This Is Not Your Garden-Variety Downturn

If the recession now underway was a "normal" contraction, the near-term investment outlook might look quite a bit better. More than a year into the downturn (as we are now) might seem like a good time to start buying in anticipation of the rebound. But this isn't your garden variety downturn, and so economic and financial metrics remain under a suspicious cloud even when they're looking bullish.

That includes our proprietary economic indices that track the general trend for the U.S. As the chart below suggests, in theory there's reason to be bullish about the next several quarters. In practice, however, playing defense is still recommended.

As we discussed last month, the Federal Reserve's printing money faster than at any time in recent memory, perhaps more so than at any other time since the institution was founded in 1913. The massive liquidity injections are, of course, registering loud and clear in our economic measures, particularly for the leading index, which looks ahead by 6 to 12 months. So it goes when the effective Fed funds rate has continuously remained under 1% since October, and under 0.5% since early December. Currently, it's hovering in the ~0.2% range.

Typically, such an easy monetary policy would be working its usual magic by juicing the economy. But not this time, at least not yet, which speaks to the magnitude of the economic headwinds currently blowing through these United States. Virtually all of the fundamental economic metrics in our index — i.e., industrial production, commercial and industrial loans, employment, etc. — are still falling. As a result, the incredibly strong rebound in the leading index in the chart above must be seen for what it is: a reflection of monetary policy that's in overdrive but not yet producing stabilization, much less growth, in the wider economy.

Alas, this morning's update on weekly jobless claims suggests the contraction is still gaining momentum. New filings for unemployment benefits — a forward-looking economic signal — surged again last week to a seasonally adjusted 626,000 — the first time claims rose above 600,000 since a brief spike north of that mark since the early 1980s.

History tells us that initial claims tend to surge higher in one final, dramatic rise, followed soon after by a robust decline and then some backing and filling as the worst of the initial claims trend passes. At that point, one could reasonably say that the recessionary momentum has ebbed, even if the aftershock rolls on for some time afterward.

Of course, such a peak is only obvious in hindsight. In the meantime, there's plenty of room for speculation about whether the current surge above 600,000 last week marks the peak. For what it's worth, we expect even higher levels of jobless claims.

That said, it's clear that the Fed's efforts are in overdrive to quickly get to the other side of the peak. Congress is now lending a hand, too.

Yes, the glorious day of a peak in initial jobless claims is coming, but it's not here yet.

Comments

[Ben Young:]

I agree with the author that extreme caution is in order. Regarding percentage comparisons with employment in the great depression (25% vs now 7.6%). A more interesting comparison would be actual human beings without jobs or severely underemployed. I think that the number at the peak of the depression was:

13.5 million
vs today
11.6 million

and these calculations were much more conservative/unadjuste... in 1937

Feb 06 02:40 PM

[sleepless_o...:]

James Picerno - Good article and some very apropos observations. Three that I feel are particularly noteworthy:
***********
"Typically, such an easy monetary policy would be working its usual magic by juicing the economy. But not this time, at least not yet, which speaks to the magnitude of the economic headwinds currently blowing through these United States. Virtually all of the fundamental economic metrics in our index — i.e., industrial production, commercial and industrial loans, employment, etc. — are still falling."
***********
"the incredibly strong rebound in the leading index in the chart above must be seen for what it is: a reflection of monetary policy that's in overdrive but not yet producing stabilization, much less growth, in the wider economy."
***********
"History tells us that initial claims tend to surge higher in one final, dramatic rise, followed soon after by a robust decline and then some backing and filling as the worst of the initial claims trend passes. At that point, one could reasonably say that the recessionary momentum has ebbed, even if the aftershock rolls on for some time afterward."
************
With regard to the last quote, there was a recent post that supports your positopn: seekingalpha.com/artic... ending

Finally, I agree with the cautionary tone of many commenters.

Feb 06 02:41 PM

[Larrysyr:]

Nick,

I appreciate your perspective. Since I have incomplete information and a broken crystal ball, I think the best course is to get as many points of view as possible.

I certainly hope you are more correct than I am.

