Double Dip Countdown: "8"

The surprise was not that GDP got revised down from initial 3.2% and first revised 3% to 2.7%, but that it was no longer consider "unexpected." While the punditry still talks of a "slowdown" and a "muddle-through economy" the broader expectations are coming to grips with the double dip. The main driver of the revision down was weaker than previously estimated PCE (personal consumption), dropping from 3.5% to 3% growth. Inventory was revised upwards a bit, and contributes over 2/3 to the GDP growth, but business spending was reduced from 3.1% to 2.2%. Since inventory rebalancing is expected to drop in Q2, this bodes very poorly for the next report. GDP growth has now dropped in half between Q4 (5.6%) and Q1 (2.7%). 

In comparison, GDP grew between 7-9% for five consecutive quarters after the 1980 double dip recession. GDP grew in the double-digits for four years after the 1932 bottom. 

ECRI dipped closer to the -10% level, which has signaled a recession 100% of the time for the past 42 years, dropping from -5.8% to -6.9%. Lakshman Achuthan, managing director of ECRI, now says a slowdown is inevitable, but found a way to add a dose of optimism:

After falling for six weeks, the uptick in the level of the Weekly Leading Index suggests some tentative stabilization, but the continuing decline in its growth rate to a 56-week low underscores the inevitability of the slowdown

ECRI is now back to the level of Dec 2007, when the recession started. 

 

An interesting debate on CNBC this morning (around when the Brazil-Portugal game sputtered to a 0-0 tie) on Stimulus vs Austerity sputtered out as well but got across the point that this isn't really a policy choice; governments always try to spend their way out of problems until austerity is forced on them. Last night the US Senate abandoned efforts to continue extending benefits to unemployed and cash-strapped State governments. The most relevant impact to the double-dip is that this worsens crumbling State finances. 

Politically, the US may be at the turning point and joining Germany, England and China in pulling back from continued stimulus (although Obama is likely to keep pushing for stimulus until the mid-term elections). It is doubtful the US calls for G20 to stimulate will have much credence. The Fed too seems to be frozen at a time when the money supply is gong the wrong way for a recovery. 

Curiously, consumer confidence rose, and is at its highest since Jan 2008. As you can see from this chart, it remains at a low level. I am constantly amused by people who argue that "restoring confidence" is all that is necessary for a recovery. Confidence is at its highest at the peak (2000, 2007 and I daresay 1929) and at its lowest at bottoms) - the consumer remains a lagging indicator. It is also always argued that as confidence returns, money comes out of mattresses and gets spent; but other than a blip around tax refund time this year, we have been seeing lagging PCE. It may be when government transfers money that appears as a windfall, it gets spent, but hard-earned money tends to be saved or spent more prudently. 

 

More relevant is that corporate profits continue to rise, and significantly profits beyond the banks that are TBTF. This of course supports the Hope Rally, assuming it continues (the report is of Q1 not current profits). Profits are a coincident indicator, and sometimes lagging, as rapid cuts in spending can temporarily boost profits amidst worsening economic conditions. Hence the good news on profits is not inconsistent with a future double-dip. 

 

Instead, the indicators that suggest the double dip are all speaking loudly: housing, unemployment claims, consumer spending. They then get picked up in ECRI and other leading indicators, all of which are dipping. You can pick out green shoots here and there, such as durable orders falling less than expected, but even there we are seeing a dip in the growth of tech and consumer electronics (iPhones and iPads notwithstanding). 

A final discussion out there is whether the yield curve is signaling recession. Mish has been showing this chart as the warning sign. It clearly shows there are no inflationary expectations in the US economy. Instead, it shows what happens when an attempted reflation fails. 

 
Gary North analyzes this, explaining why an inverted yield curve normally signals recession: higher rates out the curve are required to hedge against inflation, but as short term rates are raised to curtail inflation, the curve inverts and a recession follows. In this case, the Fed is holding down short term rates and the fear is of deflation. The obvious failure of central banks to reflate means that in the private market short term rates will rise, leading perversely to a liquidity shortage. Lenders compound this by buying bonds to lock in the longer term rates, driving rates down. Hence, this time around the inverted yield curve is produced by fear: 

• business borrowers fear of inadequate capital, so they pay up in the short end
• lenders fear a recession with falling rates, so they lock in the long end

As a consequence, the CMI indicator which tracks the demand side of the economy, is dropping and signaling contraction. Their explanation of the impact of continued government interventions and gimmicks is priceless:

[I]t has instead, unfolded so far as a mild but persistent kind of contraction, more like a 'walking pneumonia' that keeps things miserable for an extended period of time.

