Excuse Me Sir, But Do You Want Another Dip With That Recession?

I am on vacation and not about to do a long post, but I just read this nice piece and thought I would pass it on; it is about the prospect of a double-dip recession. Apparently economists are now up into the 30-40% range of expecting it and only a few months ago were around 15%. Seriously? I never went below 50%, though my timing has been off a smidgen.

http://finance.fortune.cnn.com/2011/08/12/recession-forecasts-economists/

Indeed, I, for one, do not believe we ever got out of the last recession. The surge we have seen has been stimulus spending, QE and QE2, not to mention the effects of stimulus and the like in other countries. In other words, it has been a manufactured economic bounce from the recession and I do not count that in my books. Had it worked in stimulating new growth, that may have been another story, but it did not work, so we really never recovered from the last recession. It was just masked over by government actions.

So where do I stand on the odds of a double-dip (assuming we ever really came out of the first one)? I side with Mr. Rosenberg in the linked article. He seems to not be wearing rose colored glasses. I think the double-dip has already arrived. All we need now is the sprinkles.

Disclosures: None.

Holy &*$%! Batman!!!

Well I suggested last Friday that the first ever downgrade of U.S. credit would be ugly, but I did not see it being this ugly. I mean shave that dog's butt and teach it to walk backwards ugly. I mean, if ugly Betty were this ugly no one could bear to watch the show. I mean . . . well you get the point, damn ugly!

Oh my God, we are back to the level the markets were at - 10 months ago!!! Oh no, we lost 10 months of growth!! The end is here!! Run for your lives!!

Wait a second, did I say just 10 months of growth? Now I realize the 2008 rescession wiped out a good decade and the last 10 months of growth was cherished by many looking to retire, but it is not a game ender. We are just shocked with the speed that 10 months evaporated in a couple of weeks.

In my view, the sell off is perhaps too ugly. Despite the downgrades people are selling their equities and buying what - you guessed it, Treasuries. So they are running to the debt that just had a credit downgrade, and no one really believes the U.S. cannot finance its debt payments. This results in rates going down for Treasuries, which means loans tied to same are also reduced, so even if the gap for loans between Treasuries and loan rates widen due to this, they are widening against a lower base - at least for the moment.

You also have oil that dipped below $80 a barrel today, so that will help a lot of folks.

And U.S. corporations are still doing quite well. Berkshire announced a 74% increase in profits last week. Most U.S. corporations have plenty of cash and decent looking profits. Sure, this is coming from off-shore profits in emerging markets, but base case they are doing pretty well, so a sell off in the equities is perhaps not justified to the extent or at the rate it has happened.

Still, as I write over seas equities are taking a big dive, U.S. futures are showing another 2% down in the morning and the uglieness continues. It will, however, stabilize. Keep the faith.

This is not to say all is fine on the western front. Corporate profits aside, the U.S. is likely entering a new recession. House prices, unemployment, deficit reduction and other factors are a deadly brew making it inevitable in my book. Now I suspect in time QE3 will slow the rescession. It is not here yet and the Fed is not likely to go there tomorrow, but it is coming. I wrote in July that it was baked in the cake at a time when something like 85% of the economists were saying it would never happen. I think that percentage has now changed just a tad. Perhaps still only 50/50 or so, but I am winning converts.

Don't get me started, however, on the EU. I predicted at the beginning of 2009 that the EU may lose the U, or at least some members, and it seems I am starting to get some traction on this prediction. Yes, PIIGS get slaughtered.

Disclosures: I do own some U.S. Treasuries but otherwise hold no investments discussed here and do not intend to buy any in the next 72 hours.

Ugly Ahead - Hold On To Your Seats

Here are a few things you need to know about today. The employment numbers were resoundingly stated as being "good" by every source I read, up 117,000, which is better than expected. Problem is we need roughly twice that many new jobs to start seriously reducing unemployment.

