Gary Shilling Still Looking for a Recession in 2012 Part I

Wednesday, April 11th, 2012

Gary Shilling has been more dour than most on the underlying economy the past 3-4 years, and that could be argued was a relatively good call.  Despite never before seen levels of federal government and central bank intervention, the economy continues to limp along at what I call a “meh” pace.  Normal recoveries sans massive intervention should have had some sustained periods of 4-5%+ type GDP growth; we’re happy with 2-3% nowadays.  Gary’s long U.S. Treasuries call has been against the grain, and mostly right the past few years, and he’s had quite a few other prescient calls as well.  Shilling posted 2 articles on Bloomberg, stating the case for a recession in 2012 – which is now again an outlier view.  We’ll look at part 1 today, and look at part 2 which focuses on the labor market tomorrow.

Here are some of his views as he looks at the main pillars of the economy:

• For several months, I’ve been forecasting a recession in the U.S. this year, arguing that weakened consumer spending – the key to the economic outlook — would tip the economy back into a downturn.  But what about recent positive data and markets? Do they affect my forecast?
• Consumers Are the Linchpin: The U.S. economy is being fueled these days by strong consumer spending, which increased in February by 0.8 percent, its best showing in seven months, after rising 0.4 percent in January. Retail sales rose 1.1 percent in February — the fastest pace in five months — while same-store sales advanced 4.7 percent. These numbers correlate with recent gains in consumer confidence and sentiment.
• I don’t see this pace continuing. Personal-income growth continues to be weak — up just 0.2 percent in February — meaning this recent exuberant consumer spending is being fueled largely by increased debt and tapping of savings.
• At the same time, pay per employee is rising slowly and continues to fall in real terms. So increased job growth remains the key to any increases in real household after-tax income, which declined in February for a second straight month and gained a mere 0.3 percent, compared with February 2011.
• Spending, Saving and Debt: The support that consumer spending has received from less saving and more debt appears temporary. Household debt – including mortgages,student loans, and auto and credit-card loans — has fallen relative to disposable personal income, though. In my analysis, this is largely because of write-offs of troubled mortgages. Nevertheless, revolving consumer credit, mostly on credit cards, is no longer being liquidated.
• Non-revolving consumer credit continues to rise in response to growing sales of vehicles — most of which are financed — and in student loans, as the poor job market keeps students in school or sends them back. Tuition increases encourage more borrowing, while interest costs on past-due loans mount.  [Mar 8, 2012: What Drove Yesterday's Surge in Consumer Credit? Massive Upswing in Federal Student Loans]
• It would seem, then, that contrary to my steadfast belief that consumers are being forced to save more and reduce debt to rebuild net worth, they have been doing the opposite lately.
• Consumer Retrenchment: The data so far aren’t conclusive, but evidence of U.S. consumer retrenchment is emerging. Consumer confidence has moved up recently but remains far below the levels of early 2007 before the collapse in subprime mortgages set off the Great Recession. Real personal consumption expenditures growth has been volatile in recent months and falling on a year-on-year basis. Voluntary departures from jobs, another measure of confidence, may be decreasing. And consumer spending will no doubt have a big slide if my forecast of another 20 percent drop in house prices pans out. (Mark’s note: that seems aggressive!)
• Housing activity remains depressed, with the only signs of life coming from the multifamily component, which is being driven by the appetite for rental apartments as homeownership declines.
• What Oil Threat?: Recently, there has been great concern about $4 per gallon gasoline and whether, as in 2008, those high prices will act as a tax on consumer incomes and force drastic cutbacks in other purchases.  These concerns are overblown. American consumers have reacted to rising gasoline prices as you would expect in tough times: by consuming less. Demand (DOEDMGAS) in the mid-February to mid- March four-week period was down 7.8 percent from a year earlier, mainly due to more efficient vehicles.
• As a result, the recent surge in gasoline prices has had a relatively small impact on consumer purchasing power. The $14.8 billion increase from October 2011 to March 2012, compared with the year-earlier period, amounts to about 0.3 percent of consumer spending.

Conclusion:

• Consumer spending is the only major source of strength in the U.S. economy this year. State and local-government spending remains depressed because of deficit woes and underfunded pension plans. Housing suffers from excess inventories and may face a further 20 percent drop in prices. Excess capacity restrains capital spending. Recent inventory building appears involuntary. So consumer retrenchment will tip the balance toward a moderate and overdue recession.

Tags: Bloomberg, Central Bank Intervention, Consumer Confidence, Downturn, Economic Outlook, Federal Government, Five Months, Gary Shilling, GDP, GDP Growth, Market Tomorrow, Massive Intervention, Personal Income Growth, Pillars, Recession, Retail Sales, Sentiment, Seven Months, Tapping, Treasuries
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“To Save the Euro, We Must Destroy Germany”

Thursday, November 17th, 2011

Yesterday German Chancellor Angela Merkel came flat out and said, “To save the Euro we must Destroy Germany“.

