"The Federal Reserve is not forecasting a recession." Federal Reserve Chairman Ben Bernanke, January 10, 2008
We all know how that turned out and four years later things are once again looking grim.
Retail sales in the United States have declined for three straight months triggering a warning sign. In every instance except for one or two this metric has correctly forecast a recession starting within a few months.
Consumers are retrenching concerned over job security in the face of economic headwinds. The unemployment rate in July rose to 8.3% while 27 states reported a rise in the unemployment rate during the month of June and the June unemployment rate in New York City hit 10%, the peak in the last recession.
Businesses are also feeling the effects of economic uncertainty as the Confidence Board released results of their latest poll which showed 17% of CEO's had a positive view of the economy in the second quarter of 2012 down from 67% in the first quarter.
The failed IPO's of Zynga (ZNGA) and Facebook (FB) are a bad sign for the technology industry, which had been counting on their success to lure more private companies into the public spotlight. In each case, neither one appears ready for the public spotlight.
A few months ago earnings estimates for third quarter called for 15% growth but that number has fallen to zero given the disappointing results for the second quarter. While the most recent PE ratio of the S&P 500 marks at 15.46 that seems expensive for a market facing very little or no growth over the second half of the year.
Global PMI's released on Wednesday confirmed that the global economy is in the process of slowing, if not in a recession. South Korea's PMI fell to 47.2 from 49.4 in June and the JP Morgan Global Manufacturing PMI fell to 48.4 from 49.1 a month ago. The US Markit PMI pulled back to 51.4 from 52.5 with Brazil suffering two straight months of industrial production declines. China was the lone bright spot with the HSBC China PMI rising to 49.3 from 48.2 indicating a moderating of the contraction.
The Federal Reserve disappointed the markets by not starting QE3 which has already been priced into the markets given the action of the major indices the past few weeks.
Below are the yield curves for the U.S., Germany, and Switzerland as of the close of trading on Friday:
Notice that the yield curves are not just flat but investors in Germany and Switzerland are willing to pay negative yields out to 3 years in Germany and 5 years in Switzerland indicating fixed income investors do not see the crisis abating anytime soon.
Negative interest rates indicate stress in the system as investors are willing to pay governments deemed safe to store their cash than leave it in a bank. Even more disconcerting are the negative interest rates out to the three and five year periods indicating market participants see the stress remaining for an extended period of time.
The irony of negative interest rates are the market participants who cried that gold (GLD, DGP) and silver (SLV, AGQ) have no value because the pay no interest but recent sovereign debt auctions are forcing people to pay them to hold their debt and not the other way around.
Despite the implementation of the ESEF and LTRO programs in Europe bond yields in Spain and Greece remain at elevated levels with Portuguese rates now rising. Rates are not rising because the at risk European countries remain locked out of the debt markets because investors have no confidence that Europe will solve their financial crisis which continues to lurch from meeting to meeting with no resolution in sight.
Finally, if the German courts approve the ESM in early September it will be funded with 80 billion euros of cash and 620 billion euros of callable capital. Of that 620 billion in callable capital, 111.1 billion is expected to come from Italy and 73.8 billion from Spain. Highly unlikely given the current circumstances surrounding each country at this moment.
The S&P 500, Dow, and Nasdaq increasingly appear to have priced in QE3 while ignoring little or no corporate profit growth.
If I seem too bearish it is because I see the continued policy missteps when combined with weakening economic data which indicates a slowdown and potential recession in the global economy.