• Every country in the G7 (except Canada) has an economy that is smaller now than it was in 2008 (before the last recession).  Because of how the NBER defines recessions, it says we had one in 2008-2009, and have since come out of it.  I suggest the definition include a comparison of the current economy size to that before the recession began. If the economy remains smaller, we’re still in a recession. Seems simple and intuitively correct, no?  By this definition, the US and every other G7 country (except Canada) has been in a recession since 2008. Maybe that’s why many say it never stopped feeling like a recession. Maybe that’s why there remain millions of unemployed Americans that don’t exist (don’t show up in the BLS employment data because they’ve used up their benefits and / or given up looking).
    • digression:  Canada’s economy had a blistering +3.6% annualized GDP growth rate in 1Q, but it fell to a -0.4% contraction in 2Q.
  • The US continues to slide into recession.
    • Once again, I may have been too optimistic. Last week I wrote that it will take 6-8 weeks for ECRI to drop to -10. Given that last week’s reading dropped from -2.1 to -4.3, we may get to -10 a little faster. A -10 reading means we’re almost certainly back in recession. My December 2010 forecast called for a 0 GDP reading for 3Q, and a negative number for 4Q. So things are unfolding according to schedule, and Wall St is slowly coming around to my point of view once again.
    • Last Thursday the ISM delivered their report on the health of manufacturing in the US for August.  The figure dropped from the previous month to slightly above flat. The ISM figure has slid since the highs early this year. The next ISM report is likely to show a marked drop into contraction.
    • The August employment report was released last week. Dismal.  Private payrolls increased 17,000, but government let that many go: zero new jobs.  Plus the previous three months’ data was revised down by 58,000 jobs. If it weren’t for people using up their benefits and falling out of the system, the real initial claims U3 rate would be 12%, not 9.1%. Hours worked and pay per hour were both down. Dismal.  Late last year I forecast a much lower U3 rate entirely from workers falling out of the UI system. Once again, I was overly optimistic. Workers are falling out the back end of the UI system as I predicted, but even fewer are being hired, making the U3 rate higher than I forecast (HA! to those that call me pessimistic.)
    • Expect both parties to come up with more myopic policies in the coming months to bribe you into securing your vote next year. Case in point: The White House is floating the concept of extending payroll tax cuts (that’s heroin to Congressional Republicans).  Since the Tea Party is now in the picture, the bill-me-later Republicans are going to be forced to turn down an unfunded tax cut for the first time in decades. It is about time.
    • 30 US States have employment trust funds that are insolvent (this is where the UI benefits are paid from). State governments failed to build a rainy day fund large enough to deal with the current economy (that is apparently not a recession. god help us if we see a recession…). As a result, states are cutting back the UI payments which will in turn slow the economy more. The US economic machine is in a negative feedback loop and needs systemic change.
  • Last week saw another episode of the Abby Joseph Cohen show on CNBC. Goldman trotted her out to reiterate her call of S&P500 at 1450 this year. The only way that’s going to happen is if trillion-dollar fiscal & monetary candy is announced in the US as well as Europe. Which begs the question: should analysts get credit for a “correct call” if they say the stock market is going higher but the economy deteriorates to the point where it needs another $T shot of monetary steroids to sustain life support (and thereby temporarily driving the stock market higher) ?   I suppose they should — but only if they indicate the economy is weak and will weaken further thus prompting another round of irresponsible myopic monetary and fiscal candy (which makes the hole that much larger).
    • On a related note: The Fed gets a lot of credit for saving the US economy with QE1 & QE2. But according to the Fed’s plan / logic prior to QE1 & QE2, QE should drive interest rates lower. IT DID THE OPPOSITE. They took action, caused the opposite result to what they intended, but got the credit.
    • Let’s say you hire me to clean the windows on your house. But I end up leaving a nasty coating of grease on them that won’t come off.  You notice this obvious poor job right away, but decide you like the privacy the new layer of grease provides. Should I get the credit ?
  • After three years, the large US banks are finally being sued for their role in pawning off dog pooh as AAA-rated mortgage backed bonds to investors (in some cases simultaneously mocking their clients for buying them in internal emails). Doubtless every case will be settled for far less than the banks “earned” off the scheme. The net loss will be borne by individual investors and the tax payers left to bail out Fanny & Freddie.  But the settlements will be a cash-flow drag on the big banks for a year or so. Good thing they’re sitting on a mountain of cash.
  • Europe is starting to come unglued. European stock markets are once again back to the lows seen in early 2009 (though not back to March 2009 lows yet).
    • Last week saw updated data on European manufacturing. That portion of the economy is now contracting.
    • Which banker are you going to believe?  The IMF says that European banks need to raise capital (immediately) because their sovereign bonds are nowhere near marked down to reflect reality, and that any sizable torpedo (spelled PIIGS) would render them insolvent or nearly so. That’s banker-talk for “Houston we have a problem”.   Naturally the European bankers say the IMF is wrong and all is well.  They’re happy to continue to value their sovereign bonds at prices their models say are right. These bankers are either delusional, lying, or both.  I know you’re shaking your head in disgust at this (you should be).  But wait. This is much the same as we’ve been doing here in the US since 2009  i.e., we’ve weakened accounting rules to permit banks to fool the public into believing they’re solvent. Reality continues to take a beating (but for how long?).
