no more illiterate than Bush"

Great, I'm going to sleep better now. Right up there with deficit neutral and sustainable debt growth. Bush couldn't make change for a dollar.

For wavers, the short term issue revolves around quantifying how willing our government is to rape and destroy the future generations of this country. Good luck timing that. Today's citizen has an embedded divine right not to pay its way and this view is fully endorsed by the majority. I think "stimulus verses economic hardship" conveniently misrepresents the issue. Better to call it "pass the buck verses economic hardship" because policy makers in their life times have no intention (or ability) of ever accounting. And I don't think Keynes ever proposed such a one way street to oblivion, so invoking his economic policies is disingenuous at best. With the rise of Obama, the term balanced budget has disappeared completely from our vocabulary. Now it is all about sustainable debt growth or what we can get away with on a continuous, long term basis.

The longer term issue is just how bad government is in this country. And forget the elephant/donkey cannon fodder. That was invented to keep folks standing around with their hands in their pockets and their mouths open.

And isn't the real issue the fact that there is another cock on the block. Ok, I get it, let's get so far in debt to China that they will have to look after us. Interesting how this dogma starts to surface once the great generation is all but gone.

[yelnick]

Bird, I am happy to stipulate that Bush was an economic illiterate as well. How could he not be when he cheer-led the greatest asset bubble in American history (with his calls for an "ownership Society" and support for no money down loans)? But it is now Obama who put half the Stimulus into tax rebates which have been shown not to work the three previous times when tried, including a year ago under the hapless Bush!

"Embracing the W" does not mean THAT W.

[DG]

Perhaps you can post a chart of the S&P and let us know how your shorts are doing.

Trade's still on, unlike your knowledge of the timing and impact of the stimulus spending.

[yelnick]

Joe, FDR caught the bottom! We bottomed in Sep32, then had a 2d bottom in Mar33 when FDR took over. Economy grew over 10% each year for the next three years. FDR got re-elected quite properly in 1936 after such a rebound from the Hoover years. Yet almost all of the initial programs of FDR had been started by Hoover, including the bank bailout plan and the public works plan. Hoover Dam is not FDR Dam.

I give great credit to FDR for restoring confidence, but a lot of that was due to the rebound. FDR also took us off gold and revalued, while Hoover tried to say on gold; and he pushed the NRA, a micro-management beyond Nixon's price controls, which was declared unconstitutional during those years in a famous case where the Feds tried to regulate local prices. When the full scope of FDR's changes began to take effect, including a very Hoover-like attempt to withdraw stimulus, we had a fall back down in the second wave of the Depression. FDr almost lost in 1940 but the buildup to the war helped him.

[graspthemarket]

Does anyone remember when Obama said it would be OK to buy stocks? It is very scary when politcal leader say everything is OK. Coolidge said that everything was OK in early 1929, right before he left office. We all know what happened. I dicussed a little bit about politcal leaders, the Great Depression, and Obama all in the same place:
http://www.graspthemarket.com/articles/20091109b.php

I think the real question is not "what" letter of recovery we are in, but "if" we are in a letter at all.

Finally, I hope we don't get out of this recession with a war. Simply put, I don't like wars, and the world sure doesn't need another one. If governments would just let things "go" and see where the chips fall, I think we would be better off.

[yelnick]

Grasp, nice comment and nice post on your site  

[yelnick]

Joe, a quick comment on today will be posted shortly

[yelnick]

TC, I will do a high level Stimulus post. There is a lot of noise about the stimulus, but the basic structure and timing are pretty well known.