No Chance of a 'V' Recovery

This is an interesting recession.

In the past I have postulated the various possibilities of the type of recovery we would face – L, U, V, or W.

The theory is that the deeper the recession, the more pressure exists to drive a recovery – hence a “V”. Even though the coincident data did not support a “V” recovery, leading indicators did.

But data this week has destroyed the belief there is pent up demand or any other bull tendencies raging.

The possibility of a “V” recovery has been taken off of the table.

Reason #1 – Disastrous Auto Sales

After cash-for-clunkers, everyone expected a drop in auto sales.

When sales drop to the lowest recessionary levels after an incentive, the significant drop in sales are proof that the incentive failed to act as a stimulus. The economy is not ready for a raging recovery.

Reason #2 – Midwest USA Manufacturing Output Dropped

The August 2009 Chicago Fed’s Manufacturing Index fell MoM. At the trough of a recession, this should send shivers down your spine. No one says recession recovery should be linear, but it completely destroys the concept there are strong recovery forces at work.

The Midwest is ground zero for manufacturing in America.

The decline was focused in the regional auto sector.

• Regional auto sector production declined 4.2%;
• Regional machinery sector output rose 0.3%;
• Regional steel sector output increased 0.6%; and
• Regional resource sector output rose 1.3%.

This is an ENORMOUS surprise after coming on the heels of cash-for-clunkers where common wisdom said that inventories were wiped, and now people were coming back to work to build autos.

Reason #3 – Personal Income Down but Spending Up

The data gets really conflicted at this point. Yes, using chained (equalized dollars), American income is down in August 2009. But spending was up almost 1% by consumers – all from durable goods which I would assume was cash-for-clunkers.

Then there was a sharp drop in the rate of savings from 4% to 3% (annualized MoM). And last Friday, US Census issued a conflicting report showing August 2009 durable goods were down.

Reduction in real income is a normal event at the end of a deep recession. Consumer spending pickup is a normal event at the end of a recession – except it appears to be induced by cash-for-clunkers (and we now know the September auto sales figures will reverse this – expect a 1% decline in September MoM.

The unexplainable is the drop in personal savings for August unless it was caused by cash-for-clunkers. We need to wait for September data.

Reason # 4 – The ISM Manufacturing Index Hit a Wall

I do not think the Institute of Supply Management (ISM) Manufacturing index can be relied on for forecasting until validated by quantitative data which comes one month later. Last month, the market was surprised when the quantitative data was contrary to the ISM survey for the matching month. As stated in my last article:

The August 2009 durable goods report shows seasonally adjusted new orders down 2.4%, while the August 2009 ISM survey which was released a month ago showed new orders were UP a statistically large 9%. This is more than a little disconnect and good reason the market is confused.

As the ISM said in their September 2009 survey that September would be worse than August, then we can project another down month for durable goods when September’s quantitative data is released.

The ISM saying September will be a little worse than August is not good news.

Reason #5 – Construction Spending Change Negligible

US Census reported construction spending for August 2009 was up 0.8% seasonally adjusted / annualized – but with a potential error factor over double the reported gain. In other words, with the margin of error there actually could have been a decline.

Not to squabble whether is it a gain or a loss, the point is the construction spending is down almost 12% YoY. A “V” recovery would have constructions spending powering up rapidly. This is not occurring.

But interestingly, government construction spending fell (hello stimulus??) 1.1% - and the gain came mostly from residential construction. This bit of good news is actually saying we are building more houses into an already overbuilt housing market.

Reason # 6 – Unemployment Claims Keep on Coming

The 4 week moving average of initial claims improved slightly last week.

We expected a jobless recovery. But when the rate of initial unemployment claims keep on coming, it brings into question whether it is possible for the economy to be improving at the structural level.

There are jobless recoveries, but not recoveries where jobs are being lost at the rate of over one half million per week – over 2 million per month. This is not a recovery – and more resembles the making of a national disaster.

No recovery can build while shedding jobs at this rate. This mitigates any recovery.

So the “V” Is Gone

For the “V” to have been in play, we had to have seen a stronger rebound. The cash-for-clunkers and other stimulus did not work. The economy is acting sluggish. The best scenario possible at this point is a “U” recovery.

If the various government rescues and stimuli have failed to produce a strong rebound, what we must hope for is a possible continuous building of fundamentals. We need to continue to monitor the dynamics through the end of this year.

The magic tricks are not working. Still no strong economic driver has appeared to save the day.

Hat tip to Steve at MEMETICS & MARKETING for editing support.

Disclosures: None

Comments

[CautiousInv...:]

Nice work Steve.

Given that our economy is still driven by consumer spending, any sustainable recovery must be built primarily upon increases in income and employment. Expansion of private investment and exports would be welcome as well.

Steve's first five arguments feed into his sixth argument; there are signs of further deterioration in the labor market with no indications of employment gains. And this is firmly supported by an underreported study by the Business Roundtable that notes of the executives surveyed 80% (approximately) see no increases in either employment or capital spending over the next six months.

To the extent this is true and the labor force expands by around 100,000 a month, it's pretty clear where the unemployment rate is heading. As another author observed today, this will inevitably lead to fresh round of braying for additional fiscal stimulus.

Oct 02 06:19 AM

[User 353732:]

All 6 trends and factors enumerated above are manifestations of more fundamental forces. These are optimism, confidence and credit.

