Market Talk

Now, as opposed to Yardeni’s sunny view, here’s another take, from the University of Maryland’s Peter Morici, who’s in what seems to be a very small camp of people looking at everything going on in the world, and actually finding it disturbing.

Crises in the Middle East and Japan threaten to thrust the U.S. and global economies into a second recession.

Since the economic recovery began in July 2009, GDP growth has averaged only 2.8 percent, a pace insufficient to bring unemployment down to acceptable levels. And that rate of growth leaves the economy too vulnerable to the slightest hiccup and a deceleration into recession.

Prior to the turmoil in the Middle East, economists were forecasting 3.5 percent growth for 2011, but the surge in oil prices to $110 a barrel and gasoline to $3.62 a gallon will likely shave half a point—perhaps more—from that rosy outlook.

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I found an interesting contrast between this outlook, from Ed Yardeni, president of Yardeni Research, and this one from Peter Morici. What I find interesting is the divergence; two guys who from my reading of them are both in the conservative camp, but with wildly different takes on what’s going on.

I don’t know that I have some brilliant insight into what all this means. I just found it very interesting, and seeing as this is Market Talk, well, here’s some talk.

From Yardeni:

What’s driving the global economy? For the past two years, it has been the boom in global manufacturing, led by demand for manufactured goods in emerging economies. The OECD index of global industrial production rose 0.9% m/m and 6.9% y/y during December to a new record high. It is up 15.3% since the most recent cyclical trough during January 2009. It had plunged 12.2% during the most recent downturn.

It should continue to grow this year. There are certainly challenges confronting global manufacturing. High food and fuel prices may depress the purchasing power of consumers around the world. Concerns about rising inflation are pushing central banks to tighten their monetary policies, particularly in emerging economies. Serious disruptions to global supply lines are already an issue for the auto and technology industries. It is difficult to assess how long these problems will persist.

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If you’re not already paying $3.50 for gas at the pump, and some of you are, are you ready for it? Because it’s coming, and when it gets here, things are going to get sticky.

It’s almost a given, because the spike in crude-oil prices this week will be filtering through to the pump over the course of the next few weeks. I know the gas station in town I go to was charging $2.95 last Friday, and was charging $3.09 yesterday (I live in Jersey; high taxes, cheap gas.)

Don’t kid yourself: the “recovery,” already a weak, pale thing, could be totally unwound by a spike in gas prices. In 2008, $4 gas was the last straw that pitched the economy over. Given how much weaker the average American is today than then, it wouldn’t surprise me if $3.50 was the trigger this time.

Once prices starting going above $3.50, we’re in seriously perilous territory (as if perilous itself isn’t perilous enough.) Now, most people think the only way that happens is is we get a serious supply shock, like if Saudi Arabia goes under, and the market universally doesn’t think that can happen. Of course, how many times have you heard a line like that?

Gluskin Sheff’s David Rosenberg’s heard it quite a few:

I have to say that it is amazing how myths become so quickly promulgated in the financial industry. First, it is now taken as a given that the Saudi Arabian political regime will remain intact because surveys show how well loved the King is and how great it is to see the population now being bought off with $36 billion of fiscal assistance from the Royal Family. As if the population is going to be bribed into trading in economic freedom for fiscal transfers, especially if the large Shiite population sees democratic concessions take hold in neighbouring Bahrain (where most of the people are Shiites, many from Iran, and ruled by the Sunnis).

Now sure the odds as of this moment are low that the revolution will spread to Saudi Arabia. But the Saudis are worried about it, which is what that payoff was all about. If the House of Saud thinks it can happen (and you don’t spend $37 billion if you don’t) then why’s the market so unconcerned? Because whistling past the graveyard is a favored strategy on Wall Street.

Newswires’ David Bird lays out the domestic picture for you: (subscription required.)

NEW YORK — U.S. gasoline prices, already at record highs for February, don’t fully reflect the surge in crude-oil prices amid turmoil in the global oil patch. A $3.50-a-gallon national average–the highest since September 2008–is in sight well ahead of the peak driving season.