 

Comments

[Ted]

Market sentiment: 2010-06-27 Bears= 64% bulls= 35%

[Steven_737]

just what the market needs...

USS Carrier Harry Truman Now Officially Just Off Iran, As Israel Allegedly Plotting An Imminent Tehran Raid

http://www.zerohedge.com/article/uss-carrier-harry-truman-now-officially-just-iran-israel-allegedly-plotting-imminent-tehran-

if this is credible, will the market rally?

[Steven_737]

maybe someone is worried...

http://www.zerohedge.com/article/curious-move-united-states-oil-fund-uso

:)

[Hockthefarm]

Yelnick:

We seem to be entering your summer of lost souls right on schedule. YTD, Dent has been calling it well, especially if we run up into mid July.

Key question I am mulling is whether or not the indexes can hold up until Septemeber. I have some doubts. Here is Bill McLaren's latest. Kinda sitting on the fence imo:

http://www.safehaven.com/article/17302/cnbc-squawkbox-europe

Cheers and keep up the great blog,
Hock

[Muang Chutzu]

McClellan interview from this weekend

http://audio.marketviews.tv/audiofiles/synd/mcclellan12.mp3

[usdollar]

I believe the R shoulder top is in, and that we will see a much faster down movement with ~8300 around the end of July. I know that I am promoting the webbot Clif High's work with tipping points. They have been astonishing right, not as Bradley, where you get 5000 turn dates in a year:). Clif High Webbot has tipping points, 9/11, 2001, October 7, 2008, May 6 2010, July 12, 2010, Nov 8-11, 2010 (WW III will possibly start here Israel attacks Iran). If that happens, I am sure that Dow 8000 will hold up nicely.

[trendlines]

Hello Yelnick,

Here's my SPX view:
http://trendlines618.blogspot.com/2010/06/s-short-term-stiff-resistance-around.html
And while you are at it, Hang Seng Index looking bullish:
http://trendlines618.blogspot.com/2010/06/hang-seng-index-trendline-watch.html

[Mr. Panic]

Sorry, the Puetz crash window can start with lunar eclipse before or after a solar eclipse. It's just that the lunar eclipse after the solar eclipse is the more common starting point. One only needs to look at June 2002; there were two lunar eclipses surrounding the solar eclipse of mid June 2002 (June 14???) One in late May; the other in late June??? The market started to fall precipitously from late May into July and most of the decline had already occurred by late June. I already have mentioned previously how June 3,2002 was an important top but the decline had already begun by then. The May 31st close was the last high/secondary top before the freefall began.
And this lunar eclipse will be marking the grand cross T square/ Cardinal Climax which according to many astrologers, most especially Arch Crawford, is one of the most unnerving alignments of the past few thousand years. Sorry I am not an astrology expert so I have to rely on the expertise of Arch Crawfords and others and I have followed Crawford long enough to know that he knows what he is doing.

[Mr. Panic]

Once it looked like the close below SP1079 was going to happen, I'm sure the big boys started dumping shares in the last minute. Someone mentioned that there was heavy selling in the last minute on the red pill site. Or they could have been dumping to make sure it closed below 1079. Now they need a gap down open but if it gaps down it's going to be one heck of a gap down because that many traders waiting for a gap open lower are going to be surely late to the party as Mr.Market doesn't give them a good entry point.

[Hockthefarm]

Mr. P:

I will grant you one thing on the astro front. Years ago as a student, I worked as a doorman at a fairly posh hotel.

Every once in awhile the front desk crew at the hotel would ask me if there was a full moon outside. They would ask this based on the number of loonies checking in to the hotel that night. I'd say they were right 70 to 80 percent of the time.

But apart from that, I'm fairly dubious. I think it is the other way around. The good market gurus go out and find astro stuff that reflects their current feelings of the market. Not the other way around.

Hock

[BZX]

Moon cycles can be visually tracked using either Welles Wilder's Delta or Steve Copan's Matrix.

For now the Lunar Delta Matrix looks constructively be bullish into mid-July as Medium Point #1 should be a high.

More info here on Delta Lunar cycles
http://www.stocks-trading-strategy-and-pattern.com/turning-points.html

[BZX]

Matrix chart has recent late June blue moon as a #12 low.

Andre Gratian's cycles has late June as a 17 week low, some kind of bounce is due here.

http://www.safehaven.com/article/17219/turning-points

[Account Deleted]

Nasdaq composite index support zone.
http://niftychartsandpatterns.blogspot.com/2010/06/nasdaq-composite-index-support-zone.html

[nspolar]

Any gold top callers?

I expected the top next week.

Was today it?

