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Commentary & Analysis
Is recession dead ahead? If so, it is Wiley Coyote time!
I think we are nearing a major Wiley Coyote moment for Mr. Market. Despite recent joy over some of the economic numbers, recession in the US is still very much in play; if so, S&P 500 Index and Crude Oil, seemingly joined at the "risk on" hip joint, seem extended, to say the least.
- Demand for oil has fallen for the first time since 2008-09 global financial crisis, according to the International Energy Agency
- The Baltic Dry Index is in the proverbial toilet and there is little sign of life there as it tests a three-year low.
LONDON, Jan 18 (Reuters) - The Baltic Exchange's main sea freight index .BADI, which tracks rates to ship dry commodities, fell to its lowest in nearly three years on Wednesday as slow Chinese demand compounded fleet growth troubles.
3. China turning over? I think so. Foreign Direct Investment fell for the second month in a row. Chinese foreign reserves may have peaked. Fixed asset investment, now dangerously off the charts in a world of falling demand, should hit growth hard. The real estate bubble may have already popped.
4.Eurozone is in recession. The question is how bad will it get before it gets better?
5. The United States is headed for recession again this year, according to Hoisington Investment Management. A two-team group of institutional fixed income manages who have been right as rain on the path of the US economy for a very long time. Key points from their latest missive.
In highly indebted countries [especially above 90% of debt-GDP; the US is at around 100%], governments have expansively taken resources from the private sector through taxing and borrowing. This leaves the private sector with less vigor to produce jobs and increase productivity, and subsequently wealth for its fellow citizens
It would be difficult to devise a more horrendous set of fiscal policy parametersto spur economic growth than currently exist. Real federal government purchases of goods and services, which comprise 8% of real GDP, will decline by about 1% if the impartial projection of the Congressional Budget Office (CBO) for a fiscal 2012 deficit of about $1.3 trillion is in the ballpark. Defense spending will bear most of the decline in federal expenditures, but non-defense spending will, at best, be flat. In spite of record deficits since the spring quarter of 2009, real federal government purchases of goods and services have risen at an anemic 1.5% annual rate, confirmation that only a small amount of exploding expenditures went for infrastructure projects. The scant growth rate in the economy suggests a negative outlay multiplier. The scant growth rate in the economy suggests a negative outlay multiplier.
Contrary to common belief, the massive deficits of recent years will actually reduce economic growth in 2012 through a subtle, but nevertheless credible channel consistent with the preponderance of economic research.
State and local purchases of goods and services (10.9% of real GDP) has fallen at a 2.1% annual rate since mid 2009, and is poised to decline further in 2012.
Two rounds of quantitative easing have raised inflation, but the pace of economic growth did not respond and the standard of living of U.S. citizensfell. During QE2 there were transitory increases in stock and commodity prices, but real consumer wealth fell.
The interconnectedness of global activity will serve to further destabilize the global financial system in 2012. Although the federal government debt to GDP ratio is surging past 100%, if private indebtedness is included our debt to GDP ratio exceeds 350%. The same calculation reveals a debt ratio of 490% in Japan, 443% in Euro currency countries, and 459% in the United Kingdom.
Unfortunately, the negative feedback of a global recession will not only impair the U.S. exports sector, but also will cause a steeper downturn overseas.
We expect that consumer spending will slow to match the existing trend in negative real income.
Firms looked into 2012, and in some cases even further, and pulled those outlays into 2011. This creates an artificial boom/bust cycle which will be evident in 2012.
Real median income stood at $51,800 in 2007, but for the first time ever has declined in this recovery and now stands at an estimated $49,400, a 6.4% drop from the previous peak. These statistics painfully point out the adjustment process in an overleveraged economy.
Short-term traders in risk assets are enjoying the ride. The buy and hold analysts are excited again, as they confidently strut across the CNBC stage. Animal spirits are rising. Very close to Wiley Coyote time we may be.
- Keynesians wrong AGAIN ... and why US may surprise on growth. 12:56 10 January 2011
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- ECB and IMF lift spirits. One Question: Who backstops the backstop? 01:53 24 January 2012
- Let's get real and Fire the Fed! 12:11 02 May 2011
- The Keynesian Path-to-Failure Game 12:31 22 October 2010