Thursday, July 16, 2009

Dennis Kneale (& Merrill Lynch) declare the recession is over!

Greetings good citizen,

Monday’s market rally was attributed to ‘rumors’ of Goldman Sach’s ‘fabulous’ earnings report…then the day of the report, the market hardly moved…which brings us to today and Intel, which actually lost money…but would have made money if not for that nasty fine the EU slapped them with.

Anyway, Intel's report drove the market up another 200+ points today...

If you wish to read an actual copy of Intel’s 2nd quarter report, you can find it in the comment section of my post titled ‘The banks will lead us to prosperity’.

That aside, not everyone I read spews ‘doom and gloom’…or they try not to anyway. I selected the following for tonight’s offering as it touches on a topic I have frequently raised in the past.

Wednesday, July 15, 2009
Show me the Engines of Growth

by CalculatedRisk on 7/15/2009 02:33:00 PM

Back in February I pointed out that I expected to see some economic rays of sunshine this year. But I never expected an immaculate recovery forecast from the FOMC.

Although I've argued repeatedly that a "Great Depression 2" was extremely unlikely, I think the other extreme - an immaculate recovery - is also unlikely.

It is probably a good time to review the usual engines of a recovery. (see Business Cycle: Temporal Order for the order in and out of a recession) [click link to view original post.]

The following table shows a simplified typical temporal order for emerging from a recession.

Housing usually leads the economy both into and out of recessions (this was true for the Great Depression too). However this time, with the huge overhang of excess inventory and high levels of distressed sales, it seems unlikely that residential investment will pick up significantly any time soon.

Note: Residential investment is mostly new home construction and home improvements.

And that leaves Personal Consumption Expenditures (PCE), and as households increase their savings rate to repair their balance sheets and work down their debt, it seems unlikely that PCE will increase significantly any time soon. Maybe there will be a pickup in auto sales from the current depressed levels, but in general a strong increase in PCE seems unlikely. So even if the economy bottoms in the 2nd half of 2009, any recovery will probably be very sluggish. [with so many out of work, where is the money supposed to come from?]

Most companies are not investing in new equipment and software - other than the normal equipment replacement purchases - because they already have too much capacity. They will not need to expand until their sales pick up significantly. So it seems unlikely that investment in equipment and software would boom until consumer spending has increased. Of course increased U.S. exports would help - but export to whom? China, and a few others ... but most of the world is also hurting.

I still think the keys are Residential Investment (RI) and PCE, and therefore I think the recovery will be sluggish. The increasingly severe slump in CRE and non-residential investment in structures will be interesting, but that is a lagging indicator for the economy.

(1) In recent recessions, unemployment significantly lagged the end of the recession. That is very likely this time too.

Have you got that good citizen? The Fed is predicting an ‘immaculate recovery’ a recovery where none of ‘the engines of prosperity’ even sputter, never mind start up and take off.

Then we have that comment near the end about ‘exports’. What the heck does the US export? Besides food, raw materials and commercial jet aircraft (that are assembled here from parts made elsewhere) what is there? How do you export nothing and expect to get paid for it (now that the financial derivatives market has collapsed?)

The serious bad news here good citizen is if we had to rely on what we make from exporting food and raw materials, what passes for our economy would collapse in a week.

The ‘reason’ the USA exists is to serve as a dumping ground for products produced around the world. Apparently this formerly lucrative activity persuaded the dumping nations to ‘foot the tab’ by lending the US government money so we could keep buying their goods with credit.

Now that the credit markets are flatter than a piece of paper this scam no longer works. The customer is broke and (surprise, surprise!) tons of them have lost their jobs to boot.

Strangely, this is a tragedy on both sides of the equation as producers kept their people working by making products for export. Now their people are losing their jobs at the same rate our people are.

Should we all camp out by our mailboxes and wait for our new ‘zero interest rate’ credit cards to start showing up again?

After all Dennis Kneale has just announced that the recession is over!

If you want to witness some logic being brutally tortured, watch the video! Mr. Kneale makes Mr. Cramer look calm and dignified and he makes Mr. Kudlow look respectable.

If you recall (and it wasn’t that long ago) employment lagged the end of the last recession by 2 years. You may also recall that all of the jobs created since the end of the 2001 recession have already disappeared, not just some of them, all of them.

Is the ‘recession’ over good citizen? The markets have tacked on more than 300 points in the past three days, Goldman, via stolen taxpayer funds and Intel, which actually had a loss.

If we add in today’s ‘end call’ by CNBC, we can only conclude what we’ve known for quite some time, the MSM can’t be trusted. If they tell you the sun is shining, you’d better go to a window and check for yourself.

Um, I guess an ‘immaculate recovery’ requires no verifiable improvement in economic conditions so perhaps Mr. Kneale isn’t full of it. What remains to be seen is how long our supply lines hold up while nobody is buying anything…

Understand that the headlines accompanying this report crow about the .6% increase over last month with no mention of how sales for the year are down 9.0% (careful with those decimal points!)

Some of us can see where this is headed and some of us don’t (because they don’t want to.) It doesn’t matter which camp you’re in because were all headed to the same destination…some of us will be prepared and some of us won’t.

Thanks for letting me inside your head,


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