For a recovery to be potent and sustained, there must be real optimism that personal, household, local and national economic circumstances will be notably better in the near future(i.e. there must be a belief in a recovery before it can occur since a recovery is as much psychological as it is statistical)

There must be confidence that the major civil institutions of the Nation will preserve and protect property rights and abide by the rule of law, not the rule of men and women who have contempt for the law.

Finally, there must be credit in large amounts, at the right time available under affordable terms to propel the expansion of economic activities.

In Oct, 2009, optimism within the Middle class and amongst the owners and managers of small and medium businesses is remarkably muted or absent. Confidence that work, savings, prudent investing, valid risk taking and useful innovation will be justly recognized and equitably rewarded is also lacking given that the Bosses urge unsustainable borrowing, unearned consumption, financial market manipulation and the preservation of the status quo. Finally, credit is still either contracting or available on onerous terms for most households, small businesses and a majority of medium sized companies.

N0 optimism+no confidence+ no credit = No "V" recovery

Oct 02 06:47 AM

[jeandit75:]

Try this type of recovery: "h"

Not only are we not seeing the premise of the improvement, but also, were are definitely pointing to double-dip (given the recent unemployment, PPI and most importantly ISM).

If the stimuli are not bringing any positive effects, we'll have to face the tough reality that stocks are poised to suffer unprecedented drop over the next few quarters.

Oct 02 07:05 AM

[User 357705:]

'The best scenario possible at this point is a “U” recovery.'

Yep. Though I think 'U' is improbable.

Oct 02 07:20 AM

[LilBob:]

I've actually been getting pretty tired of hearing predictions of a "jobless v-shaped recovery", which, in a consumer-driven economy is about as likely as french-speaking airborne swine.

I'm coming to the conclusion that our economic future may have to come from the bottom up; as in armies of low paid service and retail sector employees getting sick of making $8 an hour stocking store shelves or flipping burgers and deciding they can do better on their own: a massive wave of entrepreneurship that can provide new products, services and jobs is the only real hope for improvement at this point.

Oct 02 07:43 AM

[Neil459:]

The conclusion seems reasonable, but the reasons, seem overstated. Manufacturing has not been a factor in the economy for years and here it is 2 of 5 reasons. This might have applied 15 years ago, but not today, especially with the permanent decimation of the auto industry.

Manufacturing is now done in Asia, America only does light assembly. Government laws preclude any real manufacturing and hence preclude the generation of real wealth.

Government laws preclude any new mining (including oil extraction) and hence preclude any increase in real wealth.

Government laws preclude the economic generation of power.

Until these change America will struggle as the middle and lower classes will increasingly not have the opportunity to provide for their family.

You can thank the socialist/communist environmental and "save the planet" organizations working with the corrupt power grabbers in Washington. Its a wonderful partnership from their standpoint. Its coupled with the fact that most American's have been educated to ignore common sense and the foundations that made American great. It will be their children that suffer and the 80's and 90's generations will go to their graves around 2050 - 2080 realizing they made a big mistake because they wanted to feel good instead of really do good.

To really do good, one has to look at and minimize the unintended consequences of every action. A frightful idea for any liberal, socialist, or communist.

Oct 02 07:48 AM

[Senan:]

Excellent article. I'm a big fan of realism and unfortunately it's often missing when analysts wheel out their predictions. I'll keep my pot of cash for now but will invest on significant weakness on companies I'm following.

Oct 02 08:06 AM

[Carlos Lam:]

Excellent, as usual, Steven. I concur with your assessment: the stimulus hasn't worked, just like "stimulus" has always failed to work. Until debt gets paid down, zombie firms go out of business, government shrinks, and entrepreneurs feel safe to start firms, there will be no recovery. Indeed, the federal government is doing everything wrong: feeding money to dead companies/banks, pushing new and expensive programs (i.e. cap-n-trade, healthcare), and turning the rule of law on its head (i.e. Chrysler bondholders). Meanwhile, the Fed continues to destroy the currency in its attempts to add "liquidity" to the economy. I, for one, do not forsee a recovery until the dollar is broken and Washington is smaller. I may be waiting for a LONG time.

Oct 02 08:07 AM

[User 357705:]

Perhaps not as long as you hope!


On Oct 02 08:07 AM Carlos Lam wrote:

> I, for one, do not forsee a recovery until the dollar
> is broken and Washington is smaller. I may be waiting for a LONG
> time.

Oct 02 08:35 AM

[MikeD71:]

No Chance of a 'V' Recovery

Thank you for stating what several of us have saying/asking, in fact, begging...for nearly everyone to stop pimping for MONTHS. Especially the media. A "V" recovery would be built on nothing, hence, it would simply be another bubble waiting to get popped. Which, by the way, is very much already there. Government spending, on a scale almost beyond belief, propping up deeply troubled sectors DOES NOT FIX ANYTHING. Real Estate...screwed. Banks...screwed. Job Market...screwed. Debt levels...climbing to mind blowing levels, every-single-day. Recovery? FANTASY.

Oct 02 08:36 AM

[prudentinve...:]

"...what we must hope for is a possible continuous building of fundamentals.."

But the fundamental fundamentals are devastated by the policies of bank bailouts, debt monetization, mortgage modifications, handouts to go shopping or buy houses or cars, bigger govt, higher taxes, etc.... , all at the expense of the dwindling productive elements of society. So how exactly are we going to build sound fundamentals?

Oct 02 08:48 AM

[AndrewBaker:]

No there isn't: and October will prove it. The unemployment figures are bad, banks and financials have far more bad debt than we yet know about, new and existing home prices are going nowhere but down and paying the mortgage loan back has never been harder.

