Signs of a Recovery?

Includes: BP, DIA, FXE, QQQ, SPY
by: Economic Disconnect

The Boston Celtics are one win away from a second title in three years. I did go on the record as picking the Celtics to win in six games. Anything can happen, and certainly the Lakers can play better ball than they have, but this scrappy Boston team is close to another championship. Good luck guys!

Signs of a Recovery?

As anyone who read me knows, I tend to be net negative on the economy and things market wise. I have been for some time. It could be a huge bias on my part (possible!) or it could just be how I look at the information in front of me and go from there. For about a year we have seen rebounds in auto sales, home sales, consumer spending (did it ever really dip?), the stock markets, shipping volumes, and oil prices. Various metrics like GDP and the ISM look pretty good. So what's the problem?

In no particular order here are some signs of severe stress and problem areas I am looking at right now:

All Time Low Interest Rates Perhaps for as Long as Five Years

This item continues to be ignored but is in no way suggestive of a stable situation. San Francisco FED member Glenn Rudebusch suggest interest rates will stay at zero (he would prefer -5%; try that out at any bank and see how fast people pull their money!) until at least 2012. I think that is the very earliest a rate hike will occur, unless a bond event occurs (unlikely). Calculated Risk pokes fun at the large number of fools, I mean seasoned market players who were predicting rate hikes as far back as 2009! Too funny. CR thinks unemployment and inflation "expectations" will be the only things the FED is concerned with. Thus, as I said, 5 years from 2008 is a safe bet! This is in no way indicative of anything good and I have argued many times that zero rates are no a structural part of the markets and will be unable to change. When is this going to be discussed?

European Banks Set Records Using the ECB Overnight Lending Facility

As detailed by Zero Hedge, Euro banks are keeping gobs of cash at the ECB instead of other channels. My favorite line of "banks are afraid to lend to each other for fear of what's on a counter party balance sheet" has already been out in force. This is of course garbage. The remaining big banks have almost identical holdings thus it is not fear, but full knowledge that keeps them from trusting each other. This is another metric that needs to be addressed by the folks doing the stashing. What's the story boys?

Record Sales of Short Term Bonds with No Yield

The Housing Time Bomb covers the 3 and 6 month Treasury sales today and notes record bids for short term US paper. Now I will always argue about the perceived "safety" of US bonds, but the point is the markets see them that way and this is a clear signal that lending by banks is not going anywhere anytime soon. In a V shaped recovery situation the last thing you want to do is get zero return on your money, yet banks are lining up out the door to do just that. I feel like Bernanke does about gold, I am puzzled!

Gulf Oil Spill

While I am sure this will all be fixed by the President's address tonight, the final impact of this event will not be known for some time. The repercussions from this disaster are going to be large and many in number. A huge unknown.

US States on Life Support; Pension Plans Gambling to Get Ahead

If all is well and getting better one would wonder why another 50 Billion is needed for the states (it will not end there!) and pension plans are getting aggressive in wild instruments to try and get some kind of return in a zero rate world. Is this a sign of an improving situation?

Assorted Items

  • Housing WILL double dip
  • GM ramping up production is going to look really stupid very soon. No worries, we can pay for it all again
  • FNM/FRE/FHA losses to be around 500 Billion; assumes no double dip!
  • Related to the Oil spill, how will this affect the economies of states impacted?

Plenty of warning signs, but I could be biased.

Something to Think About

Another great write up over at The Automatic Earth tonight and you would do well to read the whole thing.

An item I think is lost to many:

Apart from the arguments about trickles and floods, such strategic default is very socially divisive, which means it will be easy to generate a mandate to prevent it in the future, whether or not doing so would violate existing contract terms. Those who expect contract terms to remain inviolate are likely to be very disappointed in many instances. Governments don't 'fight fair'. When push comes to shove, they are perfectly capable of changing the rules abruptly, and retro-actively if they perceive it to be necessary. After all, we are already witnessing the demise of the rule of law in many obvious ways. The rule of law exists only when the centre agrees to be bound by the same rules as others, and that is less and less the case all the time.

The above is pointed towards debt "strategic defaults" but I think it applies to the market mechanisms many rely on. Many times I have read that in the even of hyperinflation, all one has to do do is buy long dated LEAP options or other such stuff and let the money roll in. What makes you think those contracts would be honored? Even if they were to be (I doubt it highly) a "windfall" tax of 99% would almost certainly punish a speculator who did this. The same applies to something like TIPS. Why would the government honor such a contract? Citing "National Security" or other such baloney they will not honor a monster debt payment if they do not have to, and they do not. They could also re-tool how inflation is calculated to screw you as well, they have done it before.

Just something to keep in mind. If things go bad you may find that the tools an mechanisms which exist today will not tomorrow.