Well not exactly, but she may as well have because that is the implication. This is what she did say: Germany Is Ready to Cede Some Sovereignty to Save the Euro

Chancellor Angela Merkel said that Germany is ready to cede some sovereignty to strengthen the euro area and restore confidence in the common currency.

European Union treaty changes to strengthen EU institutions and patrol tighter budget rules are needed “to make the euro zone more crisis-proof,” Merkel told reporters in Berlin today at a joint briefing with Irish Prime Minister Enda Kenny.

“Germany sees the need in this context to show the markets and the world public that the euro will remain together, that the euro must be defended, but also that we are prepared to give up a little bit of national sovereignty,” Merkel said. Germany wants a strong EU and a euro “of 17 member states that is just as strong and inspires confidence on international markets.”

Not Merkel’s Decision

For starters Merkel is saying what she wants. It is debatable if that is what Germany wants at all. I rather doubt it.

Moreover, even if it is what Germany wants, it is not Merkel’s decision. Such decisions, as the German supreme court has ruled are up to voters of Germany, not politicians with an axe to grind about what they want.

If German voters want to cede power and form a European nanny state, then so be it. But it will be the end of Germany and the end of Europe as well should they do so.

Desperate Attempt to Save Something Not Worth Saving

As the crisis lingers the cries for more intervention get louder and louder, even though the massive intervention to date has only made matters worse.

Ambrose Evans-Pritchard highlights the cries for intervention in Latin showdown with Germany over ECB

The EU’s €440bn EFSF bail-out fund was supposed to take over on the rescue task, relieving the central bank. It has been a disastrous flop, unable to raise money itself at a viable cost after toying with leverage plans that greatly concentrate risk for creditor states. The net effect has been to accelerate contagion to the core.

Germany’s constitutional court has ruled that “open-ended” and “automatic” liablities violate the country’s Basic Law. So only the Germans can save monetary union, yet the Germans cannot legally do so. Europe’s crisis has reached an impasse, the result of the original design flaws of EMU.

Even so, a growing chorus of economists within Germany itself is calling for a strategic change. Wurzburg professor Peter Bofinger wants the ECB to cap Italian and Spanish yields.

“We are in an emergency situation; this isn’t plastic surgery. If worse comes to worst, the ECB has to act before the financial system falls. And if it acts, it should act properly and set an upper limit for sovereign yields. It’s naive to believe that Italy can solve its problems on its own. Structural reforms can’t be implemented overnight.”

Dennis Snower, head of the Kiel Institute, said the ECB must act to stem the crisis, even if this means straying into fiscal policy. Thomas Mayer from Deutsche Bank said Italy’s new government will fail unless the ECB buys time by holding down yields, perhaps as low as 5pc.

Euro Experiment is Over

Pritchard concludes with a couple of paragraphs that I whole-heartedly endorse…

David Heathcoat-Amory, Britain’s former Europe minister, said Berlin will do whatever it takes to try to save EMU.

“The Germans will pay up, accept eurobonds, and mobilise enormous firepower. But this won’t save monetary union in the end because it is not a debt crisis. It is a currency crisis. The weaker states are uncompetitive and you cannot force them to deflate their way back to competitiveness by cutting wages 30pc. The EU elites won’t admit it, but the euro experiment is over,” he said.

Merkel is willing to destroy Germany (and Europe) to save something that is doomed anyway.

Top Orwellian Comments Of All Times

• An American major after the destruction of the Vietnamese Village Ben Tre: “It became necessary to destroy the village in order to save it.”
• Vice President Joe Biden: “We Have to Go Spend Money to Keep From Going Bankrupt.“
• President George W. Bush: “I’ve abandoned free-market principles to save the free-market system.”

We can safely add “To Save the Euro we Must Cede Sovereignty” to that list.

Unlimited Supply of Hare-Brained Ideas

There have been more hare-brained ideas in the last 6 months on how to save the Euro and the global economy than in the prior three years combined.

Ceding sovereignty to save the unsavable is one of them. A leveraged EFSF is another hare-brained idea. It has already blown sky high.

Here are some more examples.

