Market Talk

As that gaudy rally from last March to May recedes further into the past, the market is finding new preoccupations. The market’s favorite letter back then was V, as in the V-shaped recovery. But now it’s most dread letter (no pun intended) is D, as in demand, as in deflation, as in deleveraging, as in as in double-dip, as in depression.

That flashy rally got a lot of people thinking the worst was over. It had to be, because the market is a leading indicator, the stock market is a discounting mechanism that’s always ahead of the economy. If the market is rallying, it means the smart money is betting on a recovery, and the smart money is never wrong (if it was, it wouldn’t be the smart money, now, would it?)

Yet, and we’ve made the point several times but it’s worth repeating: they thought the worst was over in 1930, too. And in 1931. And in 1932.

One of my favorite websites is the Joliet, Ill., library’s site. They have this great page with business headlines from the local papers from the early years of the Depression. All the leading lights of the day, from President Hoover to Irving Fisher to John Jacob Raskob, thought the “worst was over,” and some bright, shiny recovery was just on the horizon. They were all wrong.

I wonder if our leading lights today may be similarly mistaken. It’s amazing that for as much as the current Fed Chairman made his bones as a student of the Depression, the Fed today finds itself stuck, unable to figure out a realistic path for monetary policy that can alleviate the economy’s biggest problem, which is that nobody’s hiring (at least, in any great numbers.)  The Fed was supposed to be managing its exit from the markets by this point, but instead all the conversation is about what it needs to do next to prevent the economy from sliding backwards. Which it’s doing on its own regardless.

So let the sell-side blather on about bond bubbles. It’s amazing that the same end of the spectrum that couldn’t see the dot-com bubble or the housing bubble somehow suddenly has crystal clarity on the subject. What the bond market is really saying is that the recession never really ended. Sure, part of what’s going on in the bond market has to do with the Fed nailing interest rates to the floor, with plans to keep them there until the economy improves or pigs fly, whichever comes first.

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- Gold dropped to a three-month low yesterday. “For gold, the battle now is between short-term traders, who see the metal’s rally as played out for the moment, and the true believers, who see gold as the only refuge from the risk of further government-engineered debasement of paper currencies,” Tom Petruno says.

- Harvard economics professor Martin Feldstein describes how difficult it truly is to forecast economic growth. “While it would be rash to forecast a double dip as the most likely outcome for the economy during the rest of this year, many of us are raising the odds that we attribute to such a downturn.”

- Nonfinancial companies in S&P 500 have a record $837B in cash, according to S&P, which is 26% higher than year-earlier figures. “The odd thing about this gigantic cash pile is that these companies are barely being paid any interest by keeping this money in cash,” Eddy Elfenbein writes at Crossing Wall Street. “It shows you just how scared they are.”

- Princeton economist and NY Times columnist Paul Krugman is baffled at the Obama administration’s waffling on whether to appoint Elizabeth Warren to head the new Consumer Financial Protection Bureau.

- Unemployment remains stubbornly high and GDP growth is slowing, but that doesn’t necessarily mean investors should avoid stocks. Peridot Capital’s Chad Brand compiles S&P 500 returns from 1958 through 2009 and concludes: “Investors choosing to own stocks only in years with negative GDP growth would have earned nearly four times as much than investors choosing to invest only when GDP was growing at 5% or better.”

- “If BP emerges from this debacle fatter and happier than anyone imagined a few months ago, whatever happened to the idea of corporate accountability?” former labor secretary Robert Reich ponders. “Does this mean any giant corporation can wreak havoc and then get back to business as usual?”

- Selling Phibro may be one of Citigroup’s best moves. “It isn’t often these days that Citigroup comes out ahead of the Wall Street pack,” WSJ’s Deal Journal says. “But at least for now, the Phibro deal is proving to be a plum.”

- “The administration would have been in a much better position today had it made a concerted effort months and months ago, even an unsuccessful one, to give the economy the help it clearly needed,” Mark Thoma writes.

- Durable goods orders slid for a second straight month, which comes as no surprise to Michael Shedlock, an investment advisor for Sitka Pacific Capital. “I cannot help but laugh at economists who refuse to see the economy is slowing dramatically, and somehow think manufacturing is going to lead the way to recovery,” he says. “That was an across the board stunningly bad report.”

