The Other McCain

"One should either write ruthlessly what one believes to be the truth, or else shut up." — Arthur Koestler

Second Half of a ‘W’-Shaped Recession?

Posted on | May 9, 2010 | 12 Comments

The obverse of “irrational exuberance” is unwarranted pessimism, and market bears run the risk of discrediting themselves by continually warning of a meltdown. Excuse me if you’ve already seen this video of the online stock-market seminar guy who got ridiculously excited about that temporary 1,000-point Dow drop last week:

OK, so that guy was pathetic. However, as to the question of whether trends of the past year represent (a) promising recovery from a “V”-shaped recession, or (b) a dead-cat bounce prior to the onset of the second downturn in a “W”-shaped recession, I’ve always said (b). 

Bearish pessimism is looking a lot smarter these days. The DJIA has lost more than 800 points since closing April 26 at 11,205, while the Greek debt crisis threatens to suck the banking system down the drain:

Europe’s government debt crisis is starting to infect the bank funding system, driving borrowing costs higher from Asia to the U.S. and threatening to slow the global economic recovery.
The interest rate that financial companies charge each other for three month loans in dollars is the highest since August, while traders are paying record amounts to hedge against losses in European bank bonds. . . .
European Union finance ministers pledged to stop a sovereign debt crisis from shattering confidence in the euro as they held an emergency summit over the weekend to hammer out a lending mechanism for deficit-stricken nations. The sovereign debt crisis may end up costing governments more than $1 trillion . . .
“Whether the markets completely unravel depends on whether politicians can stabilize the peripheral government market,” said James Gledhill, who helps manage about 58 billion pounds ($85 billion) as head of fixed income at Henderson Global Investors Ltd. in London. “The tail risk is the stress on banks which stops them from lending to corporates and feeds through to become a real economy problem.”

Translation: Government demand for additional credit, to cope in the short term with the sovereign-debt crisis, will siphon capital away from the private sector and impede recovery.

To repeat what I wrote a year ago:

The stimulus-and-bailout policies have not addressed the fundamental problems of the economy — namely, an excess of debt and a shortage of capital to spur job creation — while the entitlement trainwreck of Social Security and Medicare looms immediately ahead. By piling on new trillion-dollar deficits, at a time when the recession will result in significant tax revenue shortfalls, the Democrats are steering the economy into a stagflation trap.

The extreme neo-Keynesian interventions of the past two years were the exact opposite of sound policy, and I repeatedly predicted in 2009 that the bond market would eventually bring about a reckoning. Investors now sense that this reckoning is much closer, and the latest attempt to prop up the Eurozone won’t change the underlying gloomy prospect.

This doesn’t mean that the Dow will lose another 200 points Monday. For all we know, the DJIA might stage a rally and end the week +500. But real-estate problems continues to weigh down the economy. The FDIC closed four more banks Friday, bringing the total number of U.S. bank failures this year to 68, and we’re likely to see another 100 or so banks go belly-up before the end of the year.

All of this, while the Fed has spent the past 16 months pumping currency at zero interest, meaning that interest rates can only go up from here. Optimists who think we’re already out of the woods and moving inexorably toward the sunny uplands of recovery are idiots.

Category: Economics

Comments

12 Responses to “Second Half of a ‘W’-Shaped Recession?”

  1. chuck cross
    May 10th, 2010 @ 3:21 am

    As of 23:15, S&P Futures are up 26.90, Dow 215, GBP, CHF, AUD and EUR gaining on the Dollar, Gold down, 10-yr Yield is rising.

    It’s 2007 again baby!

    Tonight, we learned that the IMF of which the U.S. is a 17% stakeholder approved EUR 220 billion in funding for the European Bailout. The Federal Reserve System has reopened their swap lines to flood foreign central banks with USD currencies which they can lend to their banks, and the ECB is going to enter the secondary credit markets and start to buy government debt (quantitative easing).

    Damned the torpedoes! Ron Paul is a kook! I wish I could find the clip of him asking Bernanke if The Fed was involved with the Greece Matter, and Bernanke sheepishly shook his head no. Liar.

    All kidding aside, I hope the blogosphere encourages their readership to make Sens. DeMint and Vitter aware of the events tonight, or rather, that Taxpayers are pissed about the events.

  2. chuck cross
    May 9th, 2010 @ 10:21 pm

    As of 23:15, S&P Futures are up 26.90, Dow 215, GBP, CHF, AUD and EUR gaining on the Dollar, Gold down, 10-yr Yield is rising.

    It’s 2007 again baby!

    Tonight, we learned that the IMF of which the U.S. is a 17% stakeholder approved EUR 220 billion in funding for the European Bailout. The Federal Reserve System has reopened their swap lines to flood foreign central banks with USD currencies which they can lend to their banks, and the ECB is going to enter the secondary credit markets and start to buy government debt (quantitative easing).

    Damned the torpedoes! Ron Paul is a kook! I wish I could find the clip of him asking Bernanke if The Fed was involved with the Greece Matter, and Bernanke sheepishly shook his head no. Liar.

    All kidding aside, I hope the blogosphere encourages their readership to make Sens. DeMint and Vitter aware of the events tonight, or rather, that Taxpayers are pissed about the events.