Let's get the next leg down done so that we can then think about a real recovery.

Oct 02 08:48 AM

[enigmaman:]

Once again hindsight proves to be great predictor of the future another " if we knew then what we know now", though if only by one day, predictions for V jobless recovery worked fine until the facts say otherwise, now we have to determine when violation of technical support levels signal this is more then a shallow retreat once again relying on our ability of "hindsight" to tell us what we should have done after we should have done it. Who can say what will happen "yesterday is a canceled check, tomorrow is a promissory note, only today is legal tender" is anybodies guess!

Oct 02 08:52 AM

[Old Trader:]

It seems evident that "targeted stimulus" has done little to nothing in stimulating the real economy. I just saw an economist from FTN on Bloomberg TV suggesting that the next step (and perhaps a better one) was something mooted months ago....just giving checks to consumers, to be used as they saw fit.

Oct 02 08:58 AM

[enigmaman:]

Year ago a study showed that it was more cost effective to just give well fare recipients a yearly check for the total amount of benefits rather then dole it out monthly, you eliminate 90% of the bureaucracy and associated cost. Same would be true as you suggest, or maybe just maybe let America know:
NO TAX INCREASE OF ANY KIND IN THE FORESEEABLE FUTURE, GOV WILL MAKE DUE WITH WHAT THEY GET, PUT THE POWER IN THE HANDS OF TAXPAYERS AND WATCH THINGS TURN AROUND


On Oct 02 08:58 AM Old Trader wrote:

> It seems evident that "targeted stimulus" has done little to nothing
> in stimulating the real economy. I just saw an economist from FTN
> on Bloomberg TV suggesting that the next step (and perhaps a better
> one) was something mooted months ago....just giving checks to consumers,
> to be used as they saw fit.

Oct 02 09:11 AM

[conceptwizard:]

Nice Article.

The US in a scramble to fight off a deflationary depression is doing just the opposite. Trillion-dollar a year fiscal shortfalls for as far as the eye can see, accompanied by wars upon wars. Government spending accounts for 25% of GDP; the same as we experienced in WWII We have Fannie Mae, Freddie Mac, Ginnie Mae and FHA & the FDIC are all bankrupt. Government is not only financing homes, but also companies, cars, Wall Street, banks and insurance companies. Taxpayers own 60% of GM and 80% of AIG, both of which are bound to fail. Under TARP government owns the banking system, most of which is insolvent. They all survive for now with government guarantees. We did not hear these problems being addressed at the G-20 meeting.

Oct 02 09:15 AM

[Hot Richard:]

I continue to short everything about the USA and I intend to take profits from the absurd policies that grip most Ponzi governments.

No end in sight. No end in sight.

Oct 02 09:22 AM

[Asbytec:]

I hate to say it, but the 'h' recovery (above) appears likely, from where I am sitting, anyway.

Oct 02 09:45 AM

[The Geoffster:]

The "real" economy can never return unless the government stops interfering with commerce. America has been moving toward a state controlled economy since the Great Depression when policy makers lost confidence in capitalism's ability to "fairly" distribute goods and services. This corresponded to the popularity of social welfare programs in Europe and the struggle between communism and fascism. In either case, statism was the outcome and personal freedom was eroded. We are now in the midst of another economic collapse and our policy makers are reacting similarly. Universal health care will become a government mandate and its costs will become unsustainable in the same manner as social security and medicare. America's shift from individual responsibility to collective responsibility is nearly complete and has been accomplished through the ballot box. Our forefathers envisioned a nation where they would take personal responsibility for their lives free of government oppression. They did not ask the government to provide for their needs because they understood the bargain was faustian. They did not believe the function of government was eleemosynary. Charity was private. Fast forward 250 years and we have become a nation which believes government can be all things to all people. Tell me, do you feel free?

Oct 02 09:50 AM

[John Bowman:]

I know people who believe we must wait for the stimulus package to work itself through the economy. They actually believe this fairy tale!!

As to entrepeneurs getting sick of minimum wage jobs and starting new ventures, I am doubting it.

If they dream up a new product, it will be made overseas. And as for services, there are too few lawns to be mowed in this country to make a decent income.

Oct 02 10:04 AM

[tunaman4u2:]

Worse employment, worse readings leads to more FED USD devaluation through printing & prolonged loose policy...
Bull market continues... on back of USD fall, not real recovery

Oct 02 10:10 AM

[MJJP:]

What you propose exists in areas like South America and Africa. Go there and see how they live day to day and see what less govt is like. Govts have always controlled trade going back to the middle ages. Do some history on the Dutch and the English. Those countries that protected their trade and encouraged the trades (unions) lived very well.


On Oct 02 09:50 AM The Geoffster wrote:

> The "real" economy can never return unless the government stops interfering
> with commerce. America has been moving toward a state controlled
> economy since the Great Depression when policy makers lost confidence
> in capitalism's ability to "fairly" distribute goods and services.
> This corresponded to the popularity of social welfare programs in
> Europe and the struggle between communism and fascism. In either
> case, statism was the outcome and personal freedom was eroded. We
> are now in the midst of another economic collapse and our policy
> makers are reacting similarly. Universal health care will become
> a government mandate and its costs will become unsustainable in the
> same manner as social security and medicare. America's shift from
> individual responsibility to collective responsibility is nearly
> complete and has been accomplished through the ballot box. Our forefathers
> envisioned a nation where they would take personal responsibility
> for their lives free of government oppression. They did not ask the
> government to provide for their needs because they understood the
> bargain was faustian. They did not believe the function of government
> was eleemosynary. Charity was private. Fast forward 250 years and
> we have become a nation which believes government can be all things
> to all people. Tell me, do you feel free?

