This Recession Will Be Neither Short Nor Shallow

Minyanville Professor Bennet Sedacca posted a stunning chart Thursday morning on continuing unemployment claims. Here it is.

Continuing Jobless Claims



click on chart for sharper image.

Implications Of An Overleveraged Consumer

For an economy overleveraged on consumer spending the chart could hardly look worse. Yet, it is going to get worse, lots worse. Hiring has stalled, commercial real estate is hitting the skids, vacancy rates at malls are rising, lease rates are dropping. In short, the Shopping Center Economic Model Is History.

The reported unemployment rates is 5.7% and rising rapidly. It takes somewhere between +100K and +150K jobs a month to keep up with the birthrate and immigration. Yet, Jobs Have Declined 7 Consecutive Months.

It will be interesting to see what the above chart looks like and what the economy looks like when the unemployment rate hits 6.5% or 7% sometime next year.

Some will point out that unemployment is a lagging indicator. It indeed is. That means unemployment will keep rising even after the economy has turned.

Now think of the implication of housing foreclosures and housing prices in light of that.

Short Squeeze In Reverse

The SEC triggered a short squeeze in financials by proposing to prop up the share price of the GSEs and instituting Selective Enforcement of Regulation SHO.

In addition, Treasury Secretary Paulson asked for and received permission to buy unlimited positions in Fannie Mae (FNM) and Freddie Mac (FRE) stocks and bonds. See US Blackmailed By China? for more on the story.

Fannie Mae Chief Executive Officer Daniel Mudd called Paulson's move a "confidence building measure". Mudd cannot possibly be further from the truth.

Let's take a look at how well those "confidence building measures" worked.

Fannie Mae (FNM) Daily Chart



click on chart for sharper image

Freddie Mac (FRE) daily chart



click on chart for sharper image

Market intervention and manipulation cannot change the long term trend.

The "L" Shaped Recession

In my opinion, the past 7 years have been among the most fiscally reckless ever in the entire history of the world. The hangover is going to be long and deep. I am sticking with my Case for an "L" Shaped Recession.

Ironically, clowns on CNBC are debating every day whether or not a recession has even started. The only way a recession hasn't started is by using a definition of 2 consecutive quarters of declining GDP. That definition is widely used but it simply is not how recession calls are made.

What actually happens is the National Bureau of Economic Research [NBER] decides recessions using a wide range of data, not just quarter to quarter GDP.

The Library of economics has a discussion of the above as well as data on the average length of a recession. From 1920 to 1938 the average length was 20 months. The average length of a recession from 1948-1991 was 11 months. The longest was the great depression that lasted 43 months.

Given that this was the greatest global fiscal party ever, the likelihood that this will be one of the greatest hangovers on record is very high. In other words, this recession will neither be short nor shallow.

For the sake of argument consider the recession began in December 2007. If 20 months is the target, the recession still has another year to go. Those who think a depression is coming may wish to add another year or more to that. Another possibility is the US will slip in and out of recession for a number of years just as Japan did.

With the above in mind....

It's Time To Think
 

• Think foreclosures have topped? Think again.
• Think housing has bottomed? Think again.
• Think CEOs are being honest about forward guidance? Think again.
• Think corporate earnings are going to improve? Think again.
• Think the parade of bottom callers is correct? Think again.

 

The big irony in all of this is bottom callers are calling the end to a recession they claim has not even started. The truth of the matter is there is no reason whatsoever to think that the economy is remotely close to turning up. The teeth of this recession have barely begun to bite.

 

Comments

[moonbat1775:]

"Selective Enforcement of Regulation SHO." Doesn't this on its face violate the "Equal protection" clause? Something stinky, me thinky.

2008 Aug 08 09:31 AM

[JAAG:]

Great article, the economy suffers everytime we have 8 years of supply-side economics from the republican party; compare it against the demand-side economics of Clinton= HUGE DIFFERENCE.
It is estimated that 70% of our economy is comprised by consumers (mainly those with incomes less than $99,000) therefore, let's take care of these group via taxes and the economy will cruise. For those idiots we call business analysts at FOX, CNBC, CNN etc... a tax cut for this income group (< $99,000 aprox.) equals profits for all companies, and wall street. It is main street that fuels wall street not the other way around.