But wait, you say, unemployment went down today from 9.2% to 9.1%, so we are making improvements, right? And here my friends is a reason to understand the figures. The "official" unemployment numbers can go down a number of ways, even aside from government manipulation. One way is for enough jobs to be created to lower the ranks of unemployed - and that did not happen. Another is for a lot of people to give up looking so they are no longer officially considered among the unemployed - and that is what happened. Yep, the number of people seeking jobs decreased over 150,000. In other words, 150,000+ simply gave up looking, which I take as a sign of how bad things are out there.

http://www.foxnews.com/politics/2011/08/05/when-good-news-is-bad-unemployment-rate-drops-as-workers-bolt-labor-force/

So the "good" numbers are simply better than expected and not so good. Just be prepared.

I have triple A (as in the auto related company) and the U.S. government (as in the rating) does not!

Well, S&P just downgraded the U.S. credit rating below AAA. Now folks are saying there should not be too much market reaction:

http://www.reuters.com/article/2011/08/06/us-usa-debt-downgrade-view-idUSTRE77504J20110806

But the first downgrade in, well, forever, is no big deal, really? S&P also says there may be further cuts if we do not do the deficit reduction that we are anticipating. I have to think this is a big deal, even if not unexpected as S&P has been calling for this for a while.

The postal service losing $3 billion and being on the verge of bankruptcy also cannot help this situation. It has been coming for a while, which has me questioning why the postal union is running radios ads on how the service is self-sufficient and not dependent on taxpayer dollars, but what do I know.

http://content.usatoday.com/communities/ondeadline/post/2011/08/postal-service-warns-of-default/1?csp=34news

Billionaires in the News

Now I could say all is terrible but Mr. 3 in the Fortune 100 list is having a good day. Berkshire Hathaway just announced profits up like 74%, so Buffet is having a pretty good day.

http://www.google.com/hostednews/ap/article/ALeqM5hRxPM2hW1icxgY27a45VveGoGUgQ?docId=938006f20797466e944d2c9206e06b83

But Mr. 1, a Mr. Slim from Mexico who has had the number 1 rank for two years in a row, is having a smidge of issues. I read yesterday that this past week he has lost $8 billion in his portfolio. Ouch!! I once lost $8 billion, and though it was not in nearly that short of a period of time, it really hurt. Now Slim only has a little over $63 billion left to survive on, and my heart really goes out to the guy. What can he do, where will he eat?

Other than this, everything is fine. Everything in Europe will be fine next week. Citizens are not still protesting in the streets in Greece and they are not quickly taking all their money out of the banks. Spain is fine. Italy just swallowed the pill and will be fine. The PIIGS are back in their safe pens and no problems exist. And before you act on this paragraph, note that not a lick of it is true.

Okay, I wish that were true, but as I said yesterday, PIIGS get slaughtered. It is just a matter of time. And this is despite whatever spending reductions the ECU requires. Did I mention that reductions in deficit spending hurt the GDP and worsen recessions? A worsened GDP is all the EU needs right now, but I agree deficits need to come down. Not an easy choice.

Disclosures: I do not own any equities mentioned in this piece and do not intend to buy any in the next 72 hours.

Silver Lining

Okay, I am the first to admit that I have been a sky-is-falling kind of guy for quite a while, which is against my optimistic grain. Despite the negativity of my posts of late (for three years), I have to say that the market dump today took me off guard. Yes, I had some put options in place and actually made money today, but I was not expecting what happened.

Here is the deal. The bigger international companies in the U.S. are making their money overseas, largely in emerging markets. For the most part, their earnings and profits are not suffering too bad, so for them to take a big hit in the market is, perhaps, not justified. I say "perhaps" as the problems in the EU and U.S. can bleed over to emerging markets readliy but they are not suffering just yet, have a fair amount of cash and, I think, are not deserving just yet a 5% stock hit. But I am not making any stock recommendations.

That said, in time I think these international companies and emerging economies have to be affected by what is going on in the EU, US and elsewhere. We are their prime markets and in time their economies will have to react.

And big corporations still doing well is not necessarily a benefit for U.S. workers. Jobs are being shipped overseas, the growth is overseas and everything else seems to be overseas. It is not leading to U.S. job creation and it will not going forward. So the good news is that the big corporations may still be making money but the bad news is that it is not supporting the U.S. economy. So, judge for yourself, what this means in terms of silver lining. The U.S. will suck wind for years to come in economic conditions even if some companies will dodge the bullet due to emerging market prospects.

Disclosures: I have some put options that I have had for over a year and they did well today, but they are all down over 50% and will likely remain so despite what the market does in weeks to come. I just kept them in the chance that what is happening now would happen.