Oct 02 10:10 AM

[bricki:]

Actually this is completely incorrect. The US is the largest manufacturing nation in the world, by a large margin. Giants like Boeing, Intel, Caterpillar plus the Pharms and farms make it so. Chip foundries, airliners, heavy earth movers and aircraft carriers are not light manufacturing or assembly. What the US doesn't offer is large numbers of manufacturing jobs because the labor component has been wrung out by increasing efficiency, which is capitalism in action. Only 8% of the labor force is employed in manufacturing. And assembly jobs are the jobs that get pushed overseas first, because they are the lowest value added, lowest tech and easiest to export.

And as far as natural resources? Wasn't the story this year the practical extraction of tremendous new natural gas reserves from shale deposits using innovative new techniques?

Your rant doesn't hold up to the facts.

www2.journalnow.com/co.../

On Oct 02 07:48 AM Neil459 wrote:

> The conclusion seems reasonable, but the reasons, seem overstated.
> Manufacturing has not been a factor in the economy for years and
> here it is 2 of 5 reasons. This might have applied 15 years ago,
> but not today, especially with the permanent decimation of the auto
> industry.
>
> Manufacturing is now done in Asia, America only does light assembly.
> Government laws preclude any real manufacturing and hence preclude
> the generation of real wealth.
>
> Government laws preclude any new mining (including oil extraction)
> and hence preclude any increase in real wealth.
>
> Government laws preclude the economic generation of power.
>
> Until these change America will struggle as the middle and lower
> classes will increasingly not have the opportunity to provide for
> their family.
>
> You can thank the socialist/communist environmental and "save the
> planet" organizations working with the corrupt power grabbers in
> Washington. Its a wonderful partnership from their standpoint.
> Its coupled with the fact that most American's have been educated
> to ignore common sense and the foundations that made American great.
> It will be their children that suffer and the 80's and 90's generations
> will go to their graves around 2050 - 2080 realizing they made a
> big mistake because they wanted to feel good instead of really do
> good.
>
> To really do good, one has to look at and minimize the unintended
> consequences of every action. A frightful idea for any liberal,
> socialist, or communist.

Oct 02 10:19 AM

[Snitzer:]

Anecdotal assessment: Our small trucking company seems to have stabilized around ten percent of where we were before the fall, with many hardships, hard decisions and heart breaking failures behind us. The big question: Can we survive through the holidays and into next year? If we make it through January then we have a shot at what for us will be the "New Normal", ten to fifteen percent of where we were, with no plans to regain the mid '08 levels.
Maybe I should go long on tobacco, my bossman is up to three packs a day, and I'm sure he's not alone.

Oct 02 10:27 AM

[The Geoffster:]

Read the Constitution.


On Oct 02 10:10 AM MJJP wrote:

> What you propose exists in areas like South America and Africa. Go
> there and see how they live day to day and see what less govt is
> like. Govts have always controlled trade going back to the middle
> ages. Do some history on the Dutch and the English. Those countries
> that protected their trade and encouraged the trades (unions) lived
> very well.

Oct 02 10:44 AM

[Joseph L. S...:]

Neil459 repeats the common fallacy that American manufacturing is no more, that we are bereft of natural resources, and that our jobs are being outsourced overseas.

Bricki accurately corrects these misconceptions. We are the #1 manufacturer in the world. We have abundant resources and are doubly blessed to have a neighbor to the north that has far more energy, base metal, grain, and precious metal resources than their population requires, and they are willing to sell it to us at current prices and at far less transportation expense.

Recessions are normal! If a human heart races 100% of the time and never rests, that human will die. Expansion and contraction are normal in heartbeats and economies.

Government intervention, artificial stimulus, and worse, "targeted" stimulus means we are interfering with the natural order of things -- much like giving a shock when the heart is not in fibrillation and creating more problems than existed before.

Plus, targeted stimulus panders to the arrogant assumption that someone in Washington DC knows what to target. Past, and current, history, prove that they do not.

Oct 02 10:49 AM

[Tony Petroski:]

I continue to call for an ampersand recovery.

This is the author's opinion: "The economy is not ready for a raging recovery."

I'm ready for a raging recovery.

Oct 02 11:13 AM

[Poor Texan:]

On Oct 02 07:43 AM LilBob wrote:

I've actually been getting pretty tired of hearing predictions of
a "jobless v-shaped recovery", which, in a consumer-driven economy is about as likely as french-speaking airborne swine.

I'm coming to the conclusion that our economic future may have to come from the bottom up; as in armies of low paid service and retail sector employees getting sick of making $8 an hour stocking store shelves or flipping burgers and deciding they can do better on their own: a massive wave of entrepreneurship that can provide new products, services and jobs is the only real hope for improvement at this point.

***
Would that this were so but our educational system has not trained minds for this type of thinking. We're more concerned with entitlements than earned rewards.