- A new paper from two economists says without the Wall Street bailout, bank stress tests, emergency lending and asset purchases by the Fed and Obama’s fiscal stimulus program, GDP would be about 6.5% lower this year.

Think the unthinkable.

So I talk about a depression, and whatda I get? Crickets. But let Paul Krugman cry about one, and everybody’s talking about it. Jeez Louise, I guess it really is all about your name. And not your first name, either.

Anyhow, I understand Krugman’s point, to a point. He now says we’re on the verge of a third depression, with the two previous ones coming in the 1870s and 1930s. Got it. I’m not so sure I buy his general prescription, that more government spending is the way to go. FDR spent money for years, and where’d it get him? I’m just not totally convinced.

Now let’s assume something wild, like, oh, I don’t know, that Larry Kudlow’s wrong, and that this is the third major economic depression like Krugman says it is. Well, then, you’re looking at this: a depression, then roughly 60 years until the next one, then a depression, then roughly 60 years until the next one.

There’s a pattern there, you might say. If that’s so, it just goes further to prove that the current environment is beyond any specific policies issues. (Although I’d still argue, and have, that a number of very specific developments over the years led to our current travails.)

Meanwhile, back to the present, John Hussman is starting to sound more than just a bit worried. Now, yes, Hussman is one of the ones that wears the bear label like it’s some kind of scarlet letter. He also happens to be one of the ones that was right while entertainers like Jim Cramer were laughing off the housing collapse.

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The big talk these days is over the double-dip, the question of whether or not the economy will slip back into recession. The bulls say no, the bears say maybe, the pragmatists say it doesn’t matter because the economy stinks regardless. The markets are talking about it, the Fed is thinking about it, Spain’s problems are threatening to make it come true.

Look, if the recovery builds steam, as most people still believe, then the economy will grow, jobs will be created, and the government’s efforts will have paid off, no matter the cost and there won’t be any double-dip. If the recovery falters, if the jobs markets stagnates, if wages stagnate, if the government is so squeezed from its last go-round with bailouts and stimulus that it’s unable to blow mind-numbing amounts of money on boosting spending, well, there still won’t be a double-dip. Why?

Because it’ll be a sign the economy never actually came out of the first dip.

The signs are growing that the real economy is hitting a plateau, if not rolling over, as the various and massive government interventions into the private market fade (except for ultra-low interest rates; the Fed’s nowhere near raising them.) What’s pushed the recovery along this past year has has been government intervention, massive stimulus spending, massive inducements to consumer spending, massive monetary easing. It’s all been temporary, however, and as various programs dissipate, the real economy is left to do the heavy lifting. There are indications it isn’t up to that job.

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- Record low new-home sales don’t deter surging stocks. “New home sales are far more important for the economy than existing home sales, and new home sales will remain under pressure until the overhang of excess housing inventory declines much further,” Calculated Risk says. “Obviously this is another extremely weak report.” Still, Dow rallies 91 points.

- Supplementary Financing Program, the Treasury’s program for assisting with the Fed’s balance sheet, is making a sudden and dramatic comeback, James Hamilton writes.

- “The Volcker rule is following the tried and true path of all Obama ‘reforms,’ meaning an idea announced with great fanfare is being whittled back to meaninglessness,” Yves Smith says.

- Martin Wolf offers quite the depressing economic outlook, predicting a sovereign debt crisis on the horizon. “This, in turn, would surely result in defaults, probably via inflation,” he says. “In essence, stretched balance sheets threaten mass private sector bankruptcy and a depression, or sovereign bankruptcy and inflation, or some combination of the two.”

- Princeton economist Paul Krugman adds his two cents: “”What we really need now is… higher spending and lower trade surpluses in surplus nations, China especially but also Germany,” he says. And “some big driver of investment, such as green technology. Absent those things, it’s hard to see how we get a durable recovery.”

- Drop in bank lending truly is “epic.”

- $15 billion jobs-creation bill seems to have some limitations, Time’s Curious Capitalist blogger notes.

- Washington Post’s sales slump improves, sort of. “As always: remember what the economy was like a year ago when you think about these year-over-year comparisons,” Peter Kafka says.

- Consumer confidence data falling ten points has only happened 21 times since Conference Board began its monthly survey in 1977. “Almost every such ten-point drop can be attributed to an unusual market-moving event,” Jim Bianco says. “This is not meant to imply a cause and effect relationship, but is certainly something worth watching over the following months.”