  3. Robert Stacy McCain
    May 10th, 2010 @ 4:42 am

    As of 23:15, S&P Futures are up 26.90, Dow 215, GBP, CHF, AUD and EUR gaining on the Dollar, Gold down, 10-yr Yield is rising.

    Another zig upwards, to be followed in due course by the inevitable downward zag. I’m not picking stocks or timing the market. This isn’t an investment advice blog. The bottom line is that the fundamentals of recovery are missing, which fact is not reflected in the short-term Dow trends. The DJIA is up 4,000 points since early 2009, despite the endless streak of economic bummers.

    Bernanke and Geithner are doing everything they can to avert collapse and, for now, it’s working. But how much longer can they continue the zero-interest rate at the Fed? Not forever. Will the Chinese continue swallowing U.S. debt forever? Not likely. So at some point, then, the limit will be reached and the reckoning will come. The only questions are, “When?” and “How?”

  4. Robert Stacy McCain
    May 9th, 2010 @ 11:42 pm

    As of 23:15, S&P Futures are up 26.90, Dow 215, GBP, CHF, AUD and EUR gaining on the Dollar, Gold down, 10-yr Yield is rising.

    Another zig upwards, to be followed in due course by the inevitable downward zag. I’m not picking stocks or timing the market. This isn’t an investment advice blog. The bottom line is that the fundamentals of recovery are missing, which fact is not reflected in the short-term Dow trends. The DJIA is up 4,000 points since early 2009, despite the endless streak of economic bummers.

    Bernanke and Geithner are doing everything they can to avert collapse and, for now, it’s working. But how much longer can they continue the zero-interest rate at the Fed? Not forever. Will the Chinese continue swallowing U.S. debt forever? Not likely. So at some point, then, the limit will be reached and the reckoning will come. The only questions are, “When?” and “How?”

  5. Estragon
    May 10th, 2010 @ 5:02 am

    The bottom line is that none of the “emergency” measures taken even began to address the underlying problems in the economy. We have a coming debt bomb of Grecian proportions and expect to finance it at 4%. Even if we can keep fooling the suckers a while longer, sooner or later the capital must dry up.

    The USA has benefited from artificially low interest rates since 9/11, mainly because confidence was so low in the rest of the world compared to us. Markets must eventually coordinate time with returns and risk, and that means rates must rise.

    The question isn’t really if we’ll take the second dip in the “W” but whether we will make the final recovery anytime soon.

    As Mieses pointed out, Keynes didn’t really come up with any new theory of economic policy. He merely cobbled together a plausible sounding justification for the policies governments in Europe and the US already favored.

    There’s a good reason even uneducated people have heard the formula E = MC², while few recognize CIG = Y. It’s because one has withstood constant challenge, testing, and observation, and the other has not.

  6. Estragon
    May 10th, 2010 @ 12:02 am

    The bottom line is that none of the “emergency” measures taken even began to address the underlying problems in the economy. We have a coming debt bomb of Grecian proportions and expect to finance it at 4%. Even if we can keep fooling the suckers a while longer, sooner or later the capital must dry up.

    The USA has benefited from artificially low interest rates since 9/11, mainly because confidence was so low in the rest of the world compared to us. Markets must eventually coordinate time with returns and risk, and that means rates must rise.

    The question isn’t really if we’ll take the second dip in the “W” but whether we will make the final recovery anytime soon.

    As Mieses pointed out, Keynes didn’t really come up with any new theory of economic policy. He merely cobbled together a plausible sounding justification for the policies governments in Europe and the US already favored.

    There’s a good reason even uneducated people have heard the formula E = MC², while few recognize CIG = Y. It’s because one has withstood constant challenge, testing, and observation, and the other has not.

  7. Count Vikula
    May 10th, 2010 @ 3:04 pm

    Oh I agree Stacy, it truly is a matter of “when.”

    I’d give it at least a decade for the markets to chew through the Euro, 6/16 european economies before Mr. Market turns its sights on the United States. The fact is, the gargantum piles of fiat currency have to go *somewhere*, and once it gets to only having the USD & Treasuries as a choice, then we’ll have our day of reckoning.

    I just picture Big Money as Dig-Dug, digging down through the asset classes until it finds something safe. It’ll take a long while, I think, before it hits metal.

  8. Count Vikula
    May 10th, 2010 @ 10:04 am

    Oh I agree Stacy, it truly is a matter of “when.”

    I’d give it at least a decade for the markets to chew through the Euro, 6/16 european economies before Mr. Market turns its sights on the United States. The fact is, the gargantum piles of fiat currency have to go *somewhere*, and once it gets to only having the USD & Treasuries as a choice, then we’ll have our day of reckoning.

    I just picture Big Money as Dig-Dug, digging down through the asset classes until it finds something safe. It’ll take a long while, I think, before it hits metal.

  9. McGehee
    May 10th, 2010 @ 5:49 pm

    I’m skeptical of calling it “W”-shaped — that will only encourage the current Blamer-in-Chief to continue disclaiming responsibility.

  10. McGehee
    May 10th, 2010 @ 12:49 pm

    I’m skeptical of calling it “W”-shaped — that will only encourage the current Blamer-in-Chief to continue disclaiming responsibility.

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