Double Dip Countdown: "6"

The count down is getting closer to the double dip: 10 - 9 - 8 - 7 - 6: ECRI's growth index is now at -9.8% after a pretty big drop from -8.3% last week (which was revised this week to -9.1%; even the revisions are making the case for a double dip). It is hovering right above the -10% level that David Rosenberg has shown from past examples has always predicted a recession ahead (42 years of data). We should crush through that next week, but that is now just a technicality; Rosenberg gave the -10% level as an easy line in the sand; -9.8% also in the past 42 years always predicted a recession in about six months, which puts it in 1Q11. 

 

Another major leading index is from Consumer Metrics Institute, and it is showing even worse conditions that ECRI. The CMI index is in contraction mode and dropping (blue line is 2010):

 

Manufacturing had been looking like a V-shaped bounce, but recently has weakened: both the Philly Fed and Empire State surveys have turned down and are approaching the zero line (which means contraction):

 

Shipping indicators are looking weaker as well: imports surging but exports lagging means we are back to consumption exceeding production:

• The containers out of LA/Long Beach and NY/NJ are continuing to grow, which is consistent with seasonal trends (this is the period of inbound shipments to stock up for back-to-school and holiday sales). Inbound is up 30% over a year ago, and is up 1% (essentially flat) over two years ago. Exports increased 7.7% from a year ago, but remain down 13% from two years ago. This means expectations are for a stronger Christmas but our exports are slackening, a bad sign that is consistent with weakening manufacturing domestically. 
• The Baltic Dry Index is falling so hard it led to a delightful headline: Market Going Down With The Ship? The BDI is used to track Chinese activity across the oceans, and the predictions of a sharp slow-down in 2H10 have increased, suggesting after restocking for the holidays imports will begin to drop.
• Rail cars had been trending up, but recently dipped below 2009 levels and are 20% below 2008 levels (see chart). When looked at more broadly as including intermodal traffic, the trend had been up but is flattening. This would be consistent with a rolling over from recovery to a second dip, but does not predict it. 

Ed Harrison of CreditWritedowns notes that the bearish pundits other than Rosenberg are playing down the double dip: Stephen Roach says only 40% likely, and Nouriel Roubini is at 20%. He thinks they are expecting a late inning save by the Fed or by more fiscal stimulus. While fiscal stimulus is looking less likely, deflation is now emerging, and that might force the Fed to begin QE2, a another round of quantitative easing, a topic is discussed in the Peak Debt post. 

The CPI fell for the third straight month in June, dropping -0.1% after -0.2% in May and -0.1% in April. The CPI is now flat for the past 8 months and down -0.3% for the past six months.

 

Mish notes how the powers-that-be tend to exclude food and energy and talk about the core rate, but this is not really valid, since those matter hugely to the people affected. As he puts it, people tend to note each penny's rise in gas prices, and ignore the drops. When gas is going up, the cries of hyperinflation! ring out; but when they drop, the silence on deflation is deafening. 

The core rate is even more misleading on real estate: it uses an imputed rent, not real housing price changes, which of course have been dropping more than the CPI shows. Oddly enough, as natural gas prices rise, the imputed rent drops; and as it falls, the imputed rent rises. The BLS assumes rent is constant and they impute a windfall in the rent due to rising heating costs. Even though a survey of real rents will quickly show they are falling with housing prices, although not as fast, since natural gas has also fallen, the imputed rent has actually gone up, keeping CPI afloat. Nuts! 

In any event, this chart shows how the CPI of all items peaked about the time the Stimulus peaked in spend rate, and has been dropping since:

What is going on behind the curtains is an historic contraction of consumer and small-business credit: the Consumer Metrics Institute notes how consumer credit has decreased in 15 of the last 16 months, and the drop in April is the second largest in history, after the drop the prior Nov (2009). The cumulative drop is the largest since 1944, when FDR pushed consumers to buy war bonds rather than borrow and spend. This contraction is part of an overall deleveraging of the private sector (especially in real estate), and is causing the total debt in Dollar terms to drop off its peak of $53T. That decrease in total debt is happening faster than government borrowing is making up, leading to deflationary pressures. As the next wave of mortgage defaults hits next year, this deflationary tendency should become very strong. 

The Fed may feel forced into QE2 to stave off the inevitable slide into deflation. Keynesian Cheerleaders like Krugman find the Fed's silence feckless. If they initiate it - perhaps to backstop Muni's, since they already have backstopped Treasuries and Mortgage-Backed Securities - it might delay the onset of the double dip. 

