The End of the Nominal Recovery


Monetary and fiscal stimulus can halt a deflation spiral, but central banks and governments can’t print purchasing power.

In other words, one year after the official end of the recession, the economy shows no signs of booming. Emergency Keynesian policy measures taken to keep the debt crisis from devolving into a 1930s deflationary spiral show signs of losing effectiveness, and the self reinforcing economic growth story is giving way to talk of a “double dip” recession, as trouble in Europe is expected to slow the US economy by the end of the year. Confidence in the resilience of the recovery is waning.

CEO Confidence Survey noted the bottom of the recession and the beginning of recovery. CEO confidence dipped slightly in Q1 2010 for the first time since Q1 2009, to 62 from 64 in Q4 2009 (a reading of more than 50 points reflects more positive than negative responses). The Q2 2010 data are due out the week of July 5. A decline in CEO confidence below 50 points will strongly support leading economic indicators that are pointing to a second recession.

The last time the economy struggled under the weight of public debt taken on to stimulate demand after a private-sector credit collapse was during the Great Depression. Is the nation’s debt-heavy balance sheet able to finance ongoing stimulus spending without triggering a US debt and currency crisis? The question is once again divided along ideological lines. It’s 1937 all over again as Democrats and Republicans battled in the Senate last week over how to pay the $141 billion cost of new legislation that extends unemployment benefits to more than two million who remain unemployed a year after the recession ended.

What if a second recession arrives while we’re still arguing about what to do about the after-effects of the last one?

Even if we dodge a double-dip recession, conditions of the economy and debt markets are the opposite today of 1983, the last time new home and car sales were this slow. Without a tail wind of falling interest rates and low debt levels, for the next 20 years inflation and interest rates will rise as policy seeks to deflate debt against wages and the dollar; real housing prices and wages decline.

A year after touring the aftermath of the Housing Bust Recession, many retailers remain closed, windows once whitewashed are now broken, boarded up, and festooned with graffiti.

The same condition is true for the financial system that got a whitewash but has yet to receive even a partial renovation.

An optimist might conclude that home and car sales are thus only as bad as in 1983, except that the economy was only one quarter the size of today’s; this post-recession housing market contraction is proportionally four times worse than the housing downturn that occurred at the end of the early 1980s recessions.

The May 2010 collapse in new home sales to 1983 levels occurred despite 30-year mortgage rates at levels not seen since 1971. Today’s 4.69% rate on a 30-year mortgage is less than half the 13% rate paid by borrowers the last time new home sales were this weak.

In 1983, mortgage rates had only one way to go – down – as disinflation proceeded for decades, although they took a detour to 15% in the two years that followed.

The ultra low rates result from the Fed’s continued purchases of mortgage-backed securities from banks. With $1.1 trillion of MBS on its balance sheet as of early June, starting from zero in January 2009, the Fed can’t find private hands to offload the securities onto and instead uses them as collateral at full market value for new loans, despite the fact that the market value is virtually nothing, as evidenced by the unwillingness of private institutions to buy them.

Business Week reported recently:

Borrowing costs have tumbled in the past two months as concern that a debt crisis in Europe may spread boosted demand for the safety of bonds including mortgage-backed securities. The lower rates have failed to lift housing demand, which has tumbled since a tax credit for first- time and certain other buyers expired at the end of April.

The average price of $5.2 trillion of bonds guaranteed by government- supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae climbed to 106.3 cents on the dollar yesterday, according to Bank of America Merrill Lynch’s Mortgage Master Index. That’s up from 104.2 cents on March 31, when the Federal Reserve ended its program purchasing $1.25 trillion of the debt.

MBS's Held by the Fed

But did the Fed really stop buying MBS?

The Fed planned to stop buying MBS at the end of this March, yet Fed MBS balances have increased by $45 billion since March 31. What will happen to the housing market when the Fed finally does begin to lower its MBS balances?


Eric Janszen
for The Daily Reckoning Australia

Eric Janszen
Eric Janszen is Founder & President of, the online economics and financial markets community that CNBC's Bill Griffeth calls "...the place to go for a contrary view of the markets," and The New York Times credits for accurate forecasts of economic developments. Eric is author of upcoming Portfolio Hardcover book, The Post-Catastrophe Economy, and co-author of America's Bubble Economy, from John Wiley & Sons.
Eric Janszen

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  1. Good news for a stockmarket rally.

