Track The Turnaround

Told you so

From Bloomberg today:

Two measures of U.S. economic performance unexpectedly turned positive in December...The National Association of Realtors said sales of existing homes rose 6.5 percent to an annual rate of 4.74 million last month, propelled by the biggest slump in prices since the Great Depression. The Conference Board’s index of leading economic indicators increased 0.3 percent as the supply of money expanded.

I won't gloat. I'll just hyperlink.

But, but, but....What about continued, massive job losses? Again, from Bloomberg:

Analysts said the indicators...needed to be viewed against the backdrop of surging firings -- 72,500 announced today alone [including from Catepillar, Sprint and Home Depot]. The job losses, they said, may deepen the pullback in consumer spending and make banks more reluctant to lend, exacerbating what’s already the longest recession since 1982.

“We are not out of the woods yet by any stretch,” said Jonathan Basile.

Duh. Payroll trends always lag behind the economy's ups and downs. The economy faces a terrible hangover from a long debt binge, serious tailwinds and even more serious risks from national capitals everywhere (see bad economic policy from governments). Employers will want confirmation things are stabilzing and are headed up before they stop retrenching and start hiring again -- especially before they start hiring full-time again.

By the time we're "out of the woods," the improved reality will be obvious to everyone and the best profit opportunities will be gone. There's no value added in asserting what is plain for all to see. There is value added in pointing out what many do not yet see.

Nosedive

There was no inflation in 2008 -- the first year for which this has been the case since 1954. This report has served to further inflame speculation that a deadly deflation spiral is upon us. Meanwhile, the Fed's separate report on industrial production in the US shows manufacturing is still nosediving. US factories, mines and utilites are operating at only 73.6% capacity -- that's a 26-year low, with the multi-month slide in capacity use rate also the most pronounced in 26 years. And like the stock market's resumed slump, this one has much more the look of a determined rot than the Arab-oil-influenced, up-and-down, V-shaped bounce in the early 1980's. It's not an oil spike, but a 20+ year self-inflicted debt binge that's behind our problems this time. This is bad.

Anyway, Asian and European markets at the time I type this are up. And the TIPS spread, though still near record lows, has been rebounding from much of this year. Though buffeted by the PPI and CPI reports of the past two days, it doesn't seem to have been as affected as you think it would be. Its rebound in 2009 remains largely intact as Washington and world capitals across the globe put currency printing presses into overdrive. Note that the dollar has continued to extend its recent slide. That doesn't spell deflation. Remember, it's darkest before the dawn...and markets, including the investors who stand to profit from being right about the future, will be the first to pick up on it.

Are We Trapped?

The Labor Department today reported a dramatic drop in producer prices or prices at the wholesale level, raising risks we may be headed for a liquidity trap or downward deflationary spiral, or the possibility we may already be stuck in one (more on that later). The core PPI was still up -- barely -- but that doesn't mean as much if we're in the midst of a widespread fall of the general price level and oil and other commodity prices continue to sink. Check out the many PPI subcategories that registered declines. Here too. The report suggested more, big price declines are coming in the months ahead. The intermediary and crude PPI -- gauges for prices further up the production pipeline -- were also way down.

Global Insight's Brian Bethume mentions the "T" word and warns:
Deflationary pressures continued to intensify, with sharp declines in prices of intermediate and crude goods for the fifth consecutive month. These underlying deflationary forces will continue to put downward pressure on producer prices in 2009...monetary authorities in major industrialized countries have fallen so far behind the curve that we have seen strong evidence of a generalized global credit crunch and liquidity trap....Extracting ourselves from this trap will require an immense amount of macro policy force around the globe.

It could be time for us dilettantes to bone up on those two terms -- deflationary spiral and liquidity trap (I posted those links yesterday, so pay attention next time). I gave a general definition in the last post -- a vicious cycle of falling prices, production, profits coupled with subsequently rising real (inflation) interest rates and debt burdens -- but click the links for more detail. Nobel Prize winner and New York Times columnist Paul Krugman is considered one of the top authorites in exploring how this happened in Japan, so check out his work on this topic as well, particularly this.

Are we liquidity trapped or not? Downwardly deflation spiraling or not? What are the key leading indicators?

Read more...

Fed's Plosser: Turnaround by 2nd half of 2009

These Fed guys are not as dumb as they look. Charles Plosser, head of the Federal Reserve Bank of Philadelphia, says the U.S. economy could begin to recover in the 2nd half of this year. Though he doesn't expect the unemployment rate to drop any time soon, he doesn't expect it to rise to double digits. Plosser's no poser. He knows business cycles.

Of course, now that more economists are coming around this emerging consensus of a 2nd-quarter rebound...I'm getting worried. Conventional wisdom is often wrong. Among many big wildcards is the possibility of external shocks from the Middle East and any of a number of other hotspots. Fingers crossed.

Speaking of wildcards, in other news, retail sales fell last month at more than double the rate forecasters expected and more than the previous month. The risk of a liquidity trap -- or a vicious deflationary spiral of falling prices, production, sales, jobs and expectations coupled with subsequently rising real (inflation-adjusted) interest rates and expanding real (inflation-adjusted) debt burdens -- can not be ruled out.