• Larry Summers says “The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending.” (Reuters)
• Alan Beattie proposes the ECB lend money to the IMF so that the IMF can take on Eurozone credit risk, in order to get around ECB statues regarding bailing out insolvent nations. Allegedly that needs to happen or it will be another Great Depression. (Financial Times)
• In one of the looniest ideas in history, economist Brad DeLong proposes “The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash before the increase in eurorisk leads American finance to tighten credit again and send us down into the double dip. The Federal Reserve Needs to do so now.” (DeLong Typepad)
• In an absurd idea since abandoned, EU officials actually proposed that rating agencies be barred from rating countries with “excessive volatility”

Quack Ideas

In regards to Beattie’s proposal EuroIntelligence writes

In the never-ending search for quack solutions to the eurozone crisis, European leaders come up with ever desperate attempts. After the silly idea of leveraging the EFSF, the G20 summit discussed – and failed to agree on – the notion of leveraging the EFSF through the IMF’s special drawing rights (SDRs).

Alan Beattie writes in the FT it is illusory to think that one could bolster the EFSF to €1 trillion through SDRs as such a decision would require approval by the US Congress, with a success chance of between low and zero, he writes. He concludes that the only thing that currently prevents a crisis resolution is ideology. The ECB could lend money to the IMF, which in turn could set up a fund to buy Italian debt.

Interventionists Man the Barricades

In response to DeLong’s proposal, my friend Pater Tenebrarum comments in Interventionists Are Manning The Barricades

Another quite funny missive reaches us via the always amusing Keynesian statist Brad DeLong, who argues that given the euro area crisis escalation, the US Federal Reserve should immediately proceed to crank up its printing press. In terms of sheer lunacy his proposal is hard to beat.

DeLong approvingly quotes an article by Paul Krugman, who bemoans the possibility of the eurocratic moloch falling apart:

“I believe that the ECB rate hike earlier this year will go down in history as a classic example of policy idiocy. We would probably still be in this mess even if the ECB hadn’t raised rates, but the sheer stupidity of obsessing over inflation when the euro was obviously at risk boggles the mind.“

First of all, who’s to say that the euro is worth saving? If saving the euro depends on the central bank rewarding the fiscal profligacy of member nations by monetizing their debt, then obviously we’d be better off without the euro. These nations could then attempt to inflate themselves to prosperity on their own.

Regarding the ECB rate hike earlier this year, it is really hard to argue that it makes any difference whatsoever if the administered interest rate sits at a minuscule 1.25% or a minuscule 1.5%. How can that have any bearing on the insolvency of peripheral governments? Moreover, whether the rate is at 1.25% (where it now is again after the recent rate cut) or 1.5% – in both cases it is well below the official inflation rate of 3%, in other words it represents a negative real interest rate. The ECB is definitely not pursuing a tight monetary policy either way.

The euro system has proven a badly constructed self-destructive system, just as its opponents have claimed from day one. In fact, they have pointed this out well before the euro was introduced. Alas, it does not logically follow from this that it is worth attempting to ‘save’ it by means of inflation, which is what all the above quoted people evidently want.

Currency Expiration Looniness

For sake of completeness, I need to point out once again Gregory Mankiw’s inane proposal to save the economy by expiring 10% of Money supply every year (see Time For Mankiw To Resign)

GDP Targeting Looniness

I also need to point out the preposterous idea by Christina Romer who proposes the Fed institute GDP targeting in which she says Dear Ben: It’s Time for Your Volcker Moment.

For starters the Fed cannot spend money, it can only lend it. Thus the Fed has at best an indirect affect on GDP.

Interest rates are at 0% and money is stacking up at the Fed as excess reserves. In such conditions, the Fed has no affect on GDP. However, the price of crude is back over $100.  Food prices are up as well. The Fed has destroyed those on fixed income.

The Fed already has a dual mandate. A dual mandate is stupid enough in and of itself. The reason is the Fed can control at most one variable at a time. For example, the Fed can defend an interest rate target but it then loses complete control over money supply. It can target money supply but lose control over interest rates.

The Fed cannot do a damn thing about jobs other than indirectly. Now Romer appears to seek a triple mandate that is quite frankly economically impossible.

How Economic Incompetents Rise to Fame and Power

Inquiring minds may be asking “How the hell did such a blazingly incompetent economist ever get picked to Chair Obama’s Council of Economic Advisers and why is she on Obama’s Economic Recovery Advisory Board?”

Those are excellent questions. The snide answer would be to place the blame on Obama. However, President Bush also had incompetent economic advisors.

The answer is more fundamental. Romer was picked precisely because she was incompetent, not in spite of her incompetence. She says the things government wants to hear.