Oct 02 11:54 AM

[Steve Pasq:]

Is a depression off the table? It's seems like people are afraid to say depression because they may be ostracized from society. It looks as if most of our stimulus dollars went straight to Sinapore real estate. After that a few green guys are congradulating each other for their big budgets to save the world but that won't result in jobs or growth because their aim is to shut down industrial activity and they are good at it. The outrage will come when the insider finance boys are exposed for indebting our population with their corrupt PIPP or whatever they call it. In fact it looks as if the Goldman/Blackrock gang are playing games with the stockmarket by manipulating insolvent organizations like AIG, FRE, FNM in exchange for TARP dollars.

Oct 02 12:00 PM

[ETFdesk.com:]

especially with these horrendous job numbers, revisions to previous months came in at -400K. Estimates were in the -150 to -200K range. Total job loss goes up from 7.6 million to 8 million. There goes there arguement that employment is less bad.
see article: Early Job Cuts Worse Than First Thought, as More Companies Go Belly Up www.etfdesk.com/headli...

Oct 02 12:23 PM

[bottoms-up:]

Maybe it will be based on the Internet...

A WWW recovery... The problem is most of us will be dead by the final W upswing...

And how's about that Obama pushing for the Olympics? That worked as well as these job creation programs...

The truth of the matter is an economy like the United States needs tremendous job creation each month... Any month where the job creation balance is "0" is awful news, but when you have losses... That is a part of this story that is missing....

We have a consumer-based economy with a population that has an inability to consume. Don't look now, but dead end straight ahead.

Oct 02 12:45 PM

[JCC:]

You raise some interesting arguments, but there is other important data:

1. ECRI's WLI is pointing to a robust recovery.
2. The housing market often leads us out of recession and the housing market is showing signs of recovery.
3. Developing economies in India and East Asia are recovering nicely.
4. The Atlanta Fed reports that Global Trade increased at it's fastest pace in 5 years.
5. Foreign demand is expected to add ~1.3% to US GDP in 2010

Could it be that proponents of a "ready-aim-fire" economic theory might be upset by the the "ready-fire-aim" approach? If we end up with a strong V shape, will you change your minds?

Oct 02 12:57 PM

[bottoms-up:]

I see your point...

A lot of this is little Dutch boy at the dike.

There will come a point of "critical mass," so to speak, when Ben can't print to buy up worthless paper and it all comes falling down.

There's an old saying that nations prepare for the next war based on the last. I think the same holds true for economic problems. Bush-Obama have thrown everything they had as the problem based on Great Depression era models, but this is nothing like the Great Depression.

My fear is that they took all of the ammunition in their "tool box" (as I think Ben was so fond of calling it last year) and fired a giant salvo to the tune of $trillions of future revenues that may never come... It didn't work...

In 2008 the nations' leaders were in fear that if they didn't do something, anything, the world would end, so they did "something," without fully understanding what they were doing or the consequences of their actions. They fired everything they had and now there is nothing left, except maybe more cover-ups via the printing presses, but that will catch up to them too.

In the words of Martha & the Vandellas: Nowhere to run, baby. Nowhere to hide. Got nowhere to run to, baby. Nowhere to hide ..


On Oct 02 10:10 AM tunaman4u2 wrote:

> Worse employment, worse readings leads to more FED USD devaluation
> through printing & prolonged loose policy...
> Bull market continues... on back of USD fall, not real recovery

Oct 02 01:04 PM

[zagrebzagreb:]

Some funny and completely adhoc interpretations of a what a sucessful market economy actually is...

People would do well to open a political economy book once in a while and understand that all modern ecomomies owe their existence to interventionist state policies. There is no such thing as a pure market economy, and the most successful are typical of the German variety, whereby socialism mingles with capitalism. All of the bemoaning about our loss of manufacturing ability should be underlined with the fact that it has generally moved to the Far East, and that region has some of the most state-controled economies ever imagined. Early industrialization was in fact led by governments (via banking) in most countires, with the notable exceptions of the US and England, and has continued as such... I can't help but notice the irony that uncontroled markets and short-term profit making got into this mess, and now there are arguments that - if we let it - the invisible hand will simply steer us to prosperity, no higher-level or inter-industry strategy needed...

GM shareholders had every opportunity to kick the incompetent management to the curb, but instead did nothing. There should have been an upheveal from within or a hostile takeover, or something... This represents a huge high-level failure of our model of corporate governance. Its time to admit just how broken our system is...

Oct 02 01:32 PM

[Tony Daltorio:]

It's amazing that the bulls still think you can have a jobless V-shaped recovery in the United States whose economy is based on consumption. An impossibility!

I continue to predict a ZZZ-shaped recovery where most Americans remain unconcerned about the economy along as they have their 'reality' shows.

Oct 02 01:45 PM

[KDG:]

Everyone throw in the towel, buy gold, load your guns, stockpile canned foods cause it is about to hit the fan...... Please. lol

Your antiquated metrics for arguing this point is pure hubris. You are preaching to the choir or at least trying to get your bear buddies to pat your back...yawn. Wake up and smell the new era of innovation. GDP is one corner in the circle of data.

Oct 02 02:30 PM

[EEB:]

Neil459 wrote: "Government intervention, artificial stimulus, and worse, "targeted" stimulus means we are interfering with the natural order of things -- much like giving a shock when the heart is not in fibrillation and creating more problems than existed before."

What, exactly, is the natural order of things? The idea that we should live according to nature has been thoroughly debunked. Does that mean that we shouldn't wear glasses? Take medicine? Perform surgeries? Ride bicycles? And so on. All of those things are artificial, just like governments, laws, etc. To say that artificial things are bad and natural things are good is clearly wrong and somewhat naive. In other words, some natural things are good and some bad. Likewise, some artificial things are good and some bad. The difficult part is figuring out which things are truly good. The categories of artificial and natural will not help you do this.