2008 Aug 08 09:44 AM

[pepe:]

What are the names and affiliations of the persons who write the scripts for the know-nothing readers like Mark Hanes and Erin Burnett?

2008 Aug 08 10:40 AM

[Andy Cole:]

Excellent article.

2008 Aug 08 11:02 PM

[secmaven:]

GDP data is being manipulated by the numbers masters in Washington just like inflation, unemployment, jobs, etc, etc. The two down quarts have come and gone. We just have not been officially informed. Meanwhile credit card and other installment consumer debt is reported up in June by 14 billion to 2.59 trillion. The party seems to still be on for the folks except that retail sales don't lie. The 14 billion was taken on to pay interest on the 2.45 trillion outstanding on May 31. Too big to fail is the American consumer.

2008 Aug 09 10:49 AM

[User 201843:]

See you in 46 months or more... I don't own any but its time for gold.

2008 Aug 09 12:38 PM

[simplesimon:]

So many realistic forecasts that are not encouraging-and they are realistic, I must say that. Yes "we" have had a long spending free for all...( not me, and probably not you - not if you're in that category significantly below $40K/yr, as a vast majority are. )The point made above that making life a little better for the so called underbelly - those with day jobs, and I don't mean those with corner offices-can turn things around nicely. I anticipate the usual 'honeymoon phase of the new presidency' may be that corner we are hoping for. At the same time, I don't think it is asking too much to require every single corp exec to master a course in ethics. Over building millions of over priced, super sized homes, at 'jumbo mortgages' was NOT altogether ethical - but having a great deal more to do with unmitigated avarice and arrogant -I'm better than you' consumption. My point being, if we owe for a $750K home, several new gas guzzlers, a mountain of consumer debt, (treating our homes as an ATM machine for equity withdrawal, damn the recession, full spend ahead)..then when things slump, as they always do...it could not be anything else other than a steep, and frightening fall. I point to this after watching the gal on Good Morning America give her "Recession Rescue" report, of how to find good buys in upscale clothing at 40% less...still squandering $1500 on trendy garments and designer boots! Here is a kid, obviously born after 1973, and who doesn't have the foggiest clue what a recession really is!
My point being we can all return to being 'normal'...that is, realize we're not impressing anyone with our $750K home brimming over with debt. WE can all just get real, get honest, get ethical, treat labor fairly...adjust if for inflation; it won't kill us-as the guy pointed out above...THAT is what will drive Wall st....working stiffs spending , but spending wisely. Bear in mind ( no pun intended), that the dollar, compared to 1965, when the minimum wage was $1.75 an hour...that the dollar is now worth one thin dime!...That means the minimum wage should be $17.50 an hour. Horrifying, you say. When really , it only means the 'dollar menu" at McDonald's, et. al...is totally unrealistic...their workers, part time, below subsistence, is the only reason they can offer food that dirt cheap...it's because the execs have no conscious, morals, or ethics...it's all about living in their $750 K homes, while the little grey haired lady serving burgers, can afford her medicine. When the CEO of McDonald's was asked about promoting his company in China with no human rights..he replied that commerce is his only concern. ...hmmm. I see.
Screw the old lady. Torture the dissident. What matters is profit, and a golden parachute for me the CEO. And we wonder why we're falling, falling, falling.

2008 Aug 09 12:47 PM

[ccerenz2:]

There are many reasons we are falling. One of them is how we continue to want to blame someone else. The reality is we are getting creamed in the economic stages. The reason is because we are uncompetitive. Our education system is declining while others are rising, our corporations are required to accept unions and the ridiculous costs associated with them, our corporate tax rates are the second highest of any developed nation, and our people are more worried about the sale at Nordstroms versus teaching their kids about finance,etc. Yes, there may be some execs that are unethical. There also are some employees who are unethical. It's human nature. But you can't blame the execs and the corporations for our predicament. We the people have become complacent, fat and happy...until the music stopped. And now, we just want to blame others. Until we Americans start standing back to back to work our way out of this socialistic, environmentalist controlled quagnire, our fall will continue at an ever faster pace.