- Critics rip new short-sale rules. “This puts a government thumb on the scale of stock prices,” says legendary short seller Jim Chanos. “Efforts to prop up stock prices where the fundamentals will not sustain them will inevitably fail.”

- How ’bout that? Goldman bows to pay pressure.

- Turbo Tim says TARP extension is needed for successful exit.

- It’s a sad day in the publishing industry. After 125 years, Editor & Publisher will fold. Newsosaur blogger Alan Mutter discusses.

- Paul Krugman puts the “good” jobs report in perspective.

- Expectations for a brief correction in the market are on the rise, yet stocks keep going up.

- One in four children are on food stamps.

- Minyanville’s Todd Harrison discusses being wrong vs. being ear1ly.

- Weekly jobless claims show firing has definitely slowed, but hiring remains in limbo.

- Hey Facebook, Twitter, MySpace…your No. 1 goal – don’t be the next Friendster.

- Recession may mark the end of an era…the US era.

Hope for sale, aisle three.

I heard a version of “Over the Rainbow” the other day, sung by a man in a sad, faraway voice, accompanied by only a ukulele. As he sang, I realized I’d actually heard the song somewhere before, but never realized what he was singing. But listening the other day, the pain, the longing, the hope, all of the humanity and confusion of our great country seemed caught in this haunting, grown man’s voice, singing this little children’s song.

The singer, it turns out, was the Hawaiian artist Israel Kamakawiwo’ole, and he’d actually recorded the song in 1993 (which includes a segue into Louis Armstrong’s “What a Wonderful World.”) But the song seemed outrageously timely to me, for a reason I can’t quite explain. Somehow “Iz,” as he was called, captured the zeitgeist of today – 16 years ago.

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They thought the worst was over, too.

It is over? Is the Great Recession over?

I don’t know. Neither do you, and anybody who says they do know is selling something.

There is absolutely no other honest answer. In journalism, you are discouraged from giving such an answer. Right or wrong, you are supposed to take a position and craft an argument that backs it up. That’s probably a relic of the Voice-of-God days for newspapers.

But with unemployment still rising, with consumers cutting back on spending and borrowing, with the biggest banks in the nation still operating by the grace of government largesse, with foreclosures still rising, with companies still getting smaller and holding off on any notions about hiring, who can say whether we’ve turned the corner based on three months?

Yesterday’s GDP report had some anxious types declaring the recession’s end. Yes, economic activity increased in the three months from July through September. But how was that achieved, and can that be sustained? It was achieved mainly through government spending. Is that sustainable? Well, it is in command economies.

It’s hard to know how bad the storm is when you’re standing in the middle of it. There were plenty of false dawns during the Great Depression.

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When we first started this blog, we had a small problem. We didn’t have any photographs. Dow Jones Newswires is, as the name implies, a wire service (that’s been around since the 1880s) and we never had any use for photographs. So we didn’t have contracts with the big photography houses, Getty, Corbis, the AP.

Sure, we could’ve just taken our images off the Internet, like so many others do, but seeing as we work for a for-profit company that cares about things like copyright law, the idea of stealing somebody else’s copyrighted was out.

Now, plenty of blogs don’t have any artwork, and it seemed like we wouldn’t either. And then I remembered the public domain.

There exists millions of images in the public domain, photographs that either reside in public collections or for which the copyright expired. And the best collection, the richest, turns out to be owned by, well, us: the Library of Congress has an online database of about 1.2 million images, with photographs going back to the very birth of photography. And they have specialized sites that comprise specific topics, like the Great Depression.

That last, given everything going on today, struck a nerve with us. We started going to that collection constantly, and it just seemed like every time we wanted an image to illustrate whatever subject we were writing about, we could find one there.

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The market's up 40% since March - how is this a depression?

Despite all the enthusiasm in the market – it’s only up about 40% in less than five months – the US is currently in the “early stages of a depression,” according to Eric Sprott of Sprott Asset Management, (hat tip Kedrosky).

Analyst makes prediction primarily based on industrial capacity collapse, government tax revenue decline, retail sales slump and rising unemployment, among other metrics.

From Sprott:

In our view, the only thing propping this market up is investor sentiment. Earnings have not improved. Keep it simple, stupid – investing is and has always been about the real economy, and this market is ignoring the hard data. You can invest in sentiment if you want to, but as we have said before, we prefer to invest in real things.

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