Gasoline prices, already up 20 cents a gallon in the futures market this week as global benchmark Brent crude climbed to as high as $120 a barrel, could hit $4 a gallon or higher, raising the spectre of economic turmoil and a double-dip recession in the world’s biggest energy user, analysts said.

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It is not technocratic economists who will win the day and pull us out of our cul-de-sac, but angry Irishmen and Spaniards who challenge, on moral terms, the right of German bankers to impose vast deadweight costs on current activity because they lent greedily into what might easily have been recognized as a property and credit bubble.

- Steve Randy Waldman, Interfluidity

I’ll tell you a secret: when the Irish crisis was at its worst (so-far worst, I suppose would be accurate,) I quietly hoped that somebody in Ireland would make some kind of stand that would scuttle all the bailouts, all the forced concessions, that would really expose the bankers to the losses sitting on their balance sheets, and once and for all get this crisis to where it must eventually go: recognizing losses wherever they lie, clearing out all the bad bets and lifting the governmental protections from the favored classes.

It didn’t happen. So far, at least. Hey, it didn’t happen here in the U.S. either, and the biggest problem with the credit crisis is that it remains so far unresolved. The Fed, two administrations and now two Congresses merely succumbed to pressure from the banking lobby, threw trillions at the system, saved the banks from their own recklessness, codified the notion of too-big-to-fail, and put the weight of all the bailouts on the backs of the taxpayers. But it didn’t solve any of the underlying problems.

That’s how I read the last three years. That’s why I don’t buy all this recovery talk.

Now, I’m no economist. I’m just an untrained journalist. But it doesn’t take a Ph.D. in economics or political science to understand that something very, very wrong went down. The argument sold to us at the time — that while distasteful, the bailouts were necessary to prevent a wider melt-down — hasn’t exactly held its own against the weight of time, as fully 10% of the work force remains unemployed, as even more millions are stuck in low-paying part-time jobs, as millions more are seeing their wages held down, all while Wall Street returns to its free-wheeling and massively profitable ways

Meanwhile, the debt bombs haven’t been defused, they’ve just been move up the ladder, from individuals and corporations to central banks and sovereign states.

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US stocks surge, as does just about every “risk” asset, after the Bank of Japan tries again to arrest the yen’s rising, the most note-worth move among several from different central banks, including those in Australia and Brazil as well as the looming bond-buying program from the Fed, that have “currency war” written all over them.

DJIA jumps 193 (1.8%) to 10945, its highest close since May 3. S&P 500 rises 24 (2.1%) to 1161, Nasdaq Comp surges 55 (2.4%) to 2400.

It’s not just stocks: gold, crude, the euro all rise sharply, as investors are betting on a widespread bout of competitive devaluations among central banks. That’s good for nominal asset prices right now, but seems to us it’s bad for everybody in the long run.

It isn’t clear why the Fed seems so intent upon launching into all this dollar bashing, unless they think the economy is weaker than they’re letting on. If the recession’s over, and the economy’s recovering, why do something so dangerous destabilizing?

The Chicago Fed’s Charles Evans today said the central bank should do “much more” for the economy. Why’s that? “In the last several months I’ve stared at our unemployment forecast and come to the conclusion that it’s just not coming down nearly as quickly as it should,” he said. “This is a far grimmer forecast than we ought to have.”

This Friday’s jobs report will be an interesting one. While the sell siders and White House tout the private-sector jobs created, the fact of the matter is that over the past three months, the economy on the whole has shed jobs. Now, the jobs market doesn’t have to disgorge half a million workers a month for it to be bad. The economy needs to create at least 100,000-150,000 some-odd jobs just to keep up with population growth. To get the unemployment rate down, it’ll have to be closer to if not more than 200,000. So losing 54,000 may not sound so bad, but it is, because it just means the the employment picture is slipping for another month.

If we’re not creating jobs, it also stands to reason that wages aren’t growing, since there’s no upward pressure on employers to keep employees. If you ask me, the Fed’s afraid that this situation will slowly drag the economy back into recession. Coming as it would with an economy that hasn’t recovered from the first recession, the worst in our lifetimes, and coming as it would with a nasty bout of deflation to boot, it appears the Fed has plenty to worry about.

