Economists are sounding the alarm

Donald Trump’s assault on the US federal government and the world’s interlinked manufacturing system have together reached an economic tipping point.

“It seems almost unavoidable that we are headed for a deep, deep recession,” said Jesse Rothstein, Berkeley professor and former chief economist at the US labour department.

Once the pace of job losses crosses a critical line, the multiplier effects can snowball suddenly.

Prof Rothstein said monthly non-farm payrolls – the barometer of US economic health watched closely by markets – could turn viciously negative by late spring, contracting at rates surpassed only during the worst months of Covid and the Lehman crisis in 2008.

“I think we’re going to see historically large drops. Losses of 400,000 a month are not implausible because people are getting nervous out there.

“It is not just the federal employees being fired: it’s all the other people worried they could be next, so they are cutting back too,” he told The Telegraph.

Torsten Slok, of Apollo Global, said layoffs could approach 1m after factoring in the likely chain reaction through contractors. “We are starting to worry about the downside risks to the economy and markets,” he said.

Mr Slok said it is a mystery as to why credit spreads and equities are still so well-behaved when the US Economic Policy Uncertainty Index was now higher than at any time during the great recession.

Read the rest here.

Cautious Signs of Economic Improvement Continue

The job market got a bucket of good news Thursday showing private sector hiring picking up and new claims for unemployment benefits dropping.

The Labor Department reported that jobless claims fell 15,000 to a seasonally-adjusted 372,000 in the week ended Dec. 31 from a revised 387,000 in the prior week. The four-week moving average, seen as a better gauge of labor market trends, dropped 3,250 to 373,250.

Applications have declined steadily over the past three months and have dropped in four of the past five weeks. The four-week moving average fell 11 percent in 2011, evidence that companies are laying off fewer workers.

Meanwhile, businesses boosted hiring by more than expected in December, a private sector employment survey showed Thursday.

U.S. private employers added 325,000 jobs in December, according to the ADP National Employment Report jointly developed with Macroeconomic Advisers LLC. Economists surveyed by Reuters had forecast the report would show a gain of 178,000 jobs.

Joel Prakken of Macroeconomic Advisers struck a note of caution, telling reporters that the December surge in hiring might have been caused in part by year-end seasonal factors and revisions were possible.

Read the rest here.

Recovery or Bear Market Rally?

There are widespread reports that at least some aspects of the Great Recession may be hitting bottom. Certainly if we believe Wall Street things are on the mend. The DOW is up 35% and the S&P 500 is up 40% since their lows in March. Surely this is a sign that Happy Days are at least on their way if not yet actually "Here Again."

March 2 to July 24th 2009 (click to enlarge)

To which I respond... maybe and maybe not. There is a very interesting phenomenon that shows up during periods of protracted economic decline or stagnation called a "bear market rally" also sometimes known as a "suckers rally." This is when investors desperate for any sort of good news latch onto the first not horrible news and read it as an indication that a corner has been turned and economic recovery is on the way.

The main characteristic of the bear market rally is a sudden sharp rush by speculative investors trying to get in at "the bottom" and score some big profits. This mass speculation temporarily drives up the value of equities and the overall indexes but it is not sustainable long term if the recovery is not real. A bear market rally ends when people begin to realize that the situation is not as good as hoped and there is a mass rush for the exits. In some cases this has precipitated stock market crashes that were as bad as or worse than the ones which may have signaled the beginning of the economic downturn. Such was the case in 1930.

In early 1930 following the crash of 1929 there was an almost violent rally on Wall Street as investors, believing that the crash was an anomaly and that damage to the broader economy had been minimal, started to dive back into the stock market. By April of 1930 the market had recovered about half of its losses from the crash of '29. It then slipped slightly and traded sideways into the middle of the summer when it dipped again. There followed a couple months of sideways trading and then the floor fell out.


The stock market crash that began in September of 1930 did not end until July of 1932. When the market finally bottomed it had lost 90% of its value from its high in August of 1929. It would not recover its pre-crash value until 1954, a quarter of a century later. Even after the great crash of 1930-1932 there would be a series of bear market rallies and mini crashes right up until the outbreak of the Second World War finally stabilized the economy.


Bear market rallies were also seen on a number of occasions during the stagflationary period of the 1970's.

It is not my intention to declare that what we are seeing today is a repetition of the events of 1930. There are important differences that could be fairly pointed out between the present day and age and the early years of the Great Depression. But I will say that if you look at the events of the last twelve months including the performance of the stock market, the similarities are chilling. One need only look at a chart of the stock market's performance over the last year to see the dangerous pattern.

Last 12 months (click to enlarge)

Year to date

And it is a fact that there has never been a stock market rally that was anywhere near the levels we have seen since the bottom in March that did not turn out to be a suckers rally. If this rally is the real deal, it will be one for the history books.

