Recession is a Reality

David Rosenberg at Merrill Lynch warns US recession is already here.

The US has entered its first full-blown economic recession in 16 years, according to investment bank Merrill Lynch. David Rosenberg, the bank's chief North American economist, argues that a weakening employment picture and declining retail sales signal the economy has tipped into its first month of recession.

Mr Rosenberg, who is well-respected on Wall Street, argues: "According to our analysis, this [recession] isn't even a forecast any more but is a present day reality."

Mr Rosenberg points to a whole batch of negative data to support his analysis, including the four key barometers used by the National Bureau of Economic Research (NEBR) - employment, real personal income, industrial production, and real sales activity in retail and manufacturing.

Mr Rosenberg notes that although the NEBR will be the final arbiter of any recession, such confirmation may be two years away as it typically waits for conclusive evidence including benchmark revisions.

However, he believes that all four of these barometers "seem to have peaked around the November-December period, strongly suggesting that we are actually into the first month of a recession."

His view is at odds with some other forecasts on Wall Street, with Lehman Brothers going so far as to issue ten reasons why the US economy will not enter into a recession.

Mr Rosenberg argued that "This isn't about 'labels.' What is important about recessions is that while each may have its own set of particular characteristics, there are also unmistakable investment patterns that emerge time and time again."

His views were cemented by last week's jobs numbers, which showed the unemployment rate hitting 5pc, an increase of 13pc year-on-year and the highest in two years.

By the time the majority of economists see what's happening the recession may be a third over. Some won't see it until it is over.

Bears Beware?

Ambrose Evans-Pritchard writes Bush convenes Plunge Protection Team.

Bears beware. The New Deal of 2008 is in the works. The US Treasury is about to shower households with rebate cheques to head off a full-blown slump, and save the Bush presidency. On Friday, Mr Bush convened the so-called Plunge Protection Team for its first known meeting in the Oval Office. The black arts unit - officially the President's Working Group on Financial Markets - was created after the 1987 crash.

It appears to have powers to support the markets in a crisis with a host of instruments, mostly by through buying futures contracts on the stock indexes (DOW, S&P 500, NASDAQ and Russell) and key credit levers. And it has the means to fry "short" traders in the hottest of oils.

The team is led by Treasury chief Hank Paulson, ex-Goldman Sachs, a man with a nose for market psychology, and includes Fed chairman Ben Bernanke and the key exchange regulators.

Emergency measures are now clearly on the agenda, apparently consisting of a mix of tax cuts for businesses and bungs for consumers. Fiscal action all too appropriate, regrettably.

We face a version of Keynes's "extreme liquidity preference" in the 1930s - banks are hoarding money, and the main credit arteries of the financial system remain blocked after five months.

"In terms of any stimulus package, we're considering all options," said Mr Bush. This should be interesting to watch. The president is not one for half measures. He has already shown in Iraq and on biofuels that he will pursue policies a l'outrance once he gets the bit between his teeth.

The Plunge Protection Team - long kept secret - was last mobilised to calm the markets after 9/11. It then went into hibernation during the long boom.

Mr Paulson reactivated it last year, asking the staff to examine "systemic risk posed by hedge funds and derivatives, and the government's ability to respond to a financial crisis", he said.

The White House certainly has grounds for alarm. The global picture is darkening by the day. The Baltic Dry Index has been falling hard for seven weeks, signalling a downturn in bulk shipments. Singapore's economy contracted 3.2pc in the final quarter of last year, led by a slump in electronics and semiconductors.

The Tokyo bourse kicked off with the worst New Year slide in more than half a century as the Seven Samurai exporters buckled. The Topix is down 24pc from its peak. If Japan and Singapore are stalling, it is a fair bet that China's efforts to tighten credit are starting to bite. Asia is not going to rescue us. On the contrary.

Keep an eye on Japan, still the world's top creditor by far, with $3 trillion in net foreign assets. The Bank of Japan has been the biggest single source of liquidity for the global asset boom over the last five years. An army of investors - Japanese insurers and pension funds, housewives and hedge funds borrowing at near zero rates in Tokyo - have sprayed money across the Antipodes, South Africa, Brazil, Turkey, Iceland, Latvia, the US commercial paper market and the City of London.

The Japanese are now bringing the money home, as they always do when the cycle turns. The yen has risen 13pc against the dollar and 12pc against sterling since the summer. We are witnessing the long-feared unwind of the "carry trade", valued by BNP Paribas in all its forms at $1.4 trillion.

Add fresh losses as the property bubbles pop in Britain, Ireland, Australia, Spain, Greece, The Netherlands, Scandinavia and Eastern Europe, as they surely must unless central banks opt for inflation (which would annihilate bonds instead, with equal damage), and you can discount $1,500bn in further attrition.

Not even a Bush New Deal can hold back the post-bubble tide that is drawing in across the globe. What it can do is buy time. Fortunately for America - and the world - the US budget deficit is a healthy 1.2pc of GDP ($163bn). Washington has the wherewithal to fund a fiscal blitz.

Britain has no such luxury. Our deficit is 3pc of GDP at the top of the cycle. Gordon Brown has shut the Keynesian door.

Which is it?

1) Crisis may make 1929 look a 'walk in the park'
2) Bears beware the PPT?

I suppose both could be correct in multiple timeframes, assuming of course one really believes the PPT could actually accomplish much of anything.

In terms of the amount of capital lost in this deflation, 1929 will look indeed like a walk in the park. Near term however, the mammoth amount of "liquidity" Pritchard claims is being sloshed about by the Fed and the ECB is simply nonexistent.

See No Helicopter Drop For Failed Banks for an analysis of "walk in the park" from a liquidity standpoint.

Long term, food stamp programs and other social nets practically guarantee we are not going to see bread lines like we saw in the great depression. Furthermore, FDIC insurance will socialize bank failures. Socializing bank failures is a moral hazard actually and I will have more on that later.

Look For PPT Conspiracy Theorists To Argue Over Every Tick

With Pritchard's latest article, plunge protection conspiracy theorists will once again be arguing over every uptick in the markets. There is proof of a PPT, but the authority of the PPT to do what Pritchard suggests is simply not there.

However, this remark by Pritchard rings true: "Add fresh losses as the property bubbles pop in Britain, Ireland, Australia, Spain, Greece, The Netherlands, Scandinavia and Eastern Europe, as they surely must unless central banks opt for inflation (which would annihilate bonds instead, with equal damage), and you can discount $1,500bn in further attrition."

That statement implies there is no way out for Central Banks. I certainly agree.

Furthermore, the odds of the UK and EU decoupling from the US are essentially zero. Imploding property bubbles and falling exports will seal the fate. So not only is recession a reality in the US, recession will soon be reality for the UK and EU as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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