What about it Mama?

ns

[Mr. Panic]

Gold looks like its topping right now. But I am not following it closely or too interested in it at the moment. Eventually it should drop hard with everything......
It looks like the SP did not gap down at the open so no sell signal based on that qualifier. Doesn't mean the selloff can't continue. I am guessing that another weekly close below 1079 or last week's close would be a sell signal too albeit probably a late one.

[Mamma Boom Boom]

ns, IMO gold has been in a topping process for 6 weeks.

[Account Deleted]

Fate of the TRIANGLE IN DOW JONES will be decided by the channel in EUR/USD
http://niftychartsandpatterns.blogspot.com/2010/06/dow-jones-triangle-and-eurusd-channel.html

[nspolar]

DG,

corrective, impulse like, or impulse?

http://www.kitco.com/charts/livesilver.html

silva off the top.

ns

[Bird]

GLD: I see some correspondence for a top off the Feb 2010 low, but not longer term off the 2008 low. NEM as a proxy also doesn't appear to be an all-clear to head south.

[Roger D.]

Gold is topping, the Dow is completeing a weak "c" up and the USD has bottomed most likely.

RD

[Whitebear]

Webbots??? How about its infamous crash call for Oct 25 2008? The market went on up from Oct 25 till May!!! Keep sprouting out tipping points and it will eventually get one right.

[Steven_737]

Webbots???

hahaha...

yeah, like when Cliff webbot predicted the earthquake in southeast USA and then the quake happened in Asia !!!

he did say though that he got the latitude correctly...

:)

[Steven_737]

Hello Duncan;

any forecast from Yves and his liquidity model?

cheers :)

[Mamma Boom Boom]

So, do we get that 1061, tomorrow?

[Bird]

Ah, so that was a prediction Mamma?

[Steven_737]

was wondering....

what are those cycles saying anyways ???

?????

[Mamma Boom Boom]

Bird, you forget already?

-------------------------

I assume 1061 will be the absolute bottom, but I have to leave the office. Try it again tomorrow.

Posted by: Mamma Boom Boom | Thursday, June 24, 2010 at 12:38 PM

[yelnick]

Steven737, Yves' company was bought by MacQuarrie and he is under different rules than before wrt to guestposts. He is pleased with his Treasuries call (rates dropping/bonds up) and also thinks the top is in on stocks

[Mamma Boom Boom]

>and also thinks the top is in on stocks<

The more the merrier.

[Mamma Boom Boom]

"Uranus is extremely important to markets right now because it is in conjunction to Jupiter and opposition to Saturn. Jupiter and Saturn pertain to the two dominant emotions influencing the trading and investment community: fear (Saturn), and greed (Jupiter). Uranus with either of these signatures can correlate with extreme price movements in financial markets. This set up could portend excessive speculation and a bubble in financial markets.

And if anything can coincide with a shift in collective psychology, it would be a strong Uranus period. Thus Uranus retrograde on July 5 may reveal an important clue to this cosmic puzzle and how it will manifest in financial markets, as we continue the race to the heart of the Cardinal Climax, July 23-August 8. Then we will be fully engulfed into this new portal, this new reality, asking: How did we get here? and, How do we get back?"

[Mr. Panic]

It turns out one of the cycles came into play last Thursday but since then we've had two dojis with a higher high on Friday. It could go either way but I'll say the turn was from a high too a low. Really though it's a muted cycle one can't trust. I'v got another one of intermediate level strength due in a couple of days but it could also mean a high where the market suddenly accelerates to the downside like its last incarnation. I'd just say that the trend is still down until the 20 day is penetrated to the upside. There is already a death cross on the New York Stock Exchange and ones will soon be forming on all the indices and of course they are lagging indicators so the markets should be well south when they do cross. Unless the averages miraculously rally 20% over the next few days to prevent those averages from crossing.

[Steven_737]

sector analysis: why the market cannot start a decent wave 2, to retrace the drop since last Monday 6-21-2010

http://steven737.typepad.com/blog/2010/06/sector-analysis-06282010.html

cheers :)

[Bird]

Mamma, Din't forget. Thought it was an extreme level that you didn't think would be exceeded. Didn't know you were calling it as something that should get hit.

[Bird]

So Mamma are you bullish because of astrology?

[Steven_737]

Duncan;

I would appreciate your comments.

http://steven737.typepad.com/blog/2010/06/es-and-nq-wave-count-6282010.html

take care :)

[BZX]

WTD equity put/call highest since July 09

[Steven_737]

ok;

:)

[yelnick]

Steven737, I don't buy the ED or LD counts. An LD needs to converge.