Double Dip Recession

Obama’s campaign and first year in office seemed tactically planned. His campaign was well-run. He got many of his legislative goals accomplished, including a large stimulus, financial reform, and health care reform (even if the health care reform did not go as far as he wished). The only thing really missing from his agenda was a passed cap and trade bill, though he got many of his ‘green energy’ desires anyways from his stimulus.

It’s almost time for mid-term elections and unemployment is still at its highs (especially when you factor in all of the people the BLS simply purged from the labor force…if we had the same size labor force as in April 2009 unemployment would be closer to 10.5%). Obama accomplished most of his legislative agenda; the problem is that his agenda was terrible. We are running a near 10% deficit and have sub 2% growth to show for it. I think Obama actually thought his proposals would work and is now having cognitive dissonance over what to do since the stimulus and his other plans have failed to help the economy. When he took office, he probably thought unemployment would be around 6% right now and everyone would be singing ‘koombaya!’ not ‘kill the incumbent!’

With the prospect of probably losing the House and possibly even the Senate come November, Obama is scrambling to get anything passed now to accomplish his goals before becoming a lame duck. For Obama, perhaps some last ditch effort will also stave off a total Democratic collapse in the fall. Over the summer, they barely passed a $26 billion Union bailout in the form of state aid. What can they get done now?

Everyone expected Obama to come out with some sort of major legislative agenda in the fall…some sort of last stand. We know he will attempt to extend the tax cuts for those making less than $200,000, but something more was expected. We found out exactly what that is today. Fifty billion more in waste, this time for ‘construction projects.’

This isn’t targeted or thoughtfully planned. Obama’s advisors thought process was probably as shallow as ‘there are a lot of unemployed construction workers….let’s give them work….they’ll vote for us.’ Gee golly. If stimulus was so helpful, wouldn’t the $800 billion have done a better job? At this point, Obama is just trying to shovel whatever money he can into the public sector to see if it will help.

It won’t. Obama and the Democrats are toast, and this bill will just add more to the debt no matter what they say about ‘closing corporate loopholes.’ If the loopholes were that bad, they should have closed them anyways without this bill. That would have played better with the public anyways.

While stocks have opened strong in September, the bears definitely still have prospects for turning out to be right in the historically gloomy month:

1. Europe is set to issue twice the amount of debt as in August. This also comes at a time when France will have a general strike beginning tomorrow since the government is raising the retirement age from 60 to 62 (the horror, the horror!)

2. Sentiment is no longer oversold in my opinion. The market is now overwhelmingly bullish after last week’s rally. I expect the AAII.com numbers that are released Thursday to show a similar uptrend in bullishness. While I certainly don’t doubt the market can go up further, I’m not expecting an oversold rally like we saw last week. There needs to be some sort of news to prompt it.

3. There may be some revolt against politics. Obama just announced another $50 billion in waste (err, infrastructure spending). While the market is supposed to like stimulus, I think most people by now understand that this is just pure government waste, won’t create jobs, and guarantees the government will have less ability to lower taxes.

That said, I don’t think we’ll see too much action in September either way. I think Europe will put off disaster until around the Spring of next year at the earliest, since their ‘we’ll bail each other out’ plan can probably push off the inevitable until then. The US is not in good shape either, but it will be in a lot worse shape once all of the 2011 tax increases (both state and federal) come into effect. I also won’t be surprised to see some blowup from Asia eventually, China and its bubbly atmosphere in general or Japan finally buckling under its enormous government debt. Again though, I don’t think it’ll happen this year, but good chance sometime next year.

The financial situation of the city of Oakland is both incredibly funny and sad at the same time. Like so many municipalities, it is burdened with heavy pension costs due to overpaying public sector employees. The solution? For this city that has had issues with crime over the years, it has had to layoff more and more policemen. Of course, the union could just accept less pay or force pensioners to stop getting free money, but nahhh, let’s just have a reduction in workforce.

Now Oakland won’t even send officers if you find your house burglarized (they will respond if someone is burglarizing your house while you’re there, they only focus on violent crime). How do you think citizens will react to this? What do you think criminals will do if they pretty much know they’ll get away with a crime if no one sees them?

