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12 Questions on Markets and the Economy

Tuesday, June 10, 2008 | 07:19 AM

Today we are going try something a little different.

Rather then synthesize what's in the news, flavored with my opinions, I am going to ask several questions -- and leave the answering to you, the reader:

1) Economy: Is the US in a mild recession, or, will we successfully avoid one? How weak is consumer spending, and how much further can it fall? Might the US be entering a significant and prolonged downturn?

2) Inflation: How much inflation is in the system? How high are inflation expectations? Under normal circumstances, inflation moderates as an economy cools. Why has that not yet happened in the United States? Will it happen in the coming year?

3) Fed cuts: Are any further Fed cuts coming? Has the market accepted the possibility that more Fed cuts are unlikely? Are equities priced for potential Fed increases as a response to inflation?

4) Market technicals: Markets have been very choppy, with advances narrow, low volume affairs. Will the March lows holds? How fraught with danger are current market conditions? How significant is the failure of major indices at the 200 day moving average? The NASDAQ is holding up much better than the S&P or Dow -- Why?

5) Employment: How strong or weak is the job market in the United States? Why has job creation been so weak this cycle? Why are new unemployment claims still below 400,000? Why have we not seen layoffs in the multi-100,000 range? Is employment significantly affecting sentiment polls? What are the odds of a robust jobs recovery in the next 12-24 months?

6) Housing: Has the real estate market bottomed yet? How much further will home prices fall? When will inventory of real estate get worked down? When will home sales turnaround? When will real estate stop negatively impacting the macro economy?

7) Credit crunch: How much damage has been done to the financial sector? How much damage will be done in the future to the banks and brokers? Are we in the ninth inning, as some have posited, of the credit crunch? Or, do we still have all way to go, to work away through financial issues?

8) Tax rebate checks: Are they stimulating the economy? Are they merely paying for food and gas price increases?

9) Politics: What is the most likely outcome of the United States elections in November? How likely is a significant increase in the razor thin Democratic majority in the Senate? In the House? How likely is a full Democratic sweep including the presidency? What are the economic and market repercussions of such an event?

10) Sentiment: Why is sentiment so negative? Is it the war, employment, gas prices -- or something else altogether? Has sentiment reached an extreme level where it can be considered a contrary indicator?

11) Data analysis: There's been lots of chatter (elsewhere as well as here) about the reporting of economic statistics by the United States government. How accurate is the data that we get out of the BLS, BEA, Census Department, Federal Reserve, and other official outlets? Have we reached the point where this data has lost significance? What does this do to the credibility of these governmental agencies? Is it possible that this data can be improved?

12) Iraq, Iran, Afghanistan: The economy seems to have pushed the Middle Eastern war(s) off the front pages of the newspapers. How good or bad are things progressing in Afghanistan? How about the war in Iraq? There is a continued buzz about a late summer or early fall assault by Israel against the nuclear facilities in Iran (with tacit US approval). How would this affect the price of oil? The global economy? The elections in the United States?

>
Please feel free to answer fully and completely in the comments section.

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Comments

All of your questions can be answered with one word:
Depression

Posted by: Gloomy | Jun 10, 2008 7:35:19 AM

Why is sentiment so negative? Look at numbers 1-12.

How can anyone be positive in the face of the worst economic turn down since the depression? It took several years for the worst effects of the depression to take hold and this will be no different. It takes time for people to lose their savings, their homes, their jobs and their hope.

We have only seen the beginning innings of this "thing".

We are in for major dislocations in our economy and lives and it will not matter who is in the WH as it will take a long time to work through this mess.

Most people are too young to remember the hard times of the 70's and early 80's. Many in our work force, and those in college have never seen a real recession and have never experienced real economic hardship and they have no idea what is coming.

Posted by: More Gloom | Jun 10, 2008 8:03:25 AM

7. CREDIT CRUNCH -- several factors are coming together simultaneously:

(a) China is doing what the Fed did in 1937 -- cranking bank reserve requirements sky high. This will produce a leveraged contraction in credit there. Shanghai experienced an 8% crashette today.

(b) Both the Fed and the ECB, under the delusion that the credit crunch and slow growth are under control, have put on their pointy-headed inflation-fighting wizard hats. Trichet even says that he may hike next month. For still-overvalued, shaky markets, rate hikes are poison.