I'll be keeping my eye out on independent, market indicators that are not as subject to the fallibility of the conventional wisdom and individual forecasters.

Bernanke sketches Exit Strategy (Daily Telegraph)

Bern, babe, Bern. Get this: According to London's Daily Telegraph (and its astute Ambrose Evans-Pritchard, one of the best economics observers out there today...if a bit uber-Kensyian), the not-so-astute Federal Resereve chairman Ben Bernanke is already planning an exit strategy from recession-driven rate cuts. He's worried critics are right and that inflation will pick up when the U.S. economy starts to recover. Doesn't sound like someone expecting this recession to last much longer or turn into a W. 

Speculators are betting on future Fed rate hikes

If the economy is sinking deeper and faster into recession, why are speculators in the futures markets (the Chicago Board of Trade to be exact) betting on future Fed rate hikes? Fed funds futures prices on the CBOT suggest those putting their own money behind their opinions believe the Fed funds rate will rise from around 0% currently to around 0.5%. Looks like some time in July is when things are expected to really get moving...up

The chart hardly suggests we're in for a robust recovery, it could just mean inflation is headed up (stagflation anyone?) and there is frankly nowhere for the fed funds rate to go but up, but it's yet another development that should make you go hmmm.....

Did The Stock Market Sniff a Turning Point, or Was It Just Clearing Its Nose?

For a brief moment, the stock market liked the jobs report. I can't remember the last time the stock market reacted positively, however briefly, to a bad jobs report since this train wreck started. But that's what happened for a few minutes of trade after the opening bell today.

 

Eugenio J. Alemán, senior economist at Wells Fargo Economics, sent out the following instant analysis acknowledging the stock market's initial jump in reaction to the jobs report (its since gone back to its regularly scheduled slump), though he's deeply skeptical. Take it away, Mr. Alemán:

The initial market reaction to the employment and unemployment numbers seems to have been “positive” in the sense that markets were probably expecting an accelerating rate of job losses, that is, a number higher in December than the one in November. However, this did not happen...the markets seem to have concluded that while in bad shape, the economy is not deteriorating at a much faster pace than during previous months...

Alemán doesn't use the "I" word (inflection point)...

..but I will.

The market might have briefly considered the possibility, however slim, that we're approaching or that we've hit a transition from an accelerating to a decelerating rate of implosion (or maybe it was just a speed bumb). Again, since that brief perk-up, the market has headed south again, so maybe it was just passing gas. Things that make you go hmmm...

Jobs Report: Pretty damn bad, but there is a sliver of a silver lining

It's bad.
Borderline apocalyptic actually.

According to today's jobs report, the U.S. has lost a whopping 524,000 payrolls in December -- on net -- and more than 1 million payrolls -- on net -- in just the past two months.

The only sliver of a silver lining is that December's losses were in line with or just below most expectations. Typically, a turning point occurs when the consensus goes from being overly optimistic to on-target (that's so rare it only happens at turning points) to overly pessimistic, but we'll need more confirmation of that in the days ahead.

Doesn't matter much to the millions now unemployed. Consider again that this is a net figure -- there's always firing and hiring going on in this economy. That means it's likely much more than 1 million jobs have been lost over the past two months, offset to an unknown extent by whatever hiring is still taking place.

In short, it's bad, dudes, but I see more signs, however frail, of a turning point.

Hi. Welcome to the Trough.

This blog was born into unusual and difficult circumstances, not unlike Brad Pitt's Benjamin Button. But the U.S. economy may already be in the midst of a turnaround (let's all hope it won't be U-shaped like Japan's decade-long slump through the turn of the century or W-shaped like The Great Depression of the 1930's...yikes).

In upcoming posts, I'll be tracking developments in key indicators with your help. Please post your thoughts, including anecdotal indicators (how is your favorite waiter at your favorite local restaurant behaving lately?).

Things are bad and will probably get worse in 2009, but absent nuclear war breaking out in the Middle East or "Lost" being renewed for another season, the future will be brighter...eventually. Don't believe the gripe...at least not indefinitely.

The essay below is my current big-picture read on the situation and what to look out for as signs of a turnaround. I tried to get this into a major Op/Ed section so I could get this silly little blog more exposure, but no such luck this time.

Anway, what follows is an extensive overview of indicators I'll be tracking on this blog. Next stop, DarynKagan.com (just kidding...actually...hmmm). Enjoy.

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Don't Worry, Be Savvy
Learn to Love The Abyss: Future's Brightest When Present's Darkest

It's always darkest before dawn so the last thing savvy investors should be dwelling on are the awful jobs, retail sales and factory production reports of the past month, or other backward-looking stats. That's not the way to get a jump on future opportunity. Junk the funk. “Malaise" talk is bunk. We haven't sunk, so don't be a skunk, because too much pessimism will cost you.

Barring a geopolitical apocalypse or the biblical Book of Revelations coming to pass (quite a few signs of that, actually, but never mind) things will get better. It's not a matter of if, but when. Here's a guide on early signs to watch.

Read more...