Seems like things are slowing down a bit.

In case you missed it this morning, the National Activity Index from the Chicago Fed slipped to -0.53 in August from -0.11 in July. You did miss it? Well, you’re not alone, that’s for sure. The national activity index isn’t exactly a top-tier data-point. It’s not even third tier; to be frank, it wasn’t even on the Dow Jones weekly economic calender. But this is one data point to which you might want to pay attention, regardless.

“As our friend Barry Ritholtz likes to call it, this is the best indicator you’ve never heard of,” Miller Tabak’s Dan Greenhaus wrote this morning. The index takes 85 separate monthly national indicator, comprising production, income, employment, housing, spending, sales and inventories, and weights them out to get its single number.

“Any reading that summarizes 85 separate other indicators is one worth watching.” Readings below zero indicate contraction, above zero, expansion. “While this index has been improving along with the economy, it is likely to print another negative number in August.”

Sure enough, it did print another negative, and the index’s three-month moving average also slipped, to -0.42 from -0.27. From the Chicago Fed: “When the CFNAI-MA3 value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun.” Not that a recession is possible, or near, but has begun. In May, the three month average was at a positive 27, so it’s seen a significant weakening over the summer.

It’s been a steady line downward, too; after May’s reading, June came in at -0.11, July was -0.27, and then August’s -0.47. Keep an eye on this one.

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Some expansion. From Gluskin Sheff’s David Rosenberg (in his daily commentary from yesterday):

• From the lows in real GDP in June/09, 69% of the recession losses have so
far been recouped.
• From the lows in employment in Dec/09, 9% of the recession losses have
been recouped.
• From the lows in household net worth in 2009Q1, 28% of the recession losses
have been recouped.
• From the lows in wages & salaries in March 2009, 36% of the recession
losses have been recouped.
• From the lows in housing starts in April 2009, 7% of the recession losses have
been recouped.
• From the lows in home prices in April 2009, 13% of the recession losses have
been recouped.
• From the lows in consumer sentiment in November 2008, 27% of the
recession losses have been recouped.
• New and existing home sales are at all-time lows – they have never recovered.

Hence the label “Great Disappointment” as it pertains to this so-called recovery.

Reading that list reminds me of the R.E.M. song “Low Low Low.” Yeah, that’s some hole we dug for ourselves, huh? How long do you think it’ll take to regain any of those pre-recession highs? Far too long, for most folks.

- With earnings season only a few weeks away, Josh Brown notes a pattern that’s developed in last six quarters. “A run up in stocks at the beginning of earnings season’s opening month followed by the almost inevitable denouement as hearts are broken and focus is diverted elsewhere,” he says. “The Ghosts of Earnings Past are haunting the nascent rally even as you read this.”

- Now that the recession is technically over, Yves Smith wonders if this is what a recovery really feels like. “The ugly fact is that serious financial crises take a very long time to resolve and result in a permanent fall in the standard of living,” she writes. “The best we can hope for, absent aggressive government action, is an economy that bumps along at a low level of what is technically growth, but is very far from what most businessmen and consumers would consider healthy.”

- Larry Summers’ decision to step down as one of Obama’s top economic advisers is a long-time coming, FusionIQ CEO Barry Ritholtz says. “Summers was a defender of the status quo…The change people voted for never appeared, and the Summers-led economic team gave us two more years of Bush bailout policies. For that humongous error, his departure is a welcome change.”

- Mark Thoma questions why the Fed’s taking a “wait and see” approach on whether more QE or other stimulative measures are needed for the economy. “The Fed should have learned that it needs to act preemptively from its mistake in dealing with the housing bubble,” Thoma says. “Cleaning up after the fact, which is what ‘wait and see’ amounts to, is inferior to preventing problems before they appear.”