    Headlines of varies articles ‘linked’ on PrudentBear website

    suggest positive environment for stocks:

    Weak Housing Data Signal That Economy Is Losing Steam

    Manufacturing Shows Weakening From China to Europe

    Jobless Claims in U.S. Increased Last Week to 472,000

    Economists Will Scour Private Sector in June Jobs Report

    Pending Sales of Existing U.S. Homes Decreased 30% in Ma

    CBO tells Obama deficit panel that forecast remains bleak

    Manufacturing Weakens From China to Europe as Economic Recovery Moderates

    Fears mount over slowing global demand

    Peterson’s $1 Billion Bet Shows Return as Deficit Concerns Rise

    New Vehicle Sales Slowed in June

    GM, Ford Sales Trail Estimates as Consumers Stay Home

  2. OK watcher give us the contrarian news on the market direction. You forgot the big negative in the consumer sentiment survey this week and the revised downward past month. And maybe you can see your way to explain how p/e’s can be sustained when extend and pretend means the balance sheets have all sorts of bogey’s in them?

  3. Watcher, check also the 20 day rate of change on the Baltic dry index

    Hope my statement above doesn’t read dismissively, it wasn’t supposed to be.

  4. Maybe watchers points are buy signals for central planners trying to engineer markets with a printing press. I wont be betting on it but. Anything can happen anytime. Who knows their minds at any one time and who knows when the inevitable fail will arrive.

  5. That Baltic Index page says everything is sweet at the bottom, there are some excerpts below suggesting trade is booming … am I missing something? I am keen to have this explained.

    6/18/10 Maersk, the world’s biggest container shipping group, is warning of an unprecedented shortage of containers in the run-up to the peak shipping season on the back of a strong rebound in global trade.
    6/10/10 Container traffic at major ports in India for the April-May period increased by 21 % YoY.
    4/9/10 Oppenheimer analyst Scott Burk said the very large crude carrier day rate was about $59,000 Friday, up from about $20,000 to $30,000 a few weeks ago.
    3/24/10 Figures from Hong Kong Airport Authority showed that cargo volume rose 30% YoY in February to 257,000 tonnes.
    Air cargo demand is rocketing in response to global economic recovery, says Lufthansa Cargo CEO Carsten Spohr.

    July 3, 2010
  6. “But did the Fed really stop buying MBS?” Interesting, one would think that if the government wants to keep ‘bond prices’ high it will have to keep buying. Evidently the market thinks they will.

    AO, I was under the impression that the Baltic Dry Index was a measure of the cost of shipping ‘dry’ as opposed to ‘wet’ i.e. oil, raw materials. Maybe Maersk is a short opportunity?

  7. @Lachlan, maybe so. Watcher was talking about a run up all this year. Out of the BDI charts you can see the S&P500 would have to sharply turn and run. That position is not the traditional sell in May and stay away.

    @Justin, the BDI is for bulk shipping based on the hourly hire rates. Merchandise shipping is analysed on the lay up rates and the container freight costs and size of the peak season surcharges. Intra Asia air and ocean have been up since Q3 09. Without me making any particular statement, air freight can be seen as a form of short covering for ocean inventory but can also mean shippers don’t want to risk building inventory.

    The latest statement of worth is from a forwarder, but these are backwards looking and talking of April : Expeditors is among the largest listed pure international forwarders. In the last two months their stock price has gone from over $42 down to $34 despite earnings and volume recoveries as per my link and that statements of fact from Annoyingorange. The 12 month basis p/e lfor EXPD still sits at nearly 22x. EXPD had been gaining sharply from Feb 09 through to May 10.

    Another of the few listed forwarders is UTIW. Chart looks the same. You can look at Deutsche Post/DHL and UPS forwarding divisions but you have to dig and frankly their period reporting has show too many past revisions and they are not as trustworthy for leading indicators because of the US domestic/EU regional biases in their stock price.

    So international forwarders are better for forward analysis than the big US integrated carriers or the shipping lines in some respects because the data isn’t polluted by domestic or ship lay ups combined with suspect competition on container shipping pricing (US and EU have launched an inquiry. I can’t do another link without this post being lost to moderation for some time so I will quote Washington Post text : quote

    BRUSSELS—A U.S. regulator and the European Union’s competition watchdog are monitoring the world’s top container shipping lines for any evidence of price fixing.