Feb 06 03:02 PM

[Gene Shorts:]

Dwight, you ignorant slut. The BDI collapsed becuase of the disappearance of shipping credit. It is bouncing back because ships were taken offline and load rates have increased on what is still operating. We are still 90% off the high. Explain copper's recent rebound if you want brownie points.


On Feb 06 12:19 PM morph366 wrote:

> Do you include the Baltic Dry Index amongst your indicators? Allegedly
> the smart money is moving back into this index so that must be the
> bottom - surely, well at least its a definite maybe.
> But I hasten to declare that I am not long shipping companies or
> the index and I remain very suspicious that anyone has a clue how
> deep and long lasting this global recession is going to be.

Feb 06 03:05 PM

[Jolly_Rancher:]

Why does anyone care what downturn this resembles? Every downturn is different. Each has its own dynamics. This time things are much different and worse and so will last much longer...

The money is going going gone. No credit, no expansion. Our economy is IMPORT-based. That means you can't grow an economy by throwing electronic funds at it. All you're going to do is cause raw material and other input prices to rise uniformly around the world which in turn is going to choke off any growth that was created from the stimulus. You must find a way to either grow the manufacturing base or dramatically and permanently reduce input prices either through productivity increases or increased raw material supplies. Chinese labor costs are rising -- so that's a no go. Raw materials are temporarily down, but no significant new supply is coming onto the market and what is coming on to market is high-cost. Using government funds to employ high cost solar energy production and other green methods as a replacement for oil makes no sense. So input prices aren't going to stay down permanently. That means we must grow our own manufacturing base or dramatically increase global productivity. As much as I hate to admit it, I do not believe our manufacturing base will ever return. I say that because our education system is totally on the rocks. A huge percentage of our high school students are DOA after graduation or they aren't graduating at all. Worse, their attitude is a nightmarish mix of lopsided priorities and consumer-centric psyche. End of story there. That leaves productivity increases to fuel growth here -- not gonna happen. Slave labor is quickly becoming a thing of the past. Labor is costing more around the world. Automation has reached significant limits. This tells me that we are in a low growth environment for the foreseeable future.

So what do we need to do?? I am getting tired of saying it....drill, nuclear, domestic investment tax breaks.

Feb 06 03:17 PM

[dw57:]

not sure that we can compare the numbers since they have changed a lot since 29. if we used the same methods to calculate the statistics would they be more a like than different?


On Feb 06 01:20 PM Nick Waddell wrote:

> LarrySyr,
>
> First of all, thanks for the even tone of your response. My point
> is this: It's bad out there, really bad. But when people start comparing
> this to the Great Depression I feel like we are losing sight a little
> bit. For certain this could get worse, but for now it qualifies as
> a bad recession, nothing more.
>
> For instance, most economists are forecasting a GDP Contraction rate
> of 5% for 2009. Let's double that and say 10%. The Great Depression
> saw a GDP contraction of over 30%.
>
> What about Unemployment? Some bears say we will see it at 12%. During
> the great depression it was 25%.
>
> What about inflation? It's around 5% now? During the early 80's it
> was 9%. During that same period unemployment was neverl below 8%.
>
>
> There are elements to this recession that are very bad, but the facts
> say that many key elements; inflation, unemployment, interest rates,
> GDP contraction are simply not there. Look at the numbers, they say
> "bad recession", not depression.

Feb 06 04:01 PM

[dw57:]

we have tried tax rebates (faster than any tax cuts). it failed. miserably . we tried doing nothing. that was worse. and while we may complain that the schools aren't doing as well as we would like. its 1000s of times better than a century ago. the problem with schools is that we are trying to use manufacturing methods for people. that will never ever work.
the other problem is even they do graduate and get that math or science degree, the majority of them went into financial WMD design. thats for two reasons, one there are very very very few jobs for them in their fields, and the other was the finance companies paid better. these kids weren't stupid, they picked going into finance. not sure we can or should drill. it will be a long time coming before its does much. and by that time, it may only replace what we have already lost by then (oil fields to decline in production over time). but the nuke option is a good one but we do need to figure out what to do with the waste,, it has a really short life span (measured in 1000s of years).
and i am afraid your right about manufacturing.
and we can add the technology industry with it