(c) Yesterday the BKX bank index plunged below the March lows. This week both the AA and A-rated CDO indexes took out the March lows. FHA lost 4.6 billion dollars. Lehman was forced to raise capital. WM is nearly a nickel stock; MBI actually IS a nickel stock; ABK is a two-penny stock.

Bottom line: the bottom ain't in. This Ponzi economy needs to be whacked so hard it brings tears to our eyes -- so hard that even the SHORTS cry, "This is too much -- STOP THE MADNESS!"

Word to the wise: don't stand too close to the Eccles Building, or the skyscrapers in the financial district. Brokers and bankers out on ledges might do anything. Your safety cannot be guaranteed.

Posted by: Jim Haygood | Jun 10, 2008 8:09:28 AM

Japan 1990-1999. Fed has undone--in the past 36 hours-- all of the credibility they belatedly earned in the days post March 17th. Have to own Two year notes 88 basis points above Funds, and the Fed on hold for a LONG TIME as we begin the switch from inflation to DEFLATION, and be short Crude with the global contraction upon us. China bubble to burst before the Olympics.

To your salient questions:

1> Consumer is just about to begin the drowning process. The prolonged downturn is here.

2>Massive Delation is here, will show-up in the #'s during next 6 months.

3>Further Fed Cuts are inevitable. US Equities do not have reality priced in. Look at them after next week's painful triple witching when we have no liquidity because of the ARBs not knowing what their 3 month cost of $$ might be.

4> Market technicals---We have not approached the lows for the year whether you look at momentum (moving averages) or the Tom DeMark indicators or E-Wave theory.

5> Weekly claims will blow through the 400k level by September. The War has kept the unemployment numbers controlled but that is coming to an end. The odds of a robust job recovery are slim and none, and you know what happened to slim....

6> US Real Estate will bottom sometime in 2013, if global central banks allow market forces to keep steep yield curves.
We are Japan of the 1990's.

7> Credit crunch has permanently changed the behavior of global banking. The ninth inning? Surely you jest. The National Anthem is still playing.

8>Tax rebate checks are paying for beer and cigarettes, and other forms of entertainment--nothing to stimulate the economy.

9>The election is too close to call at this point, but one might think this will be a non-event unless the Democrats sweep two of the three branches up for grabs. This economic contraction trumps politics as it has in the 30's and the 70's. Only time can cure it. Better Global Central Banking can soften the damage but not the duration.

10> War is tough to have an economic view on other than it has obviously helped the airlines (or maybe just delayed their failure) and prevented unemployment from showing levels in the high 8% with jobless claims north of 450k. As oil and the crude complex collapse, this part of the world will become a bit less of a "hot spot"--not cool, just less hot.

+++++++++> In the meantime, keep up the great work BR. This blog is a daily destination for many. Thank you.

Posted by: Band on the Run | Jun 10, 2008 8:12:26 AM

Sorry Barry.. too many questions this early in the morning.

I did, however, have a long talk with a younger employee yesterday. College grad, mid 20's. He is, quite frankly, shell-shocked about what is happening around him. His gasoline bills, his now cancelled honeymoon trip (airfare), etc. I told him not to worry. I made it through the '70's and so can he.

In an odd sort of way, many of these things may end up being good for us. Kind of like grounding a spoiled teenager. Makes them appreciate what they had.

Posted by: austincompany | Jun 10, 2008 8:13:50 AM

Holy Crap, BR, you've opened the floodgates with this one... be prepared for the commenting deluge. Oughta be interesting!

Posted by: bluestatedon | Jun 10, 2008 8:13:59 AM

13. OIL -- BLACK GOLD -- TEXAS TEA.

Excuse me, is there something wrong with my quote screen? Crude +3.33?

Why, no. No, this is not a horror movie. This is REAL.

Man, we is EFFED BACKWARDS.

Posted by: JIm Haygood | Jun 10, 2008 8:17:28 AM

I think the talk for the forseeable future will be inflation, inflation inflation!!!

The $10 daily rise in oil futures caught the attention of the Fed. They have no choice but to talk tough about inflation. But what can they actually accomplish? Raise rates 1/4 point? There is a chance of runaway inflation in the coming months, all fuelled by the Fed's low interest policy.

Runaway inflation has the potential to completely destabilize the US and world economies.

OAO Gazprom just released an estimate for oil to reach $250 !

The Saudi's are realizing that the less crude they bring to market, the more value it will have down the road. Oil in the ground is considered to be real money in the bank!

