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Posts Tagged ‘double dip recession’

Are we heading towards a double dip recession?  Take a look at the numbers:

May new home sales plunged -32%.

Mortgage delinquencies are up 36% since last year

The Baltic Dry Index has dropped -40% since May 26, 2010.  This index is considered a leading indicator of the future growth of the economy.

Manufacturing index plunged in May
May housing starts fell -10%
May retail sales post biggest decline since September 2009
May existing home sales fell unexpectedly?

Pile on top of those statistics the fact we have a major landscape change occurring in the Gulf of Mexico that will negatively affect the economy and that region as well as continued climbing unemployment and a decline in consumer spending, I just don’t think that a double dip recession is avoidable.

John Mauldin pointed out in his excellent weekly writing Frontline Thoughts that the index of weekly leading economic numbers has turned negative.  There was a -23% decline.  Then he showed this chart of what this type of drop has signaled in the past.

   

For all of those in the financial services community wanting you to drink “the everything is OK” Kool-aid, they are going to have a tough time spinning out from underneath these deteriorating numbers.

In addition these numbers are showing a renewed decline in real estate.  As I have stated before, it will be tough to turn the Titanic around without a recovering real estate market. 

This is Evidence that Economic Numbers could be Rigged

Either these numbers are rigged or their methodology is flawed or they were able to actually hand pick and find a few thousand happy people.  Now with all of the above bad news that is coming up along with high unemployment and a stock market that has been in the tank since April…The University of Michigan Consumer Sentiment Index jumped to its highest level in 2 years.  Are you kidding me?  If you believe that you might also believe that British Petroleum has the problem in the Gulf under control.  Really, there is no way that could be accurate.   

On Friday the ever so important unemployment numbers are coming out.  That should give us an interesting piece of the puzzle.  I just wonder how many jobs the Government will create out of thin air this time?   

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Economists debate whether or not we are going to fall into the dreaded “double dip” recession.  This occurs when you go through a recession, start a period of recovery, and then fall back into a recession again. 

Let’s look at the basics.  You have a Government that has spent 100’s of billions of dollars to stimulate the economy and yet we have very little to show for it and we still have a large unemployment problem.  Oh pardon the mistake –the politicians have a lot to show for it as they have been able to use our tax money to pay back favors. 

The realization is two fold.  First government spending isn’t going to be the solution to our economic problems.  If you want companies to start hiring, then build confidence back that the Obama Administration and the rest of the politicians are not going to destroy this country by turning us completely into a socialistic country.  You do that by passing legislation and using resources to help the small business owner.  Unfortunately, the opposite is happening.

Second, we are going to be hard pressed to recover without the participation of the consumer.  The consumer is not confident and for good reasons. 

  • We are well into this so called recovery and the unemployment problem is bad as it possibly could be.  That will continue to keep consumers in a less than confident state of mind. 
  • Confidence in spending money is also tied to the stock market.  If the stock market has begun a bear market, consumer confidence will fall off the cliff. 

Then there is the foreclosure crisis, the state of emergency in the Gulf, and the list goes on.   There isn’t much to be confident about in this environment.  So, it shouldn’t be a big surprise that Friday’s consumer spending fell off the cliff (comparatively speaking) when you look at how the above have performed recently. 

So, it really surprises me when economists are so bubbly about things.  The Wall Street Journal had this to say in their weekend edition.

“The surprisingly poor sales cast fresh doubt in consumer spending that had allowed economists to raise their forecasts for US growth this year despite a moribund housing market, a dismal job market, and tepid business investment.”

So economists really thought that the consumer facing the prospects of losing their home and their job or the consumer who is not employed or underemployed gave economists enough confidence to raise forecasts?  

The bottom line is that we are going to be extremely lucky to escape a double dip recession.  I think that the question on economists’ mind shouldn’t be whether we face it but how deep this one is going to be.

The probabilities are high that the decline that started in April in the stock market will start to resume again in short order.

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There is an intense debate on Wall Street about whether or not we are heading towards a massive inflationary problem or if we are stuck in a deflationary problem.  Inflation is when prices go up and deflation is when prices go down.

If you are investing money, it is going to be important to get this one right.  So many of the talking heads on CNBC are declaring that we are heading towards extreme inflation.  They cite that the printing of money by the government is causing it.   They also point to this “incredible” rebound we are seeing in the economy.

If you will bear with me, I need to put the KOOL-AID down so that I am not tempted to drink it.  On the surface, it is inflationary when the Government prints enormous amounts of money.  However, the story goes well beyond the printing of money.  I regard these financial hosts as pretty smart people.  I often wonder if these hosts are all told to always be positive no matter what?  After all, they do work for CNBC, which is owned by GE, a publically traded company. 

Here is the evidence of deflation:

The velocity of money – Dig out your economics book. The velocity of money measures the circulation of money throughout the economy.  The velocity of money would need to be running pretty high to potentially create inflation.  Currently it is very low primarily because banks aren’t lending money and consumers aren’t spending money.

A world overloaded with debt – Debt in itself is deflationary.  Deflation is brought on by a debt crisis. 

The money supply – The money supply has been decreasing and not increasing. You would need to see the money supply expanding at a great pace to see inflation.  

The CPI and the PPI – The PPI or Producers Price Index shows whether or not the prices or increasing or decreasing at the producers level.  In other words, are the widgets getting more or less expensive to make?  The CPI or consumer price index shows what is happening to consumer prices. Are they going up (inflationary) or down (deflationary)? 

The latest PPI numbers showed an increase in prices at the consumer level.  When that happens, typically those higher costs get passed onto the consumer and are reflected in the CPI number.  However, the CPI numbers released on Friday showed the first drop in 27 years.  That tells me that companies are getting hit with higher costs but are not able to pass them on because the consumer is so strapped.  That keeps a lid on prices.  In fact, companies are dropping prices to get consumers to buy items.  That in itself is deflationary.

To be fair, the CPI minus energy and food costs decreased.  Yes we depend on energy and food which have been going up.  I think that net effect is clearly deflationary.     

In short, the reason that the printing of money is not causing inflation is simply because the printed money is not circulating.  It is absorbing losses of all kinds due to the effects of the debt crisis.  Until you get massive circulation which would show up in the above indicators, I think that we are stuck with deflation.  Plus you better hope that it doesn’t turn into inflation.  That would force the Federal Reserve Board to start aggressively raising rates which would easily throw us into a double dip recession if we aren’t already heading that way.

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