According the USA Today article linked to above, similar situations are already happening in Tulsa and a suburb of Boston. As it happens in more and more cities (and if the situation becomes more severe), citizens are going to increasingly arm themselves to protect their property.

This is what happens when you have a corrupt system that overpays public employees with lavish pension benefits. When the cities inevitably get squeezed, instead of being able to cut the pensions, they are forced to simply fire employees and the citizens enjoy less services.

Cities should just go bankrupt, ditch the pensions in bankruptcy court, and start over with sane pay and benefits for public sector employees.

The first few days have started off with a bang for the stock market, with the Dow Jones now up around 400 points over the last three days. Likewise, bonds have sold off, as investors re-risk into equities.

The triggers for the rise are primarily an ISM number and the non-farm payrolls, which showed a private sector gain of 67,000 jobs.

I’m skeptical that this data is what really has driven the market. I think the market is just oversold and would cling to any data that wasn’t terrible as an excuse to rally. There also hasn’t been a terrible, external shock that would rock the markets, like a sovereign near default (though Ireland is looking increasingly suspicious).

If you look at the AAII.com sentiment survey, it showed a surge in bearishness a couple weeks ago (the survey comes out on Thursdays, but my guess is most respondents probably submitted their answer by Monday or Tuesday).  The survey coming out on August 26 showed about 50% bearishness and only 20% bullishness.  This week’s one showed a small increase in bullishness (probably due to last Friday’s rally) but bears still healthily outnumbered bulls. I expect to see another surge in bullishness this coming week due to the past three days, an indicator that the market will no longer be oversold.

Now, let’s look at the numbers. A 67,000 print for jobs gained still beat expectations, but at this point, we have to ask are expectations too low? This is peak stimulus, lowest tax rates we’ll see for a few years. Also, the sovereign debt issues are currently under control. If we can’t even create enough jobs just to keep up with population growth now, how will we have a chance to avoid a double dip if any of the sovereign debt issues or another external shock pops up or if taxes are indeed raised next year?

As for the ISM number, well, one not-so-terrible ISM number a recovery does not maketh (especially when new orders are way down). Art Cashin calls it an outlier here:

It seems public worry about a double dip recession is on the rise. The number of Google searches for ‘double dip recession’ has skyrocketed over the summer. A few came out in Spring 2009, but the real gain was recent:

Let’s give this graph some context though. Very few people use the phrase ‘double dip’ when Googling. The generic term ‘recession’ still gets many more searches, and the search volume is still much lower than when the recession first started.

What to take away from this? I don’t think it means much actually. Most of the initial Googling was probably people just thinking ‘What the **** is this recession  thing?!!!’ and the drop in searches for ‘recession’ doesn’t indicate an economic rebound as much as people are just used to a shitty economy now.

With the stock market, there’s a decent amount of zig zag lately. The market took a beating in May and June, shot up in July and then back down in August. Bond yields, on the other hand, have only trended one way- down.

People are gobbling up US treasuries faster than fat kids can eat cake. With 10 year yields now at an abysmal 2.46%, you’d think yields couldn’t go any lower….but they still do!

Think about it…people are locking in 2.46% for 10 years! Not only are they locking it in (without inflation protection), they are loaning it to a government that has major structural debt issues.

While there is talks of a bond bubble, a fundamental necessity of a bubble (that people buy an asset in the hopes of selling it at a higher price) is just not there. People are buying bonds because they fear a double dip recession, or at least a reduction in stock prices.

I take away 2 things from bond prices:

1. The bond market is right and a double dip recession is coming. The last time we saw action like this on the 10 year, the S&P 500 was in the 800′s.

2. The bond market is wrong and this is the latest chapter of retail investors getting burned. However, I don’t think they’ll get burned because we’ll have awesome economic growth and bond yields go up since people are happily buying stocks and corporate bonds. I think the more likely scenario is the US fiscal situation deteriorates so badly that we have a currency crisis, in which case holding dated US treasuries is about the worst investment you can make.

Of course, there is the third way that Congress  and the President magically becomes economically literate and reduces the size of government, reduces taxes, we have economic growth, yields go up….but ehhh, that’s not until 2013 at best.