On Oct 02 10:49 AM Joseph L. Shaefer wrote:

> Neil459 repeats the common fallacy that American manufacturing is
> no more, that we are bereft of natural resources, and that our jobs
> are being outsourced overseas.
>
> Bricki accurately corrects these misconceptions. We are the #1 manufacturer
> in the world. We have abundant resources and are doubly blessed
> to have a neighbor to the north that has far more energy, base metal,
> grain, and precious metal resources than their population requires,
> and they are willing to sell it to us at current prices and at far
> less transportation expense.
>
> Recessions are normal! If a human heart races 100% of the time and
> never rests, that human will die. Expansion and contraction are
> normal in heartbeats and economies.
>
> Government intervention, artificial stimulus, and worse, "targeted"
> stimulus means we are interfering with the natural order of things
> -- much like giving a shock when the heart is not in fibrillation
> and creating more problems than existed before.
>
> Plus, targeted stimulus panders to the arrogant assumption that someone
> in Washington DC knows what to target. Past, and current, history,
> prove that they do not.

Oct 02 03:01 PM

[GoodLife:]

Nice article.

No V?!? There have been people calling this whole thing correctly for years: Faber, Harry Schulz, Jim Sinclair, Jim Rogers, and many others. See, e.g., the 'Big Picture' article here: www.hsletter.com/HSLne...

Likewise, we've been getting the same old 'we're turning the corner' swill from the same old suspects for years as well.

I know who I'll listen to.

Expect things to turn around when the real problem, excess debt, nears resolution. Until then it's bear market rallies. This thing has barely started.

Oct 02 03:58 PM

[enigmaman:]

Your points of fact are well taken but

1-ECRI has been wrong before and they were in 2007 about the strength of our economy
2-We have more houses then qualified buyers and 6 million more foreclosures on the horizon, builders are selling at looses just to stay in business, so housing is now our ball and chain and not the cavalry
3-India and East Asia are doing fine so far, whom will they sell their wares to to maintain their GDP, it wont be USA ,then who?
4- Like all headlines, they show we are breaking records all over the place, but what lies underneath those numbers, todays stats were sobering because they indicate economy still needs to be in ICU and also needs pacemaker to keep its heart beating
5- Foreign demand for what?

I want a V shape recovery, I really do, everyone prospers from a good economy, there is no reason to want it to falter because it takes all down with it. Then again there is no reason to believe everything will come up roses because we want it to, to expect a V shaped recovery after all that this economy and its people have been through in such a short time and facing a government that insists on adding debt upon debt without worry about an 18% tax revenue shortfall is insane, OK wishful thinking. The devil is in the details and the details are what we are not getting, but they are there is you search for them and when you find them they are worse then you expected, like today workers are losing hours worked at an unrepresented pace, worse then anticipated. Give you an idea about unemployment, at 9.8%, the Pres said his stimulus would add 3million jobs in the next two year, Ha, but lets say it did, the unemployment numbers would not change because the underemployed represent 3 million jobs, so before we can add one new job employers have to bring current employtees back up to 40 hrs work week. So the uphill battle is steeper then the Admin is letting on, peel the onion and make sure you hold your nose and shield your eyes otherwise it will make you cry


On Oct 02 12:57 PM JCC wrote:

> You raise some interesting arguments, but there is other important
> data:
>
> 1. ECRI's WLI is pointing to a robust recovery.
> 2. The housing market often leads us out of recession and the housing
> market is showing signs of recovery.
> 3. Developing economies in India and East Asia are recovering nicely.
>
> 4. The Atlanta Fed reports that Global Trade increased at it's fastest
> pace in 5 years.
> 5. Foreign demand is expected to add ~1.3% to US GDP in 2010
>
> Could it be that proponents of a "ready-aim-fire" economic theory
> might be upset by the the "ready-fire-aim" approach? If we end up
> with a strong V shape, will you change your minds?

Oct 02 04:16 PM

[JCC:]

One other important point often forgotten is the Pareto principal or law of large numbers. With this principal we find that in any large group 20% of the members create 80% of the results. So in a company 20% of the parts equate to 80% of inventory value. In an economy 20% of the members hold 80% of the the wealth. So when that wealthy 20% starts to spend, we can start a recovery.

That is one reason why unemployment is a lagging indicator. Because of this, recovery starts in advance of employment recovery.

Oct 02 04:27 PM

[Outofchips:]

Matilda happens to be a strong supporter of abortion. Since this is a free country, she is free to donate as much of her hard-earned money as she chooses to support abortion in Africa. There is nothing in our constitution to prevent this, even if some of us strongly disagree with the cause she supports because, within legal limits, our country was designed to support and protect personal freedom.

John happens to strongly oppose abortion. He prefers not to donate to a cause that supports abortion in Africa . . . but he does anyway, since Congress has mandated a portion of taxes support abortion there. He is donating money to support an issue he opposes, like it or not. He wonders, “Why does Congress have the right to support any cause through public taxes?” He can’t find anything in the constitution that suggests Congress shall support abortion in Africa, democracy and arms support in countries of its choosing, and other popular causes.

He has searched the constitution to identify the underlying authority of the federal government to use tax revenue to support ACORN, or support noncompetitive businesses, or even to define which countries US citizens can visit, and he claims this is not a role of our federal government according to his study of our constitution. Of course, John is only an ordinary somewhat educated citizen much like our founders, unlike today's highly esteemed constitutional lawyers.