On Feb 06 03:17 PM Jolly_Rancher wrote:

> Why does anyone care what downturn this resembles? Every downturn
> is different. Each has its own dynamics. This time things are much
> different and worse and so will last much longer...
>
> The money is going going gone. No credit, no expansion. Our economy
> is IMPORT-based. That means you can't grow an economy by throwing
> electronic funds at it. All you're going to do is cause raw material
> and other input prices to rise uniformly around the world which in
> turn is going to choke off any growth that was created from the stimulus.
> You must find a way to either grow the manufacturing base or dramatically
> and permanently reduce input prices either through productivity increases
> or increased raw material supplies. Chinese labor costs are rising
> -- so that's a no go. Raw materials are temporarily down, but no
> significant new supply is coming onto the market and what is coming
> on to market is high-cost. Using government funds to employ high
> cost solar energy production and other green methods as a replacement
> for oil makes no sense. So input prices aren't going to stay down
> permanently. That means we must grow our own manufacturing base or
> dramatically increase global productivity. As much as I hate to admit
> it, I do not believe our manufacturing base will ever return. I say
> that because our education system is totally on the rocks. A huge
> percentage of our high school students are DOA after graduation or
> they aren't graduating at all. Worse, their attitude is a nightmarish
> mix of lopsided priorities and consumer-centric psyche. End of story
> there. That leaves productivity increases to fuel growth here --
> not gonna happen. Slave labor is quickly becoming a thing of the
> past. Labor is costing more around the world. Automation has reached
> significant limits. This tells me that we are in a low growth environment
> for the foreseeable future.
>
> So what do we need to do?? I am getting tired of saying it....drill,
> nuclear, domestic investment tax breaks.

Feb 06 04:11 PM

[Dave Wrixon:]

And the point you missed is that Pecking Order inevitably changes with such events. Often it is he changing of the pecking order that actually triggers such events. This one marks the end of the US of a dominant global economic power. The rebirth of the US will follow the pattern of Britain. It will take years. They need to get through the Shock Denial Anger Acceptance Adjustment thing whichever model it is that you use. If the US are as arrogant and pig headed as the British, it will take decades. But if they succeed eventually, things won't be the same, they will in an odd kind of way be better.


On Feb 06 12:36 PM Consider_this wrote:

> I disagree, this time it's not different. This has happened before,
> you just have to zoom out to a much larger historical context. History
> is richer than you think:
>
> 1. Japan, 1980s.
> 2. Argentina, 2000.
> 3. The Panic of 1837 was a panic in the United States built on a
> speculative fever. The bubble burst on May 10, 1837 in New York City,
> when every bank stopped payment in specie (gold and silver coinage).
> The Panic was followed by a five-year depression, with the failure
> of banks and record high unemployment levels. (src: wikipedia)<br/>4...
> Railway Mania (1840s)
> 5. Florida speculative building bubble (1926)
> 6. Great Depression (1929)
> 7. British Colonial Empire, raise and collapse.
> 8. Dutch Golden Age: (Wikipedia: The Golden Age was a period in Dutch
> history, roughly spanning the 17th century, in which Dutch trade,
> science, and art were among the most acclaimed in the world.) Killed
> by Tulips Mania / bubble.
>
> They were all of spectacular scale of their time.
>
> However, one thing *IS* true -- the world did continue to exist after
> that. It is NOT doomsday.
>
> Economically, though, very few escaped unscathed, and almost nobody
> profitted from these.
>
> So shorts should beware they're not going to be able to walk away
> from manias of these scale along with their profits when all is said
> and done. Because after all, even shorts are part of an economic
> fabric. For when the whole system fails, what use is an individual's
> power in the big picture?

Feb 06 06:07 PM

[CJJ:]

This time is different from the past in that to date it has yet to pass.

This time is the same in that people are egotistical to their time and place in history and everytime something is current it is the worst.