1. We need to print more money
2. We need to spend more money
3. We do not need to worry about debt
4. The “Free Lunch” exists
5. Government is the savior

In short, Romer preaches exactly what presidents want to hear.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: Ambrose, Angela Merkel, Berlin Today, Budget Rules, Chancellor Angela Merkel, Desperate Attempt, ECB, Enda Kenny, Euro Zone, Evans Pritchard, German Chancellor Angela Merkel, German Supreme Court, German Voters, Implication, International Markets, Irish Prime Minister, Massive Intervention, Nanny State, National Sovereignty, Treaty Changes
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Albert Edwards still uber-bearish, calls for new lows in 2010

Friday, November 13th, 2009

The post below is republished courtesy of Trader Mark, writer of the Fund My Mutual Fund blog (hat tip: Damien Hoffman of Wall St Cheat Sheet).

Societe Generale’s Albert Edwards is generally considered an uber bear, although there were times in the past year he has tactically increased exposure to equities to take advantage of oversold conditions. Now is not one of those times. In fact, Edwards chimes in with many similar thoughts we’ve posted on the fundamentals … but sticks his neck out calling for new lows in 2010.

While the belief from this blog writer is this will all end badly, knowing when and how will be the ultimate question. Without the massive intervention by central banks and governments we’d have a different landscape; and without knowing to what lengths these people will continue to go to, it’s much more difficult to predict the intermediate road ahead. But unless the basic laws of economics are repressed permanently, the ultimate destination seems no different.

As with “intellectual bears” today, the Nasdaq bears of 1999 and real estate bears of 2006 were ultimately correct; but in the interim a lot of money was made by those who ignored warnings on the upside before it all came crashing down. And specific to Nasdaq, most bears who attempted to step in front of the freight train had little equity left to actually profit from their (eventual) accurate prognostications. Irony at it’s best.

At this point many who are non believers have finally jumped on board, with everyone assuming they can jump right back out, through the same narrow door when “some day” arrives.  If only it were that easy …

Via Reuters:

- Albert Edwards, an analyst at French bank Societe Generale who correctly predicted the Asian financial crisis, sees global equity markets at a new low and chances of another global recession in 2010.

- Edwards, a prominent equities bear and a long-term critic of the policies of Western central banks, is skeptical of popular opinion that extreme policy responses will safeguard the West against a repeat of Japan’s ‘lost decade’ of the 1990’s.

- “People should question the happy clappy nonsense from sellside analysts,” London-based Edwards, a global strategist with SocGen’s Corporate & Investment Banking group, told a media briefing. “We are not saying that people should not participate in the rallies — that will get you fired as a fund manager — but they should not become too convinced of the recovery,” he said. (hand raised)

- Edwards expected China to go into a recession at some point as cyclicality catches up with the economy, and called people’s excessive faith in growth stories a “sick joke”.

- He said while inflation was a concern, deflation was a bigger worry in the near term, at a time when western and Japanese governments were effectively insolvent.  (print, print, print until your daddy takes the T bond away?)

- “If we get an economic downturn next year, when you have got core inflation at half a percent, I think there will be a real deflation panic, a bit like in Japan.”

- Edwards picked grains like corn, wheat and soybeans as a more secular bet on China’s growth story over other commodities and their related stocks as these have lagged the broad rally in the markets.  (interestingly these agriculture commodities have lagged big time … my belief is because one can stockpile many commodities such as oil or copper with the cheap money being handed out – whereas foods spoil)

- Edwards is more worried about Japan in the near term as he expects the world’s second-largest economy to run into difficulty funding itself next year as demand for Japanese government bonds wane and bond yields rise further.  The significance of higher Japanese government bond yields was that it would cause some Japanese investors, who have been investing overseas in search of higher returns, to bring that money back home, he said.

- “Equity valuations have been totally ridiculous for the last ten years but I’m less bearish than I was two years ago because we have had one round of correction,” said Edwards, who thinks the S&P 500 should have dropped to 500 points last year to hit the bottom of the valuation cycle.

Some more recent Edwards below.

1)  ZeroHedge provided further Albert Edwards thought process two weeks ago here.

2)  Investment Postcards blog has a blurb from September here.

Edwards concludes that the global crunch is not receding, but intensifying, stating that the unwinding of the “grotesque debt excesses” of the last decade has only just begun. “As Japan experienced before, it is deleveraging that is the problem and retrenchment takes many years, rendering the economy extremely vulnerable to rapid relapses back into recession when any reverse or pause in extreme stimulus occurs.”

3)  Edwards is one the prominent bears quoted often in this piece from The Economist in early October [hit fullscreen option for easy reading].

Source: Trader Mark, Fund My Mutual Fund, November 10, 2009.

Tags: Asian Financial Crisis, Bank Societe Generale, Central Banks, Cheat Sheet, China, Commodities, Edwards, Ees, Emerging Markets, Freight Train, French Bank, Global Equity Markets, Global Recession, Hat Tip, Hoffman, Irony, Laws Of Economics, Lows, Massive Intervention, Mutual Fund, Nasdaq, oil, Reuters, Societe Generale
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