But, what if the majority of the people prefer that taxes be directed to a cause not covered by the constitution? Congress will most likely support the cause since politicians LOVE their jobs and they keep their jobs by receiving the majority vote. Even if it’s wrong, who can stop them?

The US Supreme Court can. That’s why conservative Presidents try very hard to nominate conservative judges and liberals push for liberal ones. And that’s also why it turns out abortion is covered in the constitution according to a liberal court.

If these “causes” or “benefits” appeal to the majority of the people and are mostly paid for by twenty per cent of the folks it doesn’t really matter if the ones paying the bills like it or not. It’s gonna happen anyway.

Let’s hope the ones paying the bills remain patriotic and stick around.

Oct 02 05:43 PM

[phdinsuntan...:]

At the root of this financially induced recession, is a global imbalance of external debt between creditor and indebted economies. Because households of the US and the UK are so indebted, monetary easing is not stimulating consumption in the indebted economies. Indebted private sector in US, UK is moderating previous excesses and needs to fund fiscal emergency measures with increasing taxes. In consequence, US-UK central banks purchases of financial institutions bonds, has been recycled by financials commodities, as lending demand remains weak. hina and other Asian creditors imported the monetary expansion from the main debtors via dollar pegs, creating large monetary/fiscal stimulus. The RMB/USD currency peg helped stocks and commodities to bubble, avoiding a deeper recession, but hardly bringing stability. Pile up of reserves in the East and deficits at the other side stopped suddenly and are reversing. Commodities, currencies, stocks and bonds will continue a volatile credit related doom and gloom process for a while until new comparative advantages be revealed and private investment leave its hidden cave and floating refuge in pristine yellow sand and palm tree covered sanctuaries.

Oct 02 06:03 PM

[bottoms-up:]

Usually it would be a lagging indicator, but nobody factored in the percent of the economy based on consumer spending. That is the new kid in town and nobody can predict how this consumer society can spend without jobs and/or the abuse of credit.


On Oct 02 04:27 PM JCC wrote:

> One other important point often forgotten is the Pareto principal
> or law of large numbers. With this principal we find that in any
> large group 20% of the members create 80% of the results. So in a
> company 20% of the parts equate to 80% of inventory value. In an
> economy 20% of the members hold 80% of the the wealth. So when that
> wealthy 20% starts to spend, we can start a recovery.
>
> That is one reason why unemployment is a lagging indicator. Because
> of this, recovery starts in advance of employment recovery.

Oct 02 06:42 PM

[John Lounsbury:]

Steve - - -

Good job connecting the dots.

At this late juncture, I'll add one more thing to the comment stream. If you look at the stock market, we have had the "V" and we are right back to where we were when Lehman went flop. We had a panic sell-off (with some rallies) to a March 9 low and V back to the same levels as a year ago.

The economy, however, is not at the same level. Housing prices are down (and I believe still going down further), unemployment is up and the labor market is much weaker. (I have written elsewhere about those details, with more coming out this weekend.)

We still have the same balance sheet problems largely unresolved for banks, except that now we have trillions of government backstop dollars, if necessary to keep the vampires alive to keep draining our blood.

So, my position is that we have had our V, but it was in the stock market. The real economy may limp back to slightly positive GDP changes, but that may not withstand all the unresolved headwinds. We may drift lower into negative territory again.

The best I can see for success here is that we don't go back to any 5-6% annual rate declines on GDP. Deleveraging is hell and deleveraging overall while allowing megabanks to hold (and maybe increase) leverage is impossible to do (in my opinion) without major damage to the rest of the economy.

Oct 02 09:47 PM

[JCC:]

Again - 80% of consumer spending is from the 20% that is the most wealthy. This concept (Pareto Principal) is one that is well known to those manufacturing and economics, but somehow is not well known in many other fields.

Again, this why you will start to see recovery in consumer spending before unemployment shows significant reduction.


On Oct 02 06:42 PM bottoms-up wrote:

> Usually it would be a lagging indicator, but nobody factored in the
> percent of the economy based on consumer spending. That is the new
> kid in town and nobody can predict how this consumer society can
> spend without jobs and/or the abuse of credit.

Oct 03 03:31 PM

[Owen B:]

You wrote, "ECRI has been wrong before and they were in 2007 about the strength of our economy"

But I've heard ECRI state that GDP growth reached a 4-year high in mid-2007. Is that not true?


On Oct 02 04:16 PM enigmaman wrote:

> Your points of fact are well taken but
>
> 1-ECRI has been wrong before and they were in 2007 about the strength
> of our economy
> 2-We have more houses then qualified buyers and 6 million more foreclosures
> on the horizon, builders are selling at looses just to stay in business,
> so housing is now our ball and chain and not the cavalry
> 3-India and East Asia are doing fine so far, whom will they sell
> their wares to to maintain their GDP, it wont be USA ,then who?<br/>4-
> Like all headlines, they show we are breaking records all over the
> place, but what lies underneath those numbers, todays stats were
> sobering because they indicate economy still needs to be in ICU and
> also needs pacemaker to keep its heart beating
> 5- Foreign demand for what?
>
> I want a V shape recovery, I really do, everyone prospers from a
> good economy, there is no reason to want it to falter because it
> takes all down with it. Then again there is no reason to believe
> everything will come up roses because we want it to, to expect a
> V shaped recovery after all that this economy and its people have
> been through in such a short time and facing a government that insists
> on adding debt upon debt without worry about an 18% tax revenue shortfall
> is insane, OK wishful thinking. The devil is in the details and the
> details are what we are not getting, but they are there is you search
> for them and when you find them they are worse then you expected,
> like today workers are losing hours worked at an unrepresented pace,
> worse then anticipated. Give you an idea about unemployment, at 9.8%,
> the Pres said his stimulus would add 3million jobs in the next two
> year, Ha, but lets say it did, the unemployment numbers would not
> change because the underemployed represent 3 million jobs, so before
> we can add one new job employers have to bring current employtees
> back up to 40 hrs work week. So the uphill battle is steeper then
> the Admin is letting on, peel the onion and make sure you hold your
> nose and shield your eyes otherwise it will make you cry