PIIGS Get Slaughtered

Not a big post at the moment, but if you have not seen it, the letter from the President of the European Commission, Jose Manuel Barroso, is worth your consideration. It goes a long way toward explaining the downward spiral of global markets today:

http://www.calculatedriskblog.com/2011/08/european-commission-president-crisis-no.html

Disclosures: None

Really - Trust Me

I posted yesterday on a host of headwinds. I did not link a lot of support but based it on what I have been reading. A host of stuff I read today further supports what I said so let me link some of it in case you think I was making it up. First, I noted China is not going to pull us out of the current economic demise as it is now having problems of its own. Don't believe me, read this:

http://seekingalpha.com/article/284142-china-s-economy-train-wreck-waiting-to-happen

I noted that I had been reading a lot about layoffs, more than usual. Today I read that layoffs have risen to a 16 month high:

http://www.latimes.com/business/la-fi-jobs-20110804,0,5481757.story

I talked about continuing and worsening problems in the EU, which is discussed further here:

http://www.nytimes.com/2011/08/04/business/global/europes-banks-struggle-with-weak-bonds.html?_r=1

I am not making this stuff up and while it sounds like I am repeating myself - well - I am. The problems have not changed much other than for the most part getting worse. I again think we will have some short term stabilization and that we are looking at QE3, which will boost the markets for a few months, but in the end - PIIGS get slaughtered!

Disclosures: None

You Ain't Seen Nuttin' Yet

I will be the first to note that the markets will likely calm down in the short term and recover a bit. But it is going to be very interesting for the rest of this year, and perhaps for a few years to come. Let's consider what keeps me, and the markets, awake at night:

• It is clear the U.S. economy is slowing down to near a dead stop. GDP numbers are not good at all. The question is, what will bring them back? I am asking as I do not know.



• There are a host of reports I have seen this past week on U.S. companies laying off thousands of employees. Some are moving them overseas and some simply cutting back, especially large banks.



• One salvation in this past recession was continued growth in China. China is pulling back to avoid a real estate bubble of its own (and related bubbles) and with major export destinations being stressed is facing great difficulty going forward. Don't believe me, look at the Hang Seng for the past three months, it is not doing well. And that is just the start. China also has horrific demographics. Lots of old people there (as in more old people there than the U.S. population) and the one child policy, whether wise or not, has led to a total male/female imbalance. It also has horrific environmental problems. China definitely has its challenges going forward. Challenges aside, as they slow down the economic train to avoid a bubble bursting they will not be the driver out of the next recession. I am looking to India to perhaps be the engineer on that train, if there is one.



• Housing is still in the doldrums. Still a lot of houses on the market and a lot of shadow inventory. I like that banks, the FHA and others are doing a lot to clear out the old stuff including donating it to charity and paying to have it demolished. Still, millions of houses will take a long while to clean off the slate and we are not there yet.



• Did I mention unemployment? As noted above, there are a lot of recent announcements on cut backs and I think the unemployment numbers will suck wind for many months to come.

Okay, you say, enough. Yet I say, I have not even touched the main headwinds that we face, which are:

• We have a major deficit problem that we need to deal with now. Reducing deficit is not something that sits well with economic growth. The just approved budget, which I still need to study more, is only the beginning. We will be pulling back on spending for at least the next decade and pulling back on spending is not good for GDP. If we add tax increases, which I believe we must, that too is a GDP damper. Can the U.S. economy thrive through this, cut backs in China, Japan's issues and what I talk about next - EU, I have my doubts?;



• Then there is the EU. I will not linger here too much as I have written about it a lot. The 10 year spread between Italy and Germany and Spain and Germany are at new highs as we speak. "Hogs get slaughtered and PIIGS get fed" only works for so long. Eventually, PIIGS get slaughtered too. The technical "default" in Greece will be followed next year by real defaults, if not sooner.

That is what keeps me awake at night. It appears the markets are starting to realize there are not enough engines of growth in the world right now to support those out of gas.

On a final note, I attach an article in the WSJ related to what is said above. Can't say I disagree with anything said in it.

http://wallstreetpit.com/80719-the-problem-is-too-much-debt

Disclosures: None.