Double Dip Countdown: T-5 After Fed Punts

The countdown is getting closer to the double dip: 10 - 9 - 8 - 7 - 6 - 5, restarted after we put the countdown on hold last week. The Fed concedes that after an unprecedented stimulus worldwide, the US economy has never recovered and is beginning to slow again. This does not mean it will go negative, but when the economic cheerleaders face reality, it means things are worse than reported. 

Already GDP, which was reported at 2.4%, was downgraded (by JP Morgan) a couple of days later due to a poor durables report, and now has been downgraded by them again to 1.3% due to a poor wholesale inventory report. Tomorrow international trade comes out, and JP will be at it again. They note that the GDP gets reported at the end of the month, with estimates for items that come in a week or two after. They think the estimate of international trade was "extreme", setting up another downwards revision tomorrow. 

The other disturbing news is more leading indicators heading south. The US LEI is heading down, although not yet signaling a second recession. The Global OECD indicators are turning over and in some cases in negative territory. David Rosenberg's Euro bearish counterpart, Albert Edwards, reports that the Conference Board indicator (excluding a yield curve input) is now in negative territory (see next chart). He pulls out the yield curve since the short-end is artificially low due to ZIRP (zero interest rate policy). He concludes that market participants will soon realize that the US is Japan of ten years ago, and will follow a similar path of deflation and zero growth. 

The Fed took a partial step today which has caused a flurry of "QE's" to wing through the blogosphere, like "QE1.5" instead of the $1T "QE2" urged by Goldman. The best is "QN": Mish calls it Quantatative Nothingness, but more kindly call it Quantitative Neutrality, since the policy is really neutral: instead of tightening by allowing the agency paper they bought in QE1 mature (and thereby lowering the Fed's assets), or expanding their assets through Goldman's QE2, the Fed stayed flat by saying it will recycle the returned cash into Treasuries. 

 

Sadly, while QE1 held rates at the long end down, it didn't do much to restart lending. Remember that in our fiat currency regime, the Fed doesn't print money but cajoles the banks to lend, which creates money. Despite the low rates, housing is in the dumpster (at the lowest levels since 1963) and consumer loans continue to fall. Here is David Rosenberg's take: QE is a "push" phenom, and where credit demand is collapsing, the Fed is pushing on a wet noodle. 

 

The credit markets responded with the biggest drop since the crisis, with rates also in the dumpster. Over at SeekingAlpha they conclude that the Fed's move is largely symbolic, since they are running out of ammunition. 

 

Mish in his Quantitative Nothingness post today looks into the yield curve, and finds it flattening, especially in the middle (seven-year). The five year is approaching its record lows of 2009, but the 30 year barely moved - hyper inflationary fears after the current policies fail? Or perhaps there is an arb play going on, to buy the mid-term bonds and short the long bond. 

The Fed tends to move cautiously, so the most astute comment of the day came from over the pond in the Globe & Mail: that the Fed is showing it will take whatever steps are necessary to prevent deflation, but it will do so in a measured way when necessary. The next step might be to monetize State pensions, which face a huge and growing shortfall. They had been designed with 8% returns in mind; but in the New Normal that is hopelessly optimistic. As the pension actuaries face up to the shortfall that a 4-5% return environment creates, the States will be forced to either pull back their commitments or put more money in to the pension plans, further withdrawing spending from the economy. Since the Fed's low rate policies and QE have dropped returns, it makes sense they figure out how to bolster the pension shortfall - but doing so simply pulls more focus away from a real recovery. 

Comments

[Wave Rust]

seems like 2 months since i wrote this ,,,,

""this is a fool bears and bulls correction, so it will probably become a 1-2, 1,2 and surprise everyone

close the gap at 1069 for a perfect overlap and next week, get up to 1115 resistance for touch and go to 1175.
don't marry the bear yet
wave rust

Posted by: Wave Rust | Thursday, July 29, 2010 at 08:27 PM""

the markets just need a plan ,,,,

,,,, so, 1069 is still open and bulls and bears are confused.
the break down for wednesday should be short lived for the bear trap, maybe spx 1101 but probably higher than that.

hopeful bulls won't jump in at the lows, so they'll miss the pop back up to and through 1130, but then will come and push the spx to 1150.