I would say as greed has propogated more people have become slaves to money than in the past where they believe people who aren't fixated on the economy are stupid, when in fact they themselves are probably the stupid ones because they are fixated on a problem that can't be explained or easily fixed. There is no solution to this crisis, there is only adaptation.
Religion was born out of a need to explain the unexplainable. Perhaps some sort of economic religion is being born out of this crisis because its obvious no one has the answer and what comes to be out of this will be just as storied as the religious texts of thousands of years ago.

Feb 06 06:26 PM

[otbricki:]

The population of the US is more than twice what it was in 1937, plus there is a much stronger social safety net and far more families where both the husband and wife work.

In addition there were no official unemployment rates calculated by government until 1940. The numbers published for per-1940 are estimates by economists using consistent methodologies to compare various periods of history.

There is no way current times are comparable in hardship. You need to stop listening to the Dr. Doom crowd.

On Feb 06 02:40 PM Da55id wrote:

> I agree with the author that extreme caution is in order. Regarding
> percentage comparisons with employment in the great depression (25%
> vs now 7.6%). A more interesting comparison would be actual human
> beings without jobs or severely underemployed. I think that the number
> at the peak of the depression was:
>
> 13.5 million
> vs today
> 11.6 million
>
> and these calculations were much more conservative/unadjuste... in
> 1937

Feb 06 08:11 PM

[raising4dau...:]

One big difference between this period and the 1930s. Back then, at least the vampire moneychangers had some honor and jumped out of windows. Now, they go on CNBC and claim that they deserve more than $500k per year for running their insolvent companies further into the ground.

No more TARP money for them; just arsenic.

Feb 06 10:37 PM

[PFandGF:]

With the money being printed out of thin air what do you think that is doing the the VALUE of money!?

COME ON! this is out of control... and we all know what happens when printing money gets out of control can anyone say Zimbabwe? (50billion dollars for 2 loaves of bread)

Oh, that's right America is too BIG to fail I forgot! hahaha WAKE UP PEOPLE the time for "getting ready" is coming to a close...

prepareforandgainfrom....

Feb 07 08:38 AM

[unclej0:]

In order to eliminate our trade deficit (which will have a negative impact on China and the petroleum exporters) we will have to eliminate energy imports or resort to a value added tax. The latter can also replace our payroll taxes and improve our competitiveness.


On Feb 06 12:30 PM MGA_1 wrote:

> I don't think we'll truly see the bottom until the trade deficit
> drops to something around $0; otherwise, it will be an economy continually
> funded by foreigners. Also, we have 1 to 1.5 trillion of Alt-A and
> Option Arm resets coming down the pike - yikes !

Feb 07 09:58 AM

[ain't no fo...:]

morph... the BDI is more a reflection right now that China commodity demand is resuming in select areas such as iron ore imports (where they built up and then ran their stocks down to zero in order to have negotiating leverage with the ore producers like Rio, BHP etc) and to some extent import of grains/fertilizers - also much of this activity in the BDI reflects hopes for success of the China stimulus package with its heavier emphasis on physical infrastructure build (steel, copper, ore etc).

In other words, BDI wouldn't necessarily directly reflect hopes for an upturn in the US economy at present.


On Feb 06 12:19 PM morph366 wrote:

> Do you include the Baltic Dry Index amongst your indicators? Allegedly
> the smart money is moving back into this index so that must be the
> bottom - surely, well at least its a definite maybe.
> But I hasten to declare that I am not long shipping companies or
> the index and I remain very suspicious that anyone has a clue how
> deep and long lasting this global recession is going to be.

Feb 07 11:53 AM

[axelrod608:]

Aside from a handful of well run, well capitalized companies that have done well all along, every upturn in stocks has been sparked by federal money or the rumor of federal money.

Some say there's more greed than fear in the markets, but I suspect it's more fear - of continuing losses at mutual and hedge funds - than greed. The nation's money managers are gonna be in the unemployment lines if they can't eke out a decent quarter soon.

Feb 07 12:00 PM

[Fred Voetsch:]

In regards to your comments below: a bubble that bursts does not just return to its mean average but tends to deflate more the larger the bubble had been inflated. We should expect real estate to not only correct but to over-correct. I would expect it to suck people in and then contract once again, perhaps repeating this cycle several times until this generation of speculators has been taught a much needed lesson.