- Google’s M&A department has thrown lots of money at many different ideas, but it’s hard to argue with some of its successful wagers throughout the years, including Android and YouTube, Digital Daily blogger John Paczkowski says. “Of course that’s just two acquisitions out of the 80 or so that Google’s made since 2001,” he notes. “But obviously the threat of a clunker investment or two isn’t going to temper Google’s aggressive acquisition strategy.”

- Bullish sentiment among advisors hit 41.4%, according to the Investors Intelligence weekly sentiment survey, which marks its highest level since early August. But, as Bespoke points out, bullish sentiment has hit that level a few times in recent months, with stocks not experiencing much success in the aftermath. “Will the third time be the charm or are we in for more of the same?”

- Keep an eye on the “quiet expansion” of Treasury Secretary Tim Geithner’s duties, especially in the aftermath of Larry Summers’ resignation, Yves Smith notes at naked capitalism. “The speculation has long been that he would not stay much beyond the mid-terms, but that looks like a far less sure bet than it did a few months ago.”

- Housing prices continue falling in wake of government’s home-buyer tax credit, dropping to lowest level in nearly six years, according to FHFA home price index. “With the two-year tax credit experience in the rearview mirror, officials probably need to be thinking about going back to the policy drawing board,” Ryan Avent writes.

- The recession’s officially over, but Tyler Cowen says it’s premature to believe the economy’s bottoming-out process is over. “It looks like a recovery only because things were, for a while, so extremely bad. I don’t yet think of us as being in a true recovery mode at all.”

- Runners are abandoning races with quirky distances in favor of the standard marathon or half marathon.

What's he doing in there?

If I were a betting man, if I were in the markets and not just somebody who reports on the markets, I’d be betting hard money that the Fed will do nothing today. If I could find anybody to lay odds on that, of course.

It just seems kind of nuts to think the Fed is going to embark on some major initiative today, at the end of its one-day rate-setting meeting. Isn’t the economy healing? Isn’t the recession over? Haven’t the data points been getting better? Then why are so many people thinking the Fed’s going to jump back in with some big support program?

Of course, on the issue of rates, it’s beyond obvious that the Fed’s not going to raise them, despite the fact that the recession is apparently over and the economy growing again. You want to know when the recession will really be over? When the Fed starts raising interest rates.

But the market isn’t focused on that. The market, and not just the stock market, is focused on whether the Fed’s going to announce a new round of quantitative easing, buy Treasurys in order to hold down interest rates (and, oh, if some of that money happens to trickle down to risky assets like, say, stocks, well, they can’t really help that now.) In the market, this is a real question.

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I meant to get to this over the weekend, but all kinds of domestic bliss issues got in the way. But it’s still relevant today, and maybe even more so now that the NBER’s declared the recession over.

Let’s accept at face value that the “recession,” the narrowly defined slide in economic activity that began in December 2007, ended in June 2009. It’s important to keep in mind this definition refers only to the slide in economic activity. Anybody who lives in the real world knows the economy remains even today in a very weakened state, maybe not technically a recession but certainly not anything even faintly resembling salad days, and that important spark that sets the economic cycle going again has yet to show up.

The recession’s end means absolutely nothing to the 15 million unemployed Americans, and is cold comfort to the millions more who are underemployed, working only part-time. It’ll elicit only a Bronx cheer from the millions more who haven’t seen a raise in two years, or have had their salaries cut, or their benefits cut, and have watched the value of their homes slide, for many below what they paid for it. It won’t mean much to the people who have seen their property taxes rise, or have to shoulder more costs for their childrens’ schooling, things that used to be covered by their (rising) property taxes.

I don’t know about you, but I know people who are still losing their jobs. I learned of another one just the other day. There are still a lot of empty storefronts where I live. There’s one shopping center by me, that I can’t remember ever having empty stores. Now it’s got gaping holes where big stores used to be, Mandee’s, Blockbuster. Unlike in the past, nothing new is coming in. The movie theater there just closed down. This is a theater that’s been around as long as I can remember. I saw “Star Wars” there (and I don’t mean those lousy prequels, I’m talking 1977-vintage, Han-shot-first version.) Now the marquee just says “thank you for your patronage.”

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