2008 Aug 09 02:47 PM

[whidbey:]

Yes!!!

2008 Aug 09 03:36 PM

[ATHELSTAN:]

The financial press and the business TV shows have lost all credibility, particularly the latter. They have deteriorated into nothing more than sounding boards for short-term traders who sing a different song every day, representatives of financial services who don't know what they're talking about, those who know how to lie with a smile and also have different stories to tell each day, and out and out liars.

Only reliable news events and serious academic analysis should form the basis for any investment decision. Brokerage house based economists have become totally untrustworthy because they have become little more than toys in the hands of management.

For the first time since the 1950s, I've moved out of stocks and into gold and 30 year Treasury bonds. To prepare for the greatest depression of all time.

2008 Aug 09 04:25 PM

[surgcare:]

Good article , FBN and CNBC are orgasmic everytime the market goes up . As for democrats who think rasing taxes , regulation and restricting trade is going to help , you need some serious medication . However ,it appears the democrats will sweep into office this year so will get to see the democrats take a barely surviving economy and kill it .

2008 Aug 09 04:31 PM

[billp37:]

This may be not quite the right place to post these questions but if any have been following auction rate securities, corp/gov msm is running articles that the problem is getting solved.

So, of course, invest more money with investment banks.

1 Is the REAL PROBLEM " [[t]he $330 billion auction-rate securities market ...]"

2 Are you aware of the "lottery" investors may have to enter to get their money back? Corp/gov msm is not reporting on this.

Read the RBC W flyer jps posted at

www.prosefights.org/th...

As mish may suggest, the world may be entering a severe recession if not depression.

And corp/gov msm [George Ure names] may be trying make things better for corp/gov by trying to assuage potential investors?

2008 Aug 09 07:16 PM

[cynic69:]

My market analyst (Marty Chenard - most valuable analyst in the world) says that the institutions are selling more stock when the price of oil goes down and the market goes up. Is it possible that these guys are leading the public down the garden path? Do you think the institutional traders know that the market is in a peak oil death spiral and they are sneaking out the back door with the jewels under their arm? Naw! Couldn't be.

2008 Aug 10 08:00 AM

[neeb??:]

Mr. Shedlock, not to put words in your mouth but I can sense where this is heading. A global depression I can easily see. A few weeks ago I thought bottom would be in the fall of 2009, now I'm suspecting --if there even IS a bottom -- maybe 2016?

2008 Aug 10 06:38 PM

[Leser:]

Simple Simon,
I just tried to buy a paint brush made elsewhere than China in one of my local large American stores. Couldn't find one there. Previously I also found very limited products available in certain other categories, if they weren't from the People's "Republic" of China. For the time being, businesses are doing just what we want them to, turning a profit, all in the name of "winning", making the most money. We need a profit at any cost. I've got to read the book _A Year Without "Made in China": One Family's True Life Adventure in the Global Economy_. I suppose, if that family did it, I can learn to do better in my attempt to "buy American" or Canadian or Mexican, etc. It can be done. (Probably we have to buy many things in rummage sales--objects that are vestiges of when the U.S. was a manufacturing giant.) Our government needs to expect more rights for the citizens from the Chinese government. (Poor Tabet!) As consumers we need to support manufacturers in countries where the dignity of the people governed is respected by those in power. If we don't, as investors we will eventually lose overseas holdings to unscrupulous governments, such as China (Venezuela, Russia?). Perhaps Russia did not "bury" us, as Khrushchev prognosticated, but economically China is eating our lunch--afterwords it will have stolen all the high-end technological knowledge the American companies are taking over there. They are technology pirates. Meanwhile more Americans are lining up for unemployment. A proper minimum wage here would assure that everyone in our country has a chance to live in decency. As capitalists, let's make our profit, but share appropriately from the production of goods and providing of services with the men and women at the lowest levels. It's the right thing to do. Indeed, there are some American companies flourishing in doing so. Yes, in China there is slave labor. We should enjoy the fireworks purchased in part by sales to us of goods made at the expense of slaves. China has some enslaved laborers. The Olympic opening spectacle was not ennobling. We sold our souls to the highest (=cheapest) bidder, China. Thanks, Nixon.

2008 Aug 10 08:25 PM