We Will See

My wife says I am an optimist. She does not read my blog. I do believe optimist describes my nature, but I suspect you may beg to differ. I have been called chicken little, but that was late last summer when I was predicting doom-and-gloom. You can figure for yourself what has happened since then.

Notably past performance is no indicator of future performance. Look at three or four years of performance at the main financial companies lest you have any doubt about this statement. Bottom line, I am just as apt as the next guy to be wrong. And negative reactions to my negative reactions are perhaps correct. I have no lock on the right direction here, just passing on what I am seeing.

What I am seeing is a job loss in March of 742,000 jobs. The only thing surprising to me is that most predicted we would do better than the February number, which I believe was barely over 700,000. If you believed things turned in March (like the market believed) then I can see why jobless expecations changed. Yet the proof is in the pudding.

Not all is lost by any means. As the linked Bloomberg article notes there are some glimmers of light. These are not yet spelling a bottom for me, but you decide on your own:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aNz_BL.tu7yw&refer=home

Here is perhaps even better news - Nouriel Roubini, one of the most prominent doom-and-gloomers, thinks the past quarter was the worst we will see. The rest of this year will still be recession but not as bad. After that he sees a long, very slow climb. It is "L" shaped but we may be at or near the bottom of the "L," according to Nouriel. Not the brightest news, but darn right cheery for Nouriel.

http://finance.yahoo.com/tech-ticker/article/223197/Roubini-Go-Ahead-Keep-Dreaming-of-That-"V-Shaped"-Recovery?tickers=xlf,%5Edji,%5Egspc

Car sales are also showing the possibility of a bottom. After all, there is just so long people can keep those old cars running - though there are obviously a lot of good used cars out there. Hardly decisively in terms of a bottom, but better than a decisive fall.

http://www.calculatedriskblog.com/2009/04/auto-sales-ray-of-sunshine.html

And did I mention the market was up today after a rough start. Good recovery after a bad jobs report. Nonetheless - here it comes - I have my doubts that the worst is behind us. Yes I know unemployment usually peaks six or so months after the market bottoms, so I am not focusing on that stat. In other words, the unemployment numbers are not a leading indicator. So let's ignore these for a moment.

Chinese manufacturing is down for eight months in a row. If you are in competition with them, perhaps a good sign, but the competition is doing no better.

http://finance.yahoo.com/news/Survey-finds-Chinese-apf-14808967.html/print

And just a smidge of corporate debt was downgraded by Moody's in the first quarter. That "smidge" totalled $1.76 trillion (with a T). That is a lot of downgrade in my book. Indeed, it is the worst default rate since WWII. Go figure.

http://www.reuters.com/article/marketsNews/idINN0142700320090401?rpc=44

And I must say that Moody's was rather moody in March. They report that credit card charge-offs were also at record highs. A sixth consecutive month of increases and the highest level in 20 years. Yep, that bodes well for a bottom.

http://www.reuters.com/article/companyNewsAndPR/idUSN0150570720090401

I mentioned yesterday GM and Chrysler's imminent bankruptcy filings. Some of the other car makers are not doing much better, despite some signs of a bottom in car sales.

http://www.calculatedriskblog.com/2009/04/ford-us-march-sales-fall-409.html

Where I am coming from has a few key items. First, roughly two thirds of our GDP, before the recession, was based on consumer spending. This was during a period when people used their houses as piggy banks, when millions more were employed than now and when credit for anyone who could fog a mirror was plentiful. We are now in a period where houses continue to lose value (so the piggy bank is not only empty but asking for money back), where incomes are stretched (if they exist at all), when credit is not being extended even to the worthy, and where the vast majority of Americans desperately need to deleverage from record high levels of debt. Even with stimulus, consumer spending ain't happening going forward at levels it did for many years, if not decades, to come - AND IT SHOULD NOT DO SO. I know the government wants us to continue spending to save the economy. At best we should slow our individual deleveraging but not stop the process.

Second, we built many mega-financial institutions off of derivatives, like mortgage securitizations, and all sorts of other fancy financial instruments. This financial market is gone and not about to return. It was highly profitable for the institutions, but it is now gone and not to return until all present memories have dissappeared. After all, we enacted laws in 1908 in response to the 1907 recession that made instruments like credit default swaps, i.e. bucket shops (look it up), illegal. During the last few months of Clinton's reign, Congress enacted the Commodities Futures Moderniztion Act of 2000, which Clinton signed into law in December 2000. It cleared the air for CDSs to be legal, for bucket shops to return with a vengence. We basically had legal, unregulated instruments, that allowed people to bet on the direction company bonds or other debt would take but with no proprietary interest in same. And bet they did, to the tune of $62 trillion by some estimates. Right - no problem here. It took us nearly 100 years to forget why we made made bucket shops illegal and hopefully it will take at least that long the next time. Don't believe me, believe Eric Dinallo, the New York Superintendant of Insurance, who recently tried to regulate certain CDS positions as insurance.

http://www.nakedcapitalism.com/2009/03/eric-dinallo-we-modernised-ourselves.html

And housing needs to bottom. There are signs that we are close, but there are other signs we are not there yet. I have posted these here yesterday and today. We will not get to the bottom of the economy until housing reaches bottom. I suspect that getting there will take a bit more time. With Alt-A mortgages and Option ARM mortgages coming to peak, with unemployment increasing drastically, with house prices continuing to decrease, I do not see a bottom in housing until late 2009 or early 2010. It could even be later in 2010. That to me will spell the beginning of the end.

After that I agree with Nouriel - the climb back will be very slow. I do not view it so much as an "L." recovery. I view our current "recession"as a correction. We are getting back to where we need to be. When we get there, the "L" will only become a "V" if there is some major economic significant gain to be exectected overall, but this is not realistic. Still, I think the economy will simply go back to a realistic level and slowly gain from there - slowly but surely. We will start to gain but from a more realistic, corrected, base. Let me be clear. If the fictional market was at 10,000 at peak and that was a false peak, perhaps the new reality market figure is 5,000. The reality may be that 5,000 is reality for our current economic condition. And going back to 10,000 could take 2, 5, 10 or so years.

Disclosures: None