Wednesday, September 02, 2009

the economy does a W?

While there are some who think the recession may be about over and Obama my be able to take credit, I disagree.

Federal Reserve efforts to thaw credit markets together with the Obama administration’s "cash-for- clunkers" program and tax credits for first-time homebuyers are reviving demand. Factories and builders, which have accounted for half of all the jobs lost since the recession began in December 2007, may keep growing in coming months as sales rise.

In fact, even while that was being written, a correction was getting underway. Within hours, the S&P was back under 1000. the price of crude and gasoline dropped, and the interest rate on 2-year bonds was back under 1%.

Nothing, of course, is cut and dryad.
"Successful investing is anticipating the anticipations of others." (John Maynard Keys).

Much of the problems of the economy is hidden beneath the surface. There is a backlog of real estate in the foreclosure process that rivals the size of all the houses currently on the market today. Consumers are racking up massive credit card debt, and job losses are still mounting up, meaning that a mountain of credit card defaults are just around the corner. (numbers you may have heard - accompanied by rosy narrative that things are getting better, are a farce - the situation is just getting worse more slowly.)

In addition, the banks have been hiding weaknesses (this is in addition to the weakness caused by NOT foreclosing on delinquent accounts) through a technique called Mark to Market accounting. This is where they can estimate their holdings to be worth more than what they really are worth.

One person I should have been reading some years ago, Bill Fleckenstein predicted much of this, years before it happened. He says this is just a continuation of the bubble collapse of 2001.

What me may be facing in the next few months is a second "bottoming" of the economy, with more job losses. More market contraction. More losses in equity of most commodities. Instead of a V shaped economic chart, it will look more like a W. The Great Depression was not all one long depressed economy, but rather 3 or 4 (depending on how you look at it) serious recessions. That was GD1, and this is shaping up to be GD2, and we will likely see a round of high inflation somewhere in the mix. Or something that just looks like inflation.

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