Recession cometh--Update On the Economy and the Markets By DoctoRx, on March 14th, 2012

  

Update On the Economy and the Markets

By DoctoRx, on March 14th, 2012

Yesterday late in the day, a bizarre thing happened.  The Fed moved up its release of the bank stress tests results by two days because one of the directors of the New York Fed, Jamie Dimon, had the company of which he is CEO, JPMorgan Chase, announce a dividend increase and a stock buyback.  Very strange.  This was associated with a jump in stock prices and a big hit to gold.
Today, not only is gold down a lot more, but industrial metals such as platinum and copper are down; while the economic depressant for the U.S. and most of its major trading partners, high oil prices, continue high–a toxic combination if continued.  And, a negative for economic activity and for stock prices, bond yields are up again today.  Getting back to gold, as of last night’s close, it has pierced its rising 200 day simply moving average on the downside, and is down a bit more today.
If matters start looking in commodities as they did in early May of last year (collapsing), when I switched from aggressive bull to aggressive bear on a dime, then we will have to deal with it.
John Hussman, in a piece I read last night, asserts that forward-looking economic indicators are actually worse now than in the summer.  Here are some of his data:

The most recent estimates we obtain for the extracted economic signal (most recent first) are as follows:
Feb: -0.647
Jan: -0.603
Dec: -0.435
Nov: -0.189
Oct: -0.041
Sep: 0.075
Aug: -0.507
Jul: -0.603

Thus he thinks a recession is likely.  Note that his article is not as dull as the above chart, and I recommend it in full for its stock market and economic comments.
Also, the ECRI team continued with its recession call as recently as Feb. 24, with multiple interviews of Dr. Achuthan on TV; they claim an 85% accuracy in their major calls; and per its website I don’t think they have changed their views.
So perhaps an unusually warm winter plus random errors in certain economic data points have masked a more sluggish economic performance than has been suggested by some of the data, and perhaps things are tipping downward in the U.S. macroeconomy.
Jeff Harding’s recession call for Q1 or Q2 of this year has thus not been proven wrong, and unlike many “gold bugs” who ascribe “hits” on gold’s price to anti-gold action by the authorities, I look at it primarily as if it were a currency that strengthens when the sustainable interest rate structure of the U.S. is “too low” relative to price inflation, though I also adjust that for gold’s price versus other tangible assets.
To translate the above:  if gold and other tangibles start moving down together, I think price deflation; I think recession.  Remember that gold has tended to move as a leveraged asset to real interest rates  (Ultimately gold should recover first, as the authorities dilute the currency more under Keynesian economic theory.)  So gold will “over-react” to a bout of price deflation association with a meaningful recession.
The markets transmit a lot more information than any individual has, that’s for sure.  And as I’ve said for some time, especially in this strange new world of ZIRP, what you do not know is the only thing you know.  So let’s see what happens.
Even ignoring that recessions happen outside of the setting of a Reinhart-Rogoff credit collapse, we are by my count 4.6 years into their paradigm of a credit collapse.  It typically takes 5-6 years to exit (a long 1.4 years potentially to go if it’s 6 years and out), and a commenter pointed out last year that R&R report that most of these credit collapse episodes end with a “bookend” recession before truly calmer economic waters occur.  (That would certainly fit Japan’s post-ZIRP situation to which I have analogized the U.S. to many times.)  I have been hoping and thinking that last year’s downturn could have been that bookend recession equivalent, but I have no pretensions of being an economic forecaster, and I try to listen to the message of the markets.  It’s important to me to have an investment strategy match the short-term economics, and when gold drops almost $150 in a very short period of time, I don’t blame Tim Geithner as the GATA people do, I think of fundamental economic reasons.
That Fed’s bank stress test was done for a reason.  It wants the banks to be safe in a severe recession with a 13% unemployment rate scenario, plus an exogenous financial shock.
The Fed is not smoking hopium anymore, if it ever was.  They believe that something wicked this way could come.  Let’s hope not, but hope is a non-strategy.
Nothing worthwhile comes easily, except the occasional winning of a lottery.
Have a nice day.