History tells us that such episodes of despression must occur in generational cycles, normally in 20, 40 and 80 year cycles. Please note that the Great Depression happened about 80 years ago and most of those who learned its lessons are either dead or out-of-power.


On Feb 06 12:47 PM fatcat wrote:

> Until housing prices reach the historic affordability ratio ,either
> by inflation in the broad economy or further erosion in prices,there
> can't be much of a recovery...

Feb 07 12:07 PM

[OldLimey:]

Mr. Waddell: There is one very simple reason why this time it's different. Every economic downturn since the 1930s has been a 'demand recession', whereas this one's a 'balance sheet recession' (as was the 1930s). This has implications:

1. A demand recession can be fought by Keynesian stimulus. Government demand substitutes, temporarily, for missing private sector demand.
2. A balance sheet recession is caused by indebtedness reaching a point where the actor concerned can no longer function effectively as a reliable generator of demand due to inadequate savings and the lack of capacity to absorb further debt. To put some meat on this, reflect on the fact that total (public and private sector) US debt at the end of this year is likely to be north of $51T and 400% of GDP; no serious country has ever come remotely close to these figures - not even Japan in the 1990s.

A demand recession can be alleviated by the type of Keynesian pump-priming governments are now engaged in. Unfortunately, a balance sheet recession can only be alleviated by deleveraging. What the US and other governments are doing may provide a temporary boost, in response to which the Keynesians will doubtless be buoyant; but at some point not very far into the future the fact that a recession induced by too much cheap credit has been addressed by yet more cheap credit rather than by letting the required deleveraging fully run its course will come back to haunt us. That is what makes this time different.




On Feb 06 12:07 PM Nick Waddell wrote:

> In every recession or every boom there are people are saying "this
> one is different". There are more similarities than differences.

Feb 07 02:05 PM

[Hmm?!:]

I would like to communicate the following simple points.

No country in the history of the world has achieved prosperity by increasing their taxes, debt, government spending or printed currency in circulation.

What John Maynard Keynes actually proposed was that government could increase spending in times of recession and save during highly expansionary periods to smooth and control the economic process better then free markets alone.

Please see the link below where even Keynes himself rails against "deficit spending" as inflationary (more than once).

en.wikipedia.org/wiki/...

It also appears Keynes may never bothered to get an economics degree (I had heard this before). It may not be relevant given his total education and experience, but it is interesting.

Feb 08 12:31 AM

[Epiphany:]

MarvinMBA's remark is a signal the submarine is scraping the bottom and ready to begin its ascent to the surface. Haven't we all been there, done that for too many decades to know better?

Feb 08 03:45 AM

[Epiphany:]

Just wait until trillions churning out of U.S. Treasury printing presses surfaces on the global economic seas like an oil slick.

Recommended reading:

The Hyperinflation Survival Guide: Strategies for American Businesses
By Harry E. Figgie, Jr.
Chairman and Chief Executive Officer
Figgie International Inc.

Noteworthy chapters include:

CHAPTER THREE
Manufacturing Decisions
Supplies dry up, resources disappear, and production may not be the most profitable use of capital.

CHAPTER FOUR
Industrial Relations
Wages climb slower than prices, and union activity often heats up. Inflation's most disastrous side effect may be the evaporation of pension funds.

APPENDIX
1971 U.S. Wage and Price Controls

Author's conclusion:
Only the government can stop inflation, and it must act soon. Once inflation takes off, only the flexible will survive.

Mathematically speaking, the current amount of cash printed to-date by the Federal Reserve, when unleashed into the world economy, will cause a very fast hyperinflationary spiral of 20% to 100% inflation per year.

The frosting on this cake: History bears testimony to the fact that hyperinflation happens fast, sometimes overnight, catching everybody by surprise. The tidal wave of currency will temporarily lift all boats as the debris rushes inland, and the trick to surviving a tidal wave is to remain on the surface to keep from drowning.

Feb 08 04:04 AM