There has been a lot of talk that the possibilities have arisen for double-dip recession. If you had asked me last month, I would have said that there was a low probability of that happening, probably near the 10-15% range. Well, a lot has changed since then; the Labor Department's jobs numbers for the month of June were revised much lower, and July's numbers showed far less jobs created than anticipated, illustrating our anemic labor market recovery. What is even more worrisome is that the best forward indicating labor market statistic, being the weekly jobless claims numbers, just came in at a 9 month high of a whopping 500,000, and this is now the third straight week that it has come in above 480,000. Just to put this in some perspective, a number of 425,000 weekly jobless claims basically means that we are growing jobs very slowly, so a number of 500,000 indicates a slowdown.
So what does this mean? It most likely means that you can forget about any sort of significant job growth over the next 3-6 months and that the unemployment rate will very likely climb for the remainder of the year. Without jobs you will see a weaker consumer, housing will continue to deteriorate (which has fallen off a cliff since the $8000 tax credit expired three months ago), and banks will move forward with more caution, which means even less credit will become available. There is a potential that this could have a snowball effect as the psychology of the consumer can retrench even further which would affect sales and aggregate demand for goods and services in just about all domestic based businesses. That of course would adversely effect countries which export goods to the US, in turn weakening their domestic sales, which again would then affect our US based corporations exporting goods and services to them. You see what I mean when I say snowball effect?
Iím not the only one who believes that the odds of a double-dip recession are rising.
One of my favorite macro economists who I follow very closely, Mohamed El Erian, from PIMCO, the one who coined the term The New Normal, recently estimated the possibility of deflation and a double-dip recession in America at 25 percent. "The US is still able to avoid deflation. We do not think that deflation and double-dip is the baseline scenario, but we think itís a risk scenario."
Mark Zandi, another well-respected economist, was recently asked about the possibilities of a double-dip recession and he responded by saying "The odds are rising. I'd say they're uncomfortably high. But I don't think we will experience a double dip. If I had to put odds on it at this point, I'd say one in four, perhaps as high as one in three. "
Goldman Sachs Senior U.S. Economist Ed McKelvey said, "as signs of slower U.S. growth have multiplied, market participants have become worried about the possibility of a double-dip recessionÖWe think the probability is unusually high ó between 25 percent and 30 percent ó but we do not see double-dip as the base case." Jan Hatzius who was recently awarded Wall Streetís top economist recently stated, "We had a housing and credit boom that was unsustainable, and now this boom has turned into a bust," Mr. Hatzius said. "There was too much debt, and the deleveraging process has still got a ways to go. Itís going to keep private demand weak. The prospect of substantial inflation seems very remote, but the prospect for deflation is far from remote. A double-dip is certainly possible but not likely."
Robert Shiller, the gentleman most responsible for the Case-Shiller housing index, a Yale University professor and author of the best-selling book "Irrational Exuberance", pinned the probability of a double-dip recession at more than a 50-50. Shiller pointed to the nation's stubbornly-high unemployment as a root cause of lingering economic woes. With the Federal Reserve running out of bullets to fight a second recession, he urged Congress to join the battle and focus on putting people back to work.
David Rosenberg, former North American chief economist for Merrill Lynch whose views are widely followed on Wall Street and more often than not prove to be correct, stated on CNBC the other day that the US economy is almost certainly headed back into a double dip recession and economists aren't seeing it because they're using "the old rules of thumb" that don't apply this time. Consumersí focus on shedding debt rather than spending will prevent the economy from growing and bring a halt to the recovery. "The risks of a double-dip recessionóif we ever got out of the first oneóare actually a lot higher than people are talking about right now," he said. "I think that it's almost a foregone conclusion, a virtual certainty."
I'd like to expand on Rosenberg's view, when he stated that "the old rules of thumb" don't apply this time; I couldn't agree more. I've been discussing this subject with my clients for over a year now. What happens is that many Wall Street "experts" and analysts use certain parameters to determine their forecasts. Think of a computer program, where you tabulate and compile numbers and use certain variables to calculate your outcome, where X + Y should always = Z. Sounds good, after all these old metrics worked for them very well in the 80's 90's and early 2000's, the problem is that the challenges we face today means that there are new variables that are missing from many of the calculations of these Wall Street analysts, hence their way off-base forecasts. What is missing in their computations are the new variables such as the massive deleveraging process that we are going through today with the consumer, the housing market, credit, state and local government jobs; the risks that government debt entails and structural unemployment problems in construction and manufacturing that we have never experienced. It's as if all common sense has been thrown out of the equation with these analysts and they over-rely on their apparently near useless metric summations. This is why El Erian's term, the New Normal, was an absolute stroke of genius, in which he and the crew from PIMCO forecast what to expect over the next 3-5 years, which is slower growth (1-2% GDP), heightened regulation, weaker dollar and unusually high structural unemployment.
So you see the odds of a double-dip recession are uncomfortably high according to some of the most well-renowned and respected economists in the world, and letís remember folks, the data that has come in since these projections were made have gotten worse. Will we see a double-dip recession? Who knows? One thing is for certain, whether we fall back into one or not, the economy will advance very slowly, and the political will from our much-esteemed leaders to spend more money in order to try to artificially kindle the economy is virtually inexistent (thank god). So you can pretty much bank on the Federal Reserve to prime the printing presses and expect some major quantitative easing measures to flood the markets with more dollars than we ever imagined. This wonít be good for the dollar or for any foreign bond investors who are holding US Treasuries in the medium to long-term.
Remember folks, as the value of paper currencies goes down, gold goes up. Itís just that simple.
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