    The scrutiny comes as the prices shipping lines charge have kept rising even as the industry’s supply of new ships has continued to increase sharply.

    The shipping lines, including industry leader AP Moeller-Maersk AS, deny they are operating a cartel.

    The Federal Maritime Commission in the U.S., where carriers enjoy broad antitrust immunity, has opened a “fact finding” investigation into shipping rates. It is due to submit an interim report on June 15 and a final report … unquote

    The Annoyingorange comments from Maersk, who overbuilt there fleet more than any other carrier, and had among the largest layups, should be taken in context of them trying to defend their price rises.

    Australia’s international scheduled air freight traffic in April 2010 increased by 12.2 per cent over April 2009 to 61,858 tonnes, according to the latest data from the government’s Bureau of Infrastructure, Transport and Regional Economics (BITRE). Now that is actually a flattening due to the weak prior period, us being a lead indicator of the past intra Asia upturn, and far better results earlier in the year.

    Asia Pacific air freight traffic for May was still up 39% on the prior year in freight-tonne-km terms but I see it as a trailing indicator and our stimulus also kicked in earlier last year when APAC was still on its knees. Cathay has one of the largest intra Asia networks and its capacity in May was 79.1% which was a 10% gain on the disasterous (in profitability terms) prior year.

    @Annoyingorange if you look at the BDI/oil price you might notice that the Oppenheimer analyst comment is from right on the last top and the subsequent direction is down. The recent drop is not as remarkable unless viewed in seasonally adjusted terms where the US summer inventory build for oil should have been happening and didn’t.

    Back to the BDI we had a long run on commodities as reflected in ore prices and what appeared to be inventory building & an infrastructure surge at the same time in China. Pressures on Chinese exporter profits and bank lending standards raised for property and wage pressures don’t bode well for export prices. Buyers of Chinese exports outside Asia are not ready for price rises. One more report link in the next post

  8. Ross, you maybe right. The next month or two things will be revealing.

    Barton Biggs has become less bullish and sold about half his stock investments this week.

    “Ralph J. Acampora, a market analyst with more than 40 years of experience, said he moved entirely out of stocks and into cash late last month. Now a partner at Alverita, a wealth management firm in New York, he said recent setbacks suggested that the market would drop another 10 or 15 percent, probably until September or October, before resuming another “meaningful rally” (Jeff Sommer, A Market Forecast That Says ‘Take Cover’,, July 2, 2010).

    The forecaster who called “take cover” was Robert Prechter Jr., who published “Conquer the Crash” in 2002, the year that the market bottom and rallied 99.4% to October 2007.

    In hindsight to conquer the crash of 2000-2002 was to buy stocks – not exactly what Prechter was advocating:

    “Perhaps the number one precaution to take at the start of a deflationary crash is to make sure that your investments capital is not invested “long in stocks, stock mutual funds, stock index futures, stock options or any other equity-based investment or speculation” (p.189).

    Prechter published an updated Conquer the Crash in 2009, the year the stockmarket formed a low and rallied.

    Prechter a contrarian indicator.

    Some technical analysts see the “death cross” this week in the S&P 500 as bearish; but others don’t:

    “Traders are wrong to suspect that the price-graph pattern known as a death cross would lead to a rout in the Standard & Poor’s 500 Index, according to Brockhouse & Cooper Inc.

    “The S&P 500’s 50-day average dropped to 1,122.48 yesterday, compared with the 200-day mean of 1,112.22. Death crosses happen when the first number drops below the second. Since 1970, death crosses in the stock index preceded an average decline of 0.4 percent in the next month and three- and six-month gains of 2.5 percent and 4.8 percent, respectively, according to the Montreal-based brokerage. Eleven of the 21 occurrences preceded a one-month rally, the firm found.

    “The technical analysis world is abuzz again,” Pierre Lapointe, Brockhouse & Cooper’s global strategist, wrote in a report today. Technical analysts use patterns in price charts to make investment decisions. “But the truth of the matter is that death crosses have little predictive value,” he added.

    “The benchmark index for U.S. stocks dropped 7.7 percent in the six months following the last death cross, on Dec. 19, 2007, Brockhouse & Cooper said. After the one before that, on July 14, 2006, the S&P 500 posed a six-month rally of 15 percent, the data show. The biggest six-month gain was the 31 percent rally after April 21, 1980, and the largest drop was the 18 percent slump following May 17, 2002. The U.K.’s FTSE 100 Index formed a death cross on June 25 and has fallen 2.6 percent since then” (Alexis Xydias, Death Cross in S&P 500 May Not Lead to Rout: Technical Analysis,, June 30, 2010).