Posted by: blin | Jun 10, 2008 8:19:13 AM

Prolonged, maybe not deep, but prolonged. The consumer is beginning to bite it. If Bernanke's comments last night are to be interpreted as the Fed contemplating halting or even raising rates then multinationals will feel the pinch of a stronger dollar and earnings power will continue its southerly trajectory.

Posted by: bonghiteric | Jun 10, 2008 8:21:21 AM

America has been in a recession since the turn of the century. Inflation will skyrocket (borrowing money is much more inflationary than printing it). Trickle-down economic theory is a fraud.

Posted by: Paul Griffith | Jun 10, 2008 8:27:21 AM

This is quite an assignment. I'm torn between an attack on Iran causing economic collapse, or the collapse creating a condition where attacking Iran will be seen as a solution to all the problems. For example if a couple of IB's go under, and a hurricane shuts down a lot of Gulf of Mexico oil, and food shortages become extreme the crackpots you have allowed to lead you will want to go to war. They already want to go to war. So I'm answering number 12. There will be war with Iran and the consequences will be severe.

Posted by: Quill | Jun 10, 2008 8:27:40 AM

Sentiment sucks because the cost of the things that people pay for most often, i.e., fuel and food, has been skyrocketing for a year, and the prices are now hitting painful levels.

Fuel has doubled...food is up 40-50%...but my salary has not increased more than 3%.

When you hear people at parties start talking about "hypermiling" and changing their driving habits and forgoing the obligatory summer beach vaca, you know that the problem has reached that pain threshold.

Posted by: Mr. Obvious | Jun 10, 2008 8:30:54 AM

I've got a provocative question: Would a $40 buck drop in oil prices be helpful or hurtful to the stock market?

I actually think a sudden steep drop would be negative for the stock market. Investors have clearly abandoned major sectors of the stock market and stuffed themselves into energy/alt.energy/infrastructure/materials plays....those are the sectors that are showing strength and the reality is that an increasing portion of S&P 500 earnings is coming from energy earnings. A violent drop in oil prices might actually cause a sharp drop in the stock market.

I think the uncomfortable aspects of this current situation is that there will be no good place to hide.

- AT

Posted by: Andy Tabbo | Jun 10, 2008 8:34:16 AM

I choose an adjective: depressing.

Without trying to hijack the thread, but as a suggestion for another one, I have not seen any serious discussion of the effects of the continuing Chinese meltdown on our economy. The Chinese markets were down over 40% when the government pumped them by removing the the transaction fees. They are now even lower. Chinese mainland averages fell 7-8% last night in response to credit tightening (think DJ down almost 1000) and there's barely a mention on the news this morning. Surely the collapse of the economy with most of the worlds accumulated foreign currency reserves will have some substantial effects.

Posted by: Mike in NOLA | Jun 10, 2008 8:38:40 AM

I am worried about my oil bill going from $500 per month (which sucked last year) to about $1,000 per month this year during the winter.

Posted by: Joe | Jun 10, 2008 8:43:12 AM

The Democrats will significantly increase their majorities in both House and Senate for these reasons:

• Consumer sentiment in the toilet
• Changing attitudes in party identification are to the Dem's advantage
• Large fundraising advantages for the Dems for the Senate and Congressional races
• The GOP has more seats to defend in the Senate than do the Democrats
• The GOP has had great trouble in recruiting quality candidates for open seats in Senate and Congressional races
• Dem activists are energized and enthusiastic, while Republicans are dispirited
• Dems can campaign against very unpopular President, while GOP candidates either have to defend Bush or distance themselves
• Not much evidence at the moment that McCain will have positive coattails
• Majority of public views war in Iraq as a mistake

Posted by: bluestatedon | Jun 10, 2008 8:46:06 AM

Certain real estate has another 30-50% drop left to go.
I use the return on investment system.
Specifically rental units.
Back in 95 i was getting a 10-12% return,(no mtge on property)
Now it's a 5% yield. That is not enough for investors to consider it.
I have computed a 30% drop in prices will return 8% okay for starters,but with inflation looming uh uh.A 50% drop will provide a 10% yield...thats where i come in.

Posted by: Ed Future | Jun 10, 2008 8:47:44 AM

High inflation = high misery index. Incompetent national leadership leads to a discontented middle class. Years of propaganda where up is down, and don't believe your lying eyes. Disparity between the wealthy and everyone else at levels not seen since the '20's.

In an election year, this is not a good time to be an incumbent...

