I find it very amusing that we are being bombarded with so many absurd election year “talking points” and none of them concern the risk of a 2012 economic recession. The entire world seems in denial about a global problem which is about to hit everyone over the head. I’m reminded of the odd brainstorming session in September of 2008, when Presidential candidates Obama and McCain were seated at the same table with a number of econ-honchos, all of whom were scratching their heads in confusion about the financial crisis. Something similar is about to happen again. You might expect our leaders to be smart enough to avoid being blindsided by an adverse economic situation – again – but this is not a perfect world. It’s not even a mediocre world.
After two rounds of quantitative easing, the Kool-Aid drinkers are sipping away, in anticipation of the “2012 bull market”. Even the usually-bearish Doug Kass recently enumerated ten reasons why he expects the stock market to rally “in the near term”. I was more impressed by the reaction posted by a commenter – identified as “Skateman” at the Pragmatic Capitalism blog. Kass’ reason #4 is particularly questionable:
Mispaced preoccupation with Europe: The European situation has improved. . . .
Skateman’s reaction to Kass’ reason #4 makes more sense:
The Europe situation has not improved. There is no escape from ultimate disaster here no matter how the deck chairs are rearranged. Market’s just whistling past the graveyard.
Of particular importance was this recent posting by Mike Shedlock (a/k/a Mish), wherein he emphasized that “without a doubt Europe is already in recession.” After presenting his readers with the most recent data supporting his claim, Mish concluded with these thoughts:
Telling banks to lend in the midst of a deepening recession with numerous austerity measures yet to kick in is simply absurd. If banks did increase loans, it would add to bank losses. The smart thing for banks to do is exactly what they are doing, parking cash at the ECB.
Austerity measures in Italy, Spain, Portugal, Greece, and France combined with escalating trade wars ensures the recession will be long and nasty.
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Don’t expect the US to be immune from a Eurozone recession and a Chinese slowdown. Unlike 2011, it will not happen again.
Back on October 8, Jeff Sommer wrote an article for The New York Times, discussing the Economic Cycle Research Institute’s forecast of another recession:
“If the United States isn’t already in a recession now it’s about to enter one,” says Lakshman Achuthan, the institute’s chief operations officer. It’s just a forecast. But if it’s borne out, the timing will be brutal, and not just for portfolio managers and incumbent politicians. Millions of people who lost their jobs in the 2008-9 recession are still out of work. And the unemployment rate in the United States remained at 9.1 percent in September. More pain is coming, says Mr. Achuthan. He thinks the unemployment rate will certainly go higher. “I wouldn’t be surprised if it goes back up into double digits,” he says.
Mr. Achuthan’s outlook was echoed by economist John Hussman of the Hussman Funds, who pointed out in his latest Weekly Market Comment that investors have been too easily influenced by recent positive economic data such as payroll reports and Purchasing Managers Indices:
I can understand this view in the sense that the data points are correct – economic data has come in above expectations for several weeks, the Chinese, European and U.S. PMI’s have all ticked higher in the latest reports, new unemployment claims have declined, and December payrolls grew by 200,000.
Unfortunately, in all of these cases, the inference being drawn from these data points is not supported by the data set of economic evidence that is presently available, which is instead historically associated with a much more difficult outcome. Specifically, the data set continues to imply a nearly immediate global economic downturn. Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) has noted if the U.S. gets through the second quarter of this year without falling into recession, “then, we’re wrong.” Frankly, I’ll be surprised if the U.S. gets through the first quarter without a downturn.
At the annual strategy seminar held by Société Générale, their head of strategy – Albert Edwards – attracted quite a bit of attention with his grim prognostications. The Economist summarized his remarks this way:
The surprise message for investors is that he feels the US is on the brink of another recession, despite the recent signs of optimism in the data (the non-farm payrolls, for example). The recent temporary boost to consumption is down to a fall in the household savings ratio, which he thinks is not sustainable.
Larry Elliott of The Guardian focused on what Albert Edwards had to say about China and he provided more detail concerning Edwards’ remarks about the United States:
“There is a likelihood of a China hard landing this year. It is hard to think 2013 and onwards will be any worse than this year if China hard-lands.”
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He added that despite the recent run of more upbeat economic news from the United States, the risk of another recession in the world’s biggest economy was “very high”. Growth had slowed to an annual rate of 1.5% in the second and third quarters of 2011, below the “stall speed” that historically led to recession. It was unlikely that the economy would muddle through, Edwards said.
So there you have it. The handwriting is on the wall. Ignore it at your peril.
When the Music Stops
Forget about all that talk concerning the Mayan calendar and December 21, 2012. The date you should be worried about is January 1, 2013. I’ve been reading so much about it that I decided to try a Google search using “January 1, 2013” to see what results would appear. Sure enough – the fifth item on the list was an article from Peter Coy at Bloomberg BusinessWeek entitled, “The End Is Coming: January 1, 2013”. The theme of that piece is best summarized in the following passage:
Peter Coy’s take on this impending crisis seemed a bit optimistic to me. My perspective on the New Year’s Meltdown had been previously shaped by a great essay from the folks at Comstock Partners. The Comstock explanation was particularly convincing because it focused on the effects of the Federal Reserve’s quantitative easing programs, emphasizing what many commentators describe as the Fed’s “Third Mandate”: keeping the stock market inflated. Beyond that, Comstock pointed out the absurdity of that cherished belief held by the magical-thinking, rose-colored glasses crowd: the Fed is about to introduce another round of quantitative easing (QE 3). Here is Comstock’s dose of common sense:
After two rounds of quantitative easing – followed by “operation twist” – the smart people are warning the rest of us about what is likely to happen when the music finally stops. Here is Comstock’s admonition:
Charles Biderman is the founder and Chief Executive Officer of TrimTabs Investment Research. He was recently interviewed by Chris Martenson. Biderman’s primary theme concerned the Federal Reserve’s “rigging” of the stock market through its quantitative easing programs, which have steered so much money into stocks that stock prices have now become a “function of liquidity” rather than fundamental value. Biderman estimated that the Fed’s liquidity pump has fed the stock market “$1.8 billion per day since August”. He does not believe this story will have a happy ending:
One of my favorite economists is John Hussman of the Hussman Funds. In his most recent Weekly Market Comment, Dr. Hussman warned us that the “music” must eventually stop:
Will January 1, 2013 be the day when the world realizes that “the Emperor is naked”? Will the American economy fall off the “massive fiscal cliff of large spending cuts and tax increases” eleven days after the end of the Mayan calendar? When we wake-up with our annual New Year’s Hangover on January 1 – will we all regret not having followed the example set by those Doomsday Preppers on the National Geographic Channel?
Get your “bug-out bag” ready! You still have nine months!