• Wall St economists and analysts are busily lowering GDP estimates for the 2nd half of this year, and for 2012. They’re slowly approaching the economic forecast I made last December, but are not there yet — and it is now late August –  well done Wall St!  How quickly that 4% 2011 GDP forecast evaporates. They’re still not close to admitting there’s a big recession on our doorstep.
  • Fed Data:
    • Look at this chart. It tells you the past 3 years have been stuck at the bottom of range versus average for the past 44 years.  This is what 70 – 75% of the US economy has been doing — as represented by the Chicago Fed Personal Consumption and Housing index. Look at the size of the drop from 2005. If the economy has felt like recession since 2007, this is why.  How anyone can say the past 2 months are a soft patch and that the economy is on the mend is beyond me.
    • The San Francisco Fed released a report indicating aging baby boomers will act as a demographic headwind for the stock market until 2027. On an inflation adjusted basis, they indicate the stock market will take until 2027 to get back to the market peak of 2010.  Ouch.
    • Last week’s Philly Fed index and NY Fed index each fell out of bed. Both are slam dunk indicators we’re entering a recession.  What do you know… the ECRI indicator has been collapsing since peaking in late April (when the greedometer was redlining!!!). ECRI is likely within 2 months of confirming we’re in a recession. I remind you again that a run-of-the-mill recession would see a 35%+ haircut in the S&P500. That would translate to a drop from 1360 in April to 900. The Dow would drop to approx 8500. And there’s not much chance this is going merely be average.
    • The Richmond  Fed released its most recent data yesterday. Yup: recessionary numbers here too.
  • Are we turning Japanese?  The yield on the US 5-year T-note dropped to 0.8%/year. The yield on the 10-year dropped under 2.0%. You better believe this can go lower. As long as there is:
    • a mountain of unsold housing inventory
    • falling house prices
    • and a burgeoning population of home owners under water that can bring the financial system down if they walk away from paying their mortgage
    • then the ultimate solution is Japanese-like interest rates.
  • Consider:
    • virtually every stock market index on the planet has dropped 20% or more  from their recent 2011 peaks –officially into a bear market. Canada’s TSX, the Dow, and the S&P500 are down less are not yet in officially gripped by the bear.
    • the BRICS are in a bear.
    • small cap stocks are in a bear.
    • mid cap stocks are in a bear.
    • growth stocks are in a bear.
    • commodities are in a bear.
    • REITS are in a bear.
    • high yield bonds are not in a bear yet, but getting there.
    • So, how much is portfolio diversification helping?
  • All but 10 of the S&P500 companies have now reported Q2 earnings. Revenue and earnings outperformed — as I said they would. Margins were the highest ever. But very little guidance was given.. The same thing happened in late 2007 and guess what came next….     Next quarter is going to be the first of many to underperform.
  • This coming Friday morning will see the 2nd estimate of 2Q GDP. It will likely be revised lower from +1.3% to +1.0%.  Shortly after this, Ben will emerge from his Jackson Hole and look for his shadow. Will there be six more weeks of nuclear winter in the stock market?  It depends on whether he launches QE3. My bet is he won’t, but he’ll:
    • lower the overnight interest rate banks earn from nearly zero to zero.
    • begin a plan to sell short term Tnotes and buy long term Tbonds. The desired impact will be to drive long term interest rates down in order to cause mortgage rates to drop further. To do this without further growing the Fed’s balance sheet will be beneficial. It is hard to see how this would drive stocks higher though.
  • Having briefly touched $1900, gold continues to set records. $2000 /oz is looking within reach this year, but there’s got to be a sizable pull-back at some point soon. If only for a few weeks.
  • US mortgage rates hit an all-time low. Yet the pace of existing home sales has dropped at a 17% rate — and that’s from last year’s dismal numbers.  This coming winter is going to be rough for house prices (as I wrote a year ago). All the more reason for the long bond to drop in yield.
  • This morning saw July’s US Durable Goods orders report. It rose 4%, far more than expected. The bounce was from June’s weak number, and significantly aided by volatile transportation numbers. Take that out, and you’re left with a 0.7% rise. Ho hum.
  • Europe continues to slide into recession.
  • It does not defy logic, but it is delusional that Sarkozy & Merkel have refused to address the elephant in the room for the past year and a half.
    • They deny there’s a problem.
    • OK, there’s a problem. But it is just a small liquidity problem.
    • OK, it’s more than just a liquidity problem. We need to bail out a sovereign country: Greece.  But it’s just Greece and just this one time.
    • OK, we need to bail out Ireland too. But its just Greece and Ireland.
    • OK, we need to bail out Portugal too. But it is just Greece, Ireland and Portugal.. Honest!
    • OK, we need a large bailout fund in case anyone else needs help. Oh, and sorry but we’ve got to make Greece’s bailout larger.  Relax, it’s not like Spain or Italy are coming under fire.
    • OK, we need to make that mega bailout fund larger. But this is absolutely going to stop the problem. We mean it this time.
    • OK, Spain and Italy are coming under fire from the bond market too. We’ll need to start buying their bonds since no one else will. But the current mega bailout fund is big enough.
    • OK, sorry again, but that mega bailout fund is still not large enough. So until we super-size it again, we’ll need you to let us use the mega bailout fund to buy bonds of Italy and Spain too. I know. I’m sorry about that. The treaties we all signed years ago explicitly said we would absolutely not do this.
    • What are they doing now?   Merkel & Sarkozy are focusing on long term integrated fiscal policy response. Who cares about 2013 when the financial system as at risk of imploding next month ?
      • Either Europe goes all-in with a multi $T bailout fund thereby allowing Germany to remake the PIIGS in their own image (good luck with that). Or it allows the PIIGS to implode and separate from the currency union. Obviously neither choice is attractive which explains why delusional policy responses have been the order of the day.
      • What of logic?   As soon as Merkel or Sarkozy address the reality of the European debt/sovereign/financial crisis:
        • their political careers will be over.
        • widespread panic ensues.
        • the European and global financial system will be in peril.
        • hence their actions are logical.
  • Back in January, I wrote to that I’ll be paying attention to Finland.  Last week, the Financial Times reported that Finland had successfully negotiated for Greece to provide collateral in exchange for Finland’s contribution to big fat Greek bailout 2.0 and the temporary European bailout fund (the EFSF). Rightfully so!  But this is encouraging others to demand the same. Last week Austria, Slovenia, Slovakia and the Netherlands followed suit. Greece is broke and doesn’t have the collateral to secure everyone’s loan. Last week’s news is going to increase pressure on Germany to add more guarantees or let the EFSF bailout fall apart.  It is increasing the odds of a surprise Greek exit from the euro and a global financial crisis. September will see all this mess come to a head.      All kidding aside, this is serious.
  • Japan.  Moody’s lowered Japan’s sovereign debt rating another notch to Aa3 based on the mountain of debt there (2X GDP). This now puts Moody’s rating on par with that of S&P’s view from January.  Japan = basket case.