Posted by: SteveC | Jun 10, 2008 8:48:55 AM

The common threat to all your points is Oil. Congress needs to quickly resolve if oil prices are related to supply and demand or related to price fixing and opportunism.

Oil does not need 1000 different ways to speculate. No other commodity does. More than enough money will still find its way to the oil markets if excessive speculation and exploitation is removed. I will let smarter people than me decide what is necessary and what is excessive.

If prices go down after the avenues of exploitation are removed, then all the other problems you mention will slowly start to take care of themselves.

If oil prices do not go lower after the loopholes are closed, then the entire world is in for more hurt than the little amounts being bitched about above.

Posted by: cinefoz | Jun 10, 2008 8:55:40 AM

1. I think we will experience a slow-motion slide into a moderately severe recession. This is going to be driven by feedback loops between the multiple crises in: housing, credit, energy. The US government's hands are tied and any kind of traditional Keynesian pump-priming is off the table. We will recover stronger, I think but it is going to be a long climb back to daylight.

2. Lots. Until demand destruction starts to eat away at energy prices inflation is going to be an (officially unacknowledged) driver of the recession. See also food if the current weather in the Midwest adversely affects the Fall harvest, which it will.

3. How much more can be cut? You have a serious (and officially unacknowledged) inflation problem, so cutting rates isn't really the answer anyway.

4. Not a market guy. I do see strength in the technology sector (my own field) as companies use technology as a hedge against rising fuel costs (telecommuting) and labor costs (productivity).

5. I think that US manufacturing and large employers are already pretty lean, so layoffs as a rescuer of profits is just nibbling around the margins. Again, "official" statistics mask the true figures of people who have given up looking and are working in the (increasing) grey economy.

6. I think there is almost no bottom to housing prices. Even as the bubble cycle works itself out through the traditional means, people will then begin to re-think the economics of living in far-flung suburbs. I see an "energy-echo" housing double-dip.

7. Dunno. I suspect there are yet at least one or two big shoes to drop. This could spook markets further.

8. Are you kidding? Short-term effects only as the money runs like sand through recipients' fingers.

9. At the current time I would put the odds of a trifecta: 60 Senate Seats, veto-proof House, White House for the Dems at about 75%. Long time 'till November though. I think markets will be neutral to positive, probably thankful that reality-based grownups are back in the driver's seat. See above about the possibility of Keynesian-style spending.

10. Bush would be suicidal to attack Iran prior to the election. I literally think it would be torches and pitchforks at the White House. That said, the EU seems to be moving in our direction on Iran and there is a chance for serious diplomancy and sanctions there. Iraq will continue to be a suppurating wound for at least a couple of more years while President Obama tries a graceful exit.

Posted by: cman | Jun 10, 2008 8:58:35 AM

1-2. Yes
3. They are fricking crooks
6. The joke that made the milk cost $1 more.
5. When all the machinery from the factories is shipped to China and the cheap crap is shipped back, what employment you are talking about.
9. Both of them will f%&^k up this f%&^ked up country. It is no men on the horizon who can make changes to this downhill rolling nation.
Congress is is a bunch of self serving morons and 90% of them deserve the jail cell (Cold cash + infinity). Our government sold us down Rio Grande. Wake up people...

Holdings: GLD, SDS, QID,SKF

Posted by: sergtat | Jun 10, 2008 9:00:19 AM

1. The US has entered in what will become a major depression.
2. Complicated q. The inflation potential is huge, considering the amount of dollars the FED has been printing. I think that 80% is held by foreigners.
3. No more cuts and no increase. I don't think the FED really mind inflation. The US is in a lot of debt. They want to inflate themselves out of this mess.

Posted by: hubert | Jun 10, 2008 9:01:43 AM

I'm not an economist so I don't feel confident enough to comment on most of these. But I don't want to give my 2c about this one:

9) Caveat; I want the democrats to win.
"What is the most likely outcome of the United States elections in November?"
I think the question really is will this be a democratic win or a democratic landslide.

"How likely is a significant increase in the razor thin Democratic majority in the Senate?" and "How likely is a full Democratic sweep including the presidency?"
Currently the democrats hold 49 seats and the republicans also hold 49 seats, the two remaining seats are independents. Bernie Sanders usually votes with the democrats, Joe Lieberman usually votes with the republicans.
Senate elections are held every six years for one third of the seats. In November americans will be voting for 35 senate seats that were last elected in 2002. At the time 23 seats went to the republicans and 12 went to the democrats. Not up for election are 37 democratic and 26 republican seats.
Strategy:
1. If the democrats only want a majority of 51 seats they need to win 14 seats. This is 2 more than they currently have and 40% of the available seats. Very doable
2. If the democrats want a filibuster proof majority in the senate the need to win 24 seats. This is 69% of the available seats. Difficult but still within the realm of possibility.
3. If the democrats want a veto proof majority they need 34 seats. This is 97% of the available seats. Impossible.