      • Speaking of European banks…… the same bankers that say their balance sheets are strong are also hoarding cash and storing it at the ECB instead of lending it to each other. Translation: bankers are lying about their balance sheet and they know they’re all lying.  This is too rich!    Last month, banks tripled the amount of cash sitting at the ECB (viewed by them as the safest place to put it). Plus, the most valuable (to banks) 3 – 12 month funding has evaporated. What’s left is bank loans measured in days to several weeks. Yeah, I trust bankers about as far as I can throw them.  This isn’t a run on banks, but it is starting to look like a fast walk.
    • Germany:
      • Today (September 7th) the German constitutional court ruled on the legality of the european bailout mechanism. To no one’s surprise, they allowed the bailouts.
      • More importantly, the latest bailout agreement heads to the Bundestag for ratification on September 29th. It was pushed out a few weeks  because Angela Merkel right now has no chance in getting EFSF bailout 2.0 passed. Her CDU party was crushed in a state election containing her own constituency last weekend. In order to increase the chances of the latest bailout passing, German parliament will be given authority to veto future bailouts. It is therefore likely that the current bailout will ultimately be approved, but Merkel may have to rely on opposition parties to carry the vote (not a good sign).  But!  The current temporary EFSF bailout fund (and, the proposed permanent replacement fund) will be far too small to do the job. By the end of this year, the EFSF will be out of money and Europe will be in desperate need of a $2-3T mega bailout fund. This is probably where it all falls apart because there’s a growing backlash against bailouts among Germans. There is zero chance a German parliament will approve another bailout after this one (and this one might not pass either).
    • Italy:
      • The Italian PM Silvio Berlusconi is making a mess of things. After committing to greater austerity measures in exchange for having the ECB buy their bonds a couple weeks ago (and thereby stopping contagion from bringing down the Italian banking system), Berlusconi reversed a commitment last week to increase taxes on the wealthy. Instead, Italy is going to increase its efforts to crack down on tax cheats (a pathetic claim that will produce nothing!).  Result: last week’s Italian bond auction was met with fewer buyers — this despite having the ECB prop up their bonds by buying them on the open market.  Italy’s days are numbered because other euro members are going to pummel the ECB if they continue to buy Italian bonds after Berlusconi reneged. Rightfully so!
      • (To be clear: if the ECB backs away from buying Italian bonds on the open market, reality will prevail and yields on Italian debt will rise inexorably, making Italy unable to service its mountainous debtload — and that assumes Italy can find buyers for its bonds in the primary debt market first!   If we’ve learned anything over the past 3 years it is that European and US politicians and central bankers will go to any length to avoid reality.)
    • Spain:
      • In a move taken from Italy’s playbook, the Spaniards are ending a wealth tax. They had one implemented that took close to $3B from 1 million wealthy Spaniards but it ended up increasing tax evasion and capital flight (money leaving the country). They’ve reached the end of the line in terms of balancing spending with taxes.
      • Result: the Spanish 5 year bond auction met with weak demand last week (just like what happened to Italy). Again, this was despite the ECB buying up Spanish bonds on the open bond market — per the agreement. Spain & Italy were to take immediate action to balance their budgets faster, in return for the ECB further infecting its balance sheet in buying Spanish & Italian bonds.
    • Greece:
      • Last week, the troika (EU, ECB, IMF) paid a quarterly visit to review Greece’s books. The progress was terrible, so they left early and in a huff.  Not good.  Greece will not come close to meeting its 2011 budget deficit target. They’re looking at US-like 9% deficit vs a 7.6% target. (how embarrassing that we’re the yardstick for profligacy!)   Plus, the big fat Greek garage sale is not going as well as planned. Greece had pledged to generate 50B euro in a privatization scheme selling national assets. Greece has far too much debt and will not be able to return to prosperity without a massive reduction in its debt (75-80% haircut), and a new currency (same thing I’ve been saying for nearly 2 years).
      • As of now, Greece is drawing a line in the sand. The Greek Minister of Finance has told the troika that Greece will not implement any further austerity measures this year despite the gaping budget hole still remaining to be plugged.
      • The implied yield on 6 month Greek debt was 92% yesterday ! This means the bond market thinks Greece will be toast within 6 months. Absent a new mega-trillion-euro  bailout fund, Greece will bolt from the euro currency before the end of the year, and negotiate a massive haircut to their creditors.
      • Greece has 5 more days to come up with a plan (again) to close the gap. The troika needs to decide whether to give Greece the next 8B euro tranche of bailout money.  Good money after bad.  Greece is almost certainly working on a plan to stiff their bailers and bring out drachma 2.0. It remains to be seen when they’ll pull the trigger.  By the way, you’re one of the bailers since the US funds the IMF more than anyone else.
        • Related note: it should be painfully obvious why the IMF is pounding the table for European banks to raise capital now — the odds are building that Greece will initiate a chain reaction via a torpedo to the European banking system.
  • Now that you’ve consumed this information, what do you think the odds are that Northern European governments continue to be hood-winked by Italy, Spain, and Greece ?