Comments

[Michael]

I have no idea why people continue to use the Baltic Dry Index as an indicator. It must be one of those indicators that the "perma-bears" like to highlight. Interestingly enough, these same people conveniently forget to tell you that the index can be easily skewed by a rising supply of shipping capacity.

Imagine that.

[Hockthefarm]

Faber on QE2:

INTERNATIONAL. Marc Faber the Swiss fund manager and Gloom Boom & Doom editor said the US is so full of debt, stuck in a period of slow growth and high enemployment, that the Federal Reserve will soon have to revert back to crisis era policies.

Speaking to Bloomberg in a live interview Thursday, Faber said: " I am conviced the Fed will soon implement further quantitative easing," adding "and massively so".

"It will probably happen in september, October," Faber said, putting a timeline to his prediction.

Explaining his reasoning, he said: "The US economy is not robust".

Not buying into the good news brigade of commentators who believe the worst is behind us and the US economy is on the mend, he said: "We have mixed signals, but in general the economy is still weak".

Nor has the recent rise of the euro dampen his views on Europe. Faber said Europe does not have a shot at growth and is stuck in sideways movements in its economy, for years to come, as austerity and bailouts weigh on growth.

In his latest monthly market commentary the famed investor discloses a bit more about his investment philosophy.

"I feel that most investors take far too many risks – often with borrowed money – and fail to diversify sufficiently. They also have little patience, very short-term time horizons and no tolerance for losses," Faber writes.

"Their expectations about investment returns are completely unrealistic… Most investors buy a stock or make an investment with the view that within a month the return should be between 10% and 20%," he adds.

"If you can achieve an annual average real return of just 3% on all your assets (inflation adjusted), you will leave a huge fortune to your children".

I prefer diversification and no leverage," he adds explaining "I have seen time and again investors (including myself) be right about an asset class' future performance but fail to convert those views into any capital gains…"

"The prime consideration should always be capital preservation and avoiding large losses," he concludes.
////

Prechter's EWT this month was all about the need to be in step with changes in social mood, in that social mood is the real driver of everything. Until recently 70 odd percent of American households have bought into the notion that they should max out on real estate debt and maintain or expand that level of debt until their death. Then a tiny group of financial experts figured out how to take that group for a ride and make a fortune in the process.

As a consequence, this group of home owners is sitting on massive debt levels supported by a depreciating asset, that requires relatively massive amounts of cash to operate. And they have just been told to expect another 10 years of it. Gee, I wonder where social mood is headed?

As for Fannie and Freddie, does anyone really think the gubmint is even in a position to pass their debt onto the tax payer. I know Bill Gross doesn't think so. He sold off a huge chunk of fannie months ago. These bondholders are in for a real haircut imo. Hussman is right, the gubmint should just walk.

Hock

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waiting for a crash, DJIA -5000

[Michael]

Speaking to Bloomberg in a live interview Thursday, Faber said: "I am conviced the Fed will soon implement further quantitative easing," adding "and massively so".

And where do you think all of that EXCESS LIQUIDITY is going to wind-up Hock?

Turn on your Brain.
It will head straight into the stock and commodity markets!

Duh.

[Wave Rust]

Duncan,
a good review and update for the economy ,,,, maybe you should call it a 'down'date. If this economy was graphed in an EW, this may become the zigzag extended C wave. '30-'32 ? ? maybe.

The Fed can flood the city again to get rid of the rats but the rats have learned to swim.

If the Fed could lend directly to the "small people" ,,,, it would loosen the banker's death grip on excess reserves ,,,, just musing ,,,, not gonna happen.

If the US economy is going down for the 2nd time, let's raise the flag, salute it, and get ready and get with another plan (sans Obama) which works to bring it back.

The economy isn't some abstract concept, it's real people.

New QE, no matter the size, will have much less effect and much shorter lived, if it has any real effect at all.

wave rust

[Hockthefarm]

Michael:

"And where do you think all of that EXCESS LIQUIDITY is going to wind-up Hock?

Turn on your Brain.
It will head straight into the stock and commodity markets!

Duh."

Duh is right! Where did I say we couldn't have a rally after an ugly fall into September/October. A good reason for more QE, or is that connection too tough for you.

Keep reading the pamphlets and don't forget to brush your tooth every once in awhile.

Good luck with the gambling,
Hock

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