As for the presidential election it is quite certain that Obama is going to win.

McCain is pro-Iraq war when America is not. McCains economic plan doesn't make sence and he said himself that he doesn't understand economics. McCain has always voted with Bush so he is not offering change. He has voted in favor of torture even though he was against it for most of his life (he was tortured himself so you would think he understands this issue).
And even the republicans agree he is not a very good candidate; in 2000 he participated in the republican primary and was defeated by Bush.

Obama has very few weaknesses except his inexperience. I would expect him to choose a more senior statesman as his VP to undo this weakness somewhat.
Obama is more right on the issues; the main three being the economy, the war and health care.
Obama has a huge advantage in campaign funds. During the primary both Hillary and Obama raised more capital than McCain and you would expect some of that money from Hillary to start flowing to Obama.
Obama has a larger and more motivated following. He polls really well with young people, the kind of people you can send door to door and will do a lot of campaigning.
And finally during the primary both Hillary and Obama got more votes than McCain. Again we should expect some of those votes to move to Obama making the gap between the two even larger.

If Obama wins with less than 60% of the vote I'd be surprised.

"What are the economic and market repercussions of such an event?"

Democrats have always outperformed republicans on economic issues. So I would expect a situation similar to Clinton in the nineties. However, in 2009 America is likely to still be in a recession and there is an enormous debt weighing down on the country. I would expect a very slow start with a very good finish.

Posted by: Jurgen | Jun 10, 2008 9:10:46 AM

I find it very interesting that the DJIA is very much in line with it´s saisonal tendendency in election years(seasonalcharts.com). Also the behavior of the small speculators (those that are usually on the wrong side of the market) in the S&P500 does not suggest, that the stock market is going to fall a lot more. Actually the small speculators have had a smaller net long position for the last couple of months, then they had at the lows of the last bear market in 2002. It would be very unusual if the so called dumb money would be right this time.

Posted by: david | Jun 10, 2008 9:18:25 AM

Okay...

Econ: Mild, hopefully, but it doesn't matter. We cannot afford what's defined as "below trend growth" at this point in our demographic cycle.

Inflation: Plenty of it, yet there will also be pockets of deflation that will twist the actual number, but don't be fooled. However, considering that the Japanese had serious deflation for too long, US policy makers prefer the devil they know.

Fed cuts: Hopefully not. If we get more cuts it will be because things are worse. At this point in the fed cut cycle we're pretty much at zero anyway.

Market: Has anyone noticed the SPX has still failed to convincingly trend higher than the dot.com high? Below trend growth means below trend broad markets.

Jobs: Job creation has shifted from traditional large employer based hiring to small company hiring. When people feel good about the economy, they start a business.

Housing: Housing is a mess and will remain stagnant longer than most believe. If we are in the 9th inning get ready for an extra inning game.

Credit crunch: See housing. The Fed and other regulators want to limit the leverage of the financial services sector. Less risk, less growth. Still too much bad paper sitting in the system. We're not Japan, but we've been slow to blow this paper out as it would lead for more bank failures.

Tax rebates: Politicos don't get it, and I used to be one. They're clueless and its a real problem.

Politics: The presidential race will be closer than people think right now. There is something to be said for understanding how to run the railroad. Obama barely knows his way around Washington and as a Democrat, he will be pulled in many directions. McCain would be a better choice, but the country is so negative right now he might not be able to make his case.

Sentiment: The global dynamic is changing. As Americans we're not sure about the future. Its fear of the unknown. Americans have come to realize that this new globalized world will be different...but how diferent...

Data: Federal data stinks. It has for years. And like research reports from brokerage houses cannot be trusted; seasonal adjustment my toochas, (can we say ass here?)

War: If the Arab world was not sitting on top of the world's known oil reserves we would not care about the region. Can anyone explain Darfur? Other than the Chinese are playing games in the region to protect their economic interest? In today's world, war is based on economic interests, that means oil. Unfortunately, we will continue to spill blood for oil.

no easy answers here...

bob

Posted by: ardano | Jun 10, 2008 9:19:43 AM