    While the Conference Board’s “Consumer Confidence” declined, the University of Michigan’s Consumer Sentiment hit a two year high last week.

    Some bulls – Biker will like the first one:

    “We’re in the middle of a sustained recovery in the U.S.,” [John] Paulson declared in London. “The risk of a double dip is less than 10 percent.” The housing market is now, he says, an attractive buying opportunity. “It’s the best time to buy a house in America,” he said. “California has been a leading indicator of the housing market, and it turned positive seven months ago. I think we’re about to turn a corner”…

    “Paulson has a simpler view: Americans are starting to spend again, in ways not terribly dissimilar to the ways we did before, buying suburban homes and stuffing our Social Security checks into slot machines. There are pitfalls. As we work our way back to the old normal and demand picks up, the years of superlow interest rates will come back to smack us, fueling inflation that Paulson sees possibly reaching into the double digits within a few years. That’s why, in addition to Florida property, Paulson is heavily invested in gold” (Hugo Lindgren, Krugman or Paulson: Who You Gonna Bet On?, July 1, 2010).

    “Stocks are the cheapest relative to bonds in three decades, a sign it’s time to buy, Michael Darda, the chief economist for MKM Partners LLC, said in a phone interview.

    “From a risk-reward standpoint these are good entry prices,” said Robert Doll … vice chairman and chief equity strategist at New York-based BlackRock Inc. “I think the risk of a double-dip recession is low.” (Kelly Bit, U.S. Stocks Drop as S&P 500 Posts 12% Loss for Second Quarter,, June 30, 2010).

    “While U.S. stocks have fallen 16 percent and lost $2.4 trillion since April 23, they may end up surging through the end of the year, said Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist. Stocks should gain as Republicans gain votes in Congress in November and the benefits from European debt-cutting measures become clear, he said.

    “Government spending may be poised to decline given that Republicans are likely to gain seats, a bullish sign for investors, Levkovich said in a July 1 interview with Bloomberg Television. A decision on whether to extend tax cuts implemented by former President George W. Bush will also help send the S&P 500 as high as 1,175, Levkovich wrote in a June 30 note.

    “Birinyi Associates Inc. also expects equities to gain. The rally since March 2009 and the retreat that began two months ago mimic the pattern set in 1982, when a bull market that lasted five years began, according to Birinyi data” ( Whitney Kisling and Nikolaj Gammeltoft U.S. Stocks Drop as Dow Posts Longest Losing Streak Since 2008,, July 3, 2010).

    While Birinyi Associates look to 1982 I prefer to look at the correction of 1975 in the bull market of 1974-76.

    (That rally was a basis of my early 2009 post suggesting that the Dow was on the cusp of a 70%+ rally – the Dow rose 70.2% from March 2009 to April 2010).

    The Dow rallied 52.7% from the December 1974 low to a July 1975 high. The Dow corrected 11.1% from July to October – a four month correction. Then the Dow rallied 29.4% to the August 1976 high. The Dow did not pass this high until after the Carter recession of 1980.

    You would expect the rally that started in 2009 would see one meaningful 10%+ correction before reaching the rally high.

  9. Watcher, Paulson is not of my favourites – he talks out the side of his mouth like Buffet. I don’t agree on his comments on the US consumer and that is the heart of the double dip as I see it. I agree though that US real estate might be at fair value as long as the local conditions have unemployment around the national average. The worst and best thing about the US is portability. You know the thing that allowed Greenspan to get away with his “small isolated areas of housing irrational exhuberance” (para). When a US town or city dies it is a long road to a comeback. You might even apply it to states right now if you look at NY and CA budgets. Munis are another extend and pretend.

    I read today that the Chinese increased the minimum wage by a third in two of the largest provinces to Y600. Now that is impact.

    Locally I have noticed funds transfering into the Healthcare sector (except the beleagered SIP) on the ASX. XSJ had a run and has now flattened. XXJ has dipped more than sharply in the past month. Property is strangely up despite commercial being in extend and pretend land with little activity. Overseas bond issuance is down 50% in the first half of the year so expect bank funding back on the govt agenda soon.


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