Oct 03 07:43 PM

[User 357705:]

This part of the rant reminds me of a bumper sticker I once saw on an Escalade that read: Nuke The Gay Unborn Whales!


On Oct 02 07:48 AM Neil459 wrote:

>.
>
> You can thank the socialist/communist environmental and "save the
> planet" organizations working with the corrupt power grabbers in
> Washington.

Oct 03 08:09 PM

[JCC:]

Agreed - Furthermore ECRI predicted the current mess a little late in March 2008, which was plenty of time to get out and preserver your capital.

ECRI has done pretty well in the economic prediction business.


On Oct 03 07:43 PM Owen B wrote:

> You wrote, "ECRI has been wrong before and they were in 2007 about
> the strength of our economy"
>
> But I've heard ECRI state that GDP growth reached a 4-year high in
> mid-2007. Is that not true?

Oct 04 09:33 AM

[Owen B:]

Yes, in March they said recession a done deal (at the time there was a big debate about recession because GDP was still coming in positive): kirklindstrom.blogspot...

But a few months earlier in January they were waving a BIG yellow flag for anyone that was listening, pointing out an unusual inventory situation/opportunity that was lost on everyone, especially policy makers: kirklindstrom.blogspot...


On Oct 04 09:33 AM JCC wrote:

> Agreed - Furthermore ECRI predicted the current mess a little late
> in March 2008, which was plenty of time to get out and preserver
> your capital.
>
> ECRI has done pretty well in the economic prediction business.
>

Oct 04 10:39 AM

[thiazole:]

Very interesting discussion. I bookmarked this article on Friday so that I could throw it back in the bears' faces in about 6 months to show just how real irrational pessimism is at the end of a recession (and after a recession has ended). In spite of the historical evidence that shows that over and over (just look at the official dates of recessions and look at Newsweek archives for 3 months after each recession has ended, and see how pessimistic the economic news is and how often the assertion that we were still in a recession was made), the general public along with most bearish pundits tend to believe that we are in a recession for a solid year after it has ended - and many think things are getting worse during this time (which is technically the definition of a recession, but half the people on SA don't even understand that, so certainly the general public is too ignorant to understand that either).

I like where the discussion ended - with ECRI predictions. One of my earliest debates here on SA was me claiming back in April that the stock market had already bottomed because it leads the economy by 6-9 months and because the ECRI predicted the recession to end this summer, so the March low was likely the recession low and that smart people were buying. Many of the same bears who posted above told me then that only idiots were investing in April (how's that crow taste, by the way?) and that the ECRI was definitely wrong "this time". Well, we are about to get at least 2-3 quarters of positive GDP in a row. Even in the worst case scenario that we have back to back recessions, this recession is still OVER and all the bears were wrong then to criticize the ECRI and yet they come back for more. I certainly understand why they are so bitter, but it can be very difficult to understand why they are so stubborn.

I also said this back in April and it is proving to be true: many of the bears on this forum will remain bearish until the stock market has peaked out. Then, and only then, will they recommend investing. To be a bear from April to now is proof that a person is DUMB money. Dumb money sells at the bottom and buys at the top. It is plain and simple. I have a very strong feeling that when I turn bearish (and I will - I'm not a permabull), that I will be arguing with the same people who are bears right now. These are people who only make decisions on trailing data, and when the market tops out, the trailing data will look pretty good, so unless they are complete hypocrites, they will turn into bulls at the top.

Oct 05 10:39 AM

[thiazole:]

What evidence do you have that we will have a jobless recovery? It is still too early to make that prediction. I'd give it until early 2010 before I made that pronouncement. Even though September's jobless numbers looked like a step backward (as did June: tinyurl.com/y9b6op4), the general trend is in the right direction. Based on the trend, we will probably be adding jobs within 3-4 months - very different from what happened after the 2001 recession ended.

I don't think this will quite be a "V" shaped recovery, but I think it will be sharper than a typical "U" (as far as GDP growth goes, anyway). It will look nothing like the L we got after 2001.

As far as REAL evidence of whether this will be a jobless recovery or not, I think the major difference is in inventories. Look at the minor dip in inventories that we saw after the 2001 recession compared with this one. Inventories have overcorrected and they continue to fall. Companies will need to rehire more vigorously this time to stop the flow.


On Oct 02 01:45 PM Tony Daltorio wrote:

> It's amazing that the bulls still think you can have a jobless V-shaped
> recovery in the United States whose economy is based on consumption.
> An impossibility!
>
> I continue to predict a ZZZ-shaped recovery where most Americans
> remain unconcerned about the economy along as they have their 'reality'
> shows.

Oct 05 11:12 AM