"Dear AIG, I quit..."

From a letter printed in today's op-ed section of the New York Times:

DEAR Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down...

Read the rest here.

The dangers of deflation

Hundreds of thousands of people are being laid off. The nation’s leading banks and carmakers need bailouts. The stock market has had an ugly 2008.

Well, here’s something else to worry about: deflation. This week, the government announced that prices fell in November for the second month in a row.

It might seem hard to understand what the problem is with falling prices. If all they mean is that we can buy our Christmas presents for less this month than we could have a month ago, maybe we can get the decked out Mac after all. What’s there to worry about?

A lot. If prices persist in their decline, they could be devastating to the economy — not primarily because of their impact on consumers’ spending habits but because of their impact on consumers’ ability to service their debts.

Think of it this way: Say you earn $50,000 a year, and have a $200,000 mortgage. If there is heavy deflation, prices and salaries fall. Your salary might go down to $40,000, but your mortgage would remain the same. Suddenly, making those mortgage payments has gotten a lot tougher.

Read the rest here.

8 really, really scary predictions

Nouriel Roubini
Known as Dr. Doom, the NYU economics professor saw the mortgage-related meltdown coming.

We are in the middle of a very severe recession that's going to continue through all of 2009 - the worst U.S. recession in the past 50 years. It's the bursting of a huge leveraged-up credit bubble. There's no going back, and there is no bottom to it. It was excessive in everything from subprime to prime, from credit cards to student loans, from corporate bonds to muni bonds. You name it. And it's all reversing right now in a very, very massive way. At this point it's not just a U.S. recession. All of the advanced economies are at the beginning of a hard landing. And emerging markets, beginning with China, are in a severe slowdown. So we're having a global recession and it's becoming worse.

Things are going to be awful for everyday people. U.S. GDP growth is going to be negative through the end of 2009. And the recovery in 2010 and 2011, if there is one, is going to be so weak - with a growth rate of 1% to 1.5% - that it's going to feel like a recession. I see the unemployment rate peaking at around 9% by 2010. The value of homes has already fallen 25%. In my view, home prices are going to fall by another 15% before bottoming out in 2010.

For the next 12 months I would stay away from risky assets. I would stay away from the stock market. I would stay away from commodities. I would stay away from credit, both high-yield and high-grade. I would stay in cash or cashlike instruments such as short-term or longer-term government bonds. It's better to stay in things with low returns rather than to lose 50% of your wealth. You should preserve capital. It'll be hard and challenging enough. I wish I could be more cheerful, but I was right a year ago, and I think I'll be right this year too.

Read the other seven predictions here.

Nouriel Roubini is a man I respect. I am not going to say he is infallible. But like Peter Schiff (see here & here) he has some credibility on this subject that is not exactly widespread these days. Thus when he speaks I pay attention. And very frankly what he is saying scares the &%!! out of me.

I really really hope that he is (finally) wrong.

Is the Worst Over? "No" says Peter Schiff

The man who was laughed at over the last 2-3 yrs for predicting the current economic crisis (see the previous post) made an appearance on CSNBC on November 20th. When asked if the worst was over he gave a frankly grim prediction for the future. This man has been dead on in his predictions thus far and his prognostications for the next couple years sound pretty well reasoned to me. I really hope that he is wrong this time. But I would not put money on it. Not even a dollar that might not be worth the paper it's printed on.

A Prophet Scorned

A Depression coming? Kipplinger says not likely...

Expect to see a recession similar to those in the 1970s and early 1980s.

What are the odds that this economic slump will deepen into a genuine depression not seen since the 1930s? In my judgment, it's not likely. Instead, I foresee a moderately severe recession.

We're all hearing more and more comparisons being drawn to the Great Depression. Yes, we're in the worst financial crisis since that era, but by no means the worst economic crisis since then -- not comparable to, say, the mid-1970s.

Former Goldman Sachs chairman John C. Whitehead got a lot of attention last week with his statement that the federal government could face a downgrading of its credit rating, aggravating the recession. The result, he said, "would be worse than the Depression." Now, "would" is a squishy word in forecasting, but the headlines screamed, "Whitehead Sees Slump Worse Than Depression."

Whitehead, a distinguished American of 86 years, was an adolescent during the 1930s, so he should remember those horrible times well. I wasn't born until after World War II, so my knowledge of the Depression comes largely from books. Here are some things I've learned:

The Great Depression was a global economic collapse of unfathomable magnitude, and today's statistics of pain would have to be multiplied manyfold to match those of the 1930s.

And the Depression was preventable -- if governments worldwide had responded earlier and smarter after the stock market crash of 1929. The lessons learned since then greatly reduce the likelihood of a reprise of that decade of hardship.

Read the rest of this very interesting and detailed article here.