the bull trap opens above 1130 and might close about 1175+

if we all hum 'cucumberbaya' at noon tomorrow, maybe the market will follow that plan, and we will all be rich by labor day.

markets can follow, if barry keeps quiet for a day or two. every time he opens his pandora box to speak, the markets vomit shortly after.

wave rust

[Wave Rust]

duncan,

what all the left wingers, the progressives, the NYC bankers and billionaires (both Buffetts) who once pumped money into Barry's campaign, are singing these days about Barry O'bagahammers ,,,,

"If I listen long enough to you,
I'd find a way to believe that it's all true.
Knowing, that you lied, straight-faced,
While I cried.
Still I look to find a reason to believe." as sung by Rod Stewart

Barry has answered the question, "Is it really possible to completely destroy any chance of an economic recovery of a free market economy in recession, in less than 18 months? "

Have wondered what would push over the house of cards in late August (like beginning on the 26th).

Well, look at the calendar ,,,, 24th - last of the big primaries; 25th durables; 26th new and continuing claims ,,,,

then the coop de grass stains, pre-market on the 27th, the GDP revisions !!! ala your JPM posts on GDP reductions.

then the american public learns what "negative growth" means ,,,, the best oxymoron since 'military intelligence'

a worse curse? i can't find one. we all could be crying the blues by christmas.

but i could be wrong too,
but you still can't fade the Fed. how can you fade nada?
thats a nulled proposition.
monetizing bad mortgages with LTD ,,,, how quaint! the perfect mask for halloween 2010.

that rate plunge on the 10 and 5 year today was a mini-september 2008 deja vu. another overture to the symphony of crashing symbols (misspelling intended).

wave rust

no, that rant doesn't make me any better. still pissed in peoria.

i'll still be looking to buy a low tomorrow. :)

[Wave Rust]

since market lows are characterized by mush fewer posts here, and most are bearish posts near the lows, ,,,, and, posting has really dropped off here in the last few days ,,,, so i guessed it was my turn to 'over post'

if the market wont put in a low, i'll try the "Barry wants to declare marshall law" series of rants.

wave rust

[yelnick]

wave, even Michelle has abandoned Barry - on his birthday! Imagine that. The panic seems to be setting into the Obama administration and its supporters. Hillary '12?

[twitter.com/DrBubb]

Various indicators that I follow suggest the market is topping now, and there is potential for another "Flash Crash" within the next few days, very possibility within this week, targetting Thursday (tomorrow).

Here's what I just posted on Twitter:
== ==
A "fall from grace"?: http://yfrog.com/f1xxxmkg /
Could trigger another "flash crash": http://tinyurl.com/GEI-Box

[Bird]

Duncan, my circle analysis proposed a few days ago pointed to mid-month as a lock out. This may still turn out to be correct. But there are a lot of deep corrections within the move from April down to July, which theoretically could have used up the NN force. For e.g., the 6.21 high was one day shy of a lock out. They are usually on the mark or one day later, so I don't love it but should consider it.

I raise all this because yesterday's high shows some powerful harmony, albeit not via all the rules I follow. Most significantly, the time from 6.21 down to 7.2 x 2.618 gives yesterday's high on the 60 min (DJI). From a circular point of view, and this is why it is very harmonic, the diagonal of a circle, expanded concentrically by 1.618, using that time period (6.21 to 7.2) as its radius exactly hits the high too.

Whether or not the high holds, that is high geometry.

[Hank Wernicki]

Today's Gap Down Forecast posted yesterday

http://www.elliottfractals.com/TRADE____SPX_8_11_10.jpg

[Wave Rust]

Duncan
Lady of Spain, MiJellO-bama, is doing the same thing that Dem candidates are doing. Barry is political and economic kryptonite.

the koolaid is wearing off.

If hillary does run for the nomination, and i hope she does, it will be the bell tolling for thee, Barry. ,,,, refer to Teddy running in 1980, his brother in 1968, Perot in 1992, and others who ran against their party's sitting prez.

spx 1101 may have been too optimistic.

good luck today. cash is lucky today.

wave rust

[yelnick]

wave, with 1101 gone, 1086 will be watched, but 1060 (some say 1057) signals a retest of 1011.

[Michael]

Wave,

How can anyone so naively place so much emphasis on the President of the United States (as you do) when it comes to the Economy?

[ROLF]

mama goes silent