US Economy from Bad to Worse

In January, in this blog I declared that I thought that the US were in recession or heading towards it and I based it on the data coming out during those days. Previously I was the one to oppose to the idea of a US recession basing my ideas on the usual data. Yesterday Bernanke has declared to a committee that macro-economic data from January tend to confirm the slowdown. I am glad to read that because this is a confirmation that my fears were right. As I used to mention in an Italian Forum, i didn't see at the time and I do not see now why the US Dollar should get stronger against the other currencies and why the price of oil should go down. My view stays the same and I actually think that troubles have not ceased and these will show their effects on the rest of the world. This short commentary is in reply to a friend's question about my current view on US Economy.

Article

Recession, at last!

Ladies and Gentlemen, after so many announcements by those who make of tarots their main meter of judgement for economic forecasts, the US recession is now near. Just to keep up with those who like numbers I would say that chances are now around 75%.

There are still doubts about the possible length of it but I think that thanks to the Asian economies, China first, it might be not as long as many fear. The kind of recession I can see is a technical one, not the tragedy a few foresee. It will impact the economies of Europe and China but concerning the latter I think that it will just a shaving off part of the forecast growth by a max 2% as internal consumption in Mainland China is still going up. Europe? Well... Eyes on Germany. As far as Italy is concerned the recession would mean nothing as we are a pretty conservative (and shameless) country showing always very contained growths (if any). So, nothing to fear about it. We normally fall from the first step of the ladder but our politicians tend to blame recessions to cover their helpless inability in running the country,

So whose fault is this recession to come? Fed, Banks, White House, Americans? The choice is wide and they all have their part of blame but I point my finger at the futility and the unjustified growth of economies since 2001. There has been a growth based on nothing. Shares values have been inflated, housing costs incredibly high thanks to bank who didn't know what to do with their money... the same way we created the Asian crisis we have created this one. One of the few times events repeat themselves. Unfortunately, even this time will be the less wealthy ones to pay for it.

Heads down! I am sure we will come out early as banks have already cleared their rubbish bins with the excuse of subprime crisis, but in a smarted way Neapolitans do these days. Without showing that subprime is only part of the problem.

Tata from cold and white Beijing!


PS - I have been asked why I am now convinced that we are close to recession while until my last intervention I was not so in line with others... Simple... there is an article I published here where it explains the main variables in the dynamic of economic growth. Some of those parameters are no longer signalling positive or neutral economical pattern. That is one answer. Second answer. The package that the White House is putting in place to avoid recession is far too little and too late. This time Americans have been hit badly with the housing crisis and does he, the President, really think that giving 800 dollars to each American tax payer would make the economy grow? Does he really think that with 800 dollars he can avoid a period of negative gowth due to debts more than consumer crisis? I am sure that even the Americans will be paying off a bit of a debt or putting them in their bank account...

The other consideration concerns the elections... Do we really think that the congress will pass a package that, if it works, will be added to the incumbent president? Let's not forget that the congress is in the hands of the opposition...

Last and not least... Bush's surprise trip in the Middle East, especially the one in Saudi Arabia. After a period of cold relationship, all of a sudden Bush seemed to be his father and show recognition and friendship to the Saudi family. It's obvious that the trip there has been a business journey to close some deals and get some oil on the cheappy. coincidentally, Gordon Brown has been seen around here asking for money. Yes, he has told Beijing that Britain welcomes Sovereign Funds... And that is another sign...

But the main factor is... the data. the figures show a slowdown and I wouldnt' be surprised if we are already in a recession. And, panic is doing the rest... Panic, excessive panic can lead to complete loss of confidence. And we are at that stage

BREAKING NEWS
On Jan 22nd Fed cuts discount rate and Fed Funds rates by 3/4%... We can now wait for BoE and ecb... While something will certainly come from PRC Central Bank. I am sure that the market will not give a toss about it...

The confidence crunch...

What I reckoned to be a useless exercise of the power of flooding the market with cash, has revealed to be a good relief for the liquidity in the euro market. The agreement between central banks to intervene on liquidity covering temporary shortfalls has been rewarded with a decreased interest rates, especially on those tenors going beyond the end of year spot.

There was no doubt, to be frank, that it would have given a relief but my argument against it was that it would have solved temporary problems, even if, calculating the forward forward rate, it was quite evident that rates on Jan 2 nd would have been much lower, around 4.15/.21 on the 2 weeks. Exactly at the same level of the periods going to Dec 31st. The turn of the year was seen around 5% and this has increased the rates on the whole curve of rates.

In Italy, more than in any other country there has been a big outrage for the very high Euribor rates and, first time in the history of this country since the Euro adoption, Fixed interest rates mortgage payers have been charged less than a variable rate debtor. This is due to the freak and extraordinary situation of liquidity crunch created after the subprime mine. No confidence of banks towards banks has led market participants to stop lending money to counterparts and this has raised the rates. But, at the same time, savers and investors have seen their wealth reducing due to the impact on the stock markets living a true rollercoaster ride. Add to this the fly to quality in the Bond Market and you end up with a concussion that makes things less and less understandable to the commoners and make them feel as if they are teased and cheated by the system.

We are assisting to an interest rate increase on the interbank rates, a reduction of the yield from AAA and sovereign bonds and a fall in the stock market… All due to… confidence!

Normally the lack of confidence is between the investors and the market now it's between the main market players themselves: Hedge Funds, Funds and Banks.

It's still unknown how much subprime crisis has hit the market and the latest number talks of 350 billion dollars which is not a huge amount considering the entity of the market but the main risk is contagion with the real economy. When it comes to housing, the market fears it greatly, even because the snowball effect is at the corner.

The Fed and the Banks in the US are trying to do as much as they can to rebuild confidence but it rather seems like trying to place a mattress to avoid injuries to a 300 pounds man falling from a 3 storey building.

The only true measure would be an act of honesty towards the market. Things have to be called by their true name and a credit crunch is a credit crunch but admitting the causes would allow the market to understand where we are heading to.

Subprime crisis cannot be the only factor making all this mess. Banks have been piling up load of rubbish in the past years because they found a way to maximize their profitability without being caught in the regulators' nets. Now that the shit hit the fan, banks tend not to call things by their true name and blame the overall market condition.

Losses should be made known and not brushed under the rug. Regulators have a duty towards people and towards those banks that have not been screwing the system to single out the wrongdoings (-ers) and help those [honest] banks that are experiencing problems in getting funds from their clients.

How can a client trust a bank if this bank is not even trusted by fellow competitors? This is the most dangerous part. A central bank intervention can reduce rates but doesn't increase the trust in the system, actually it has the opposite effect on confidence. It gives the idea of a Big Brother always there ready to intervene and change the rules when things are not going up to as it was planned due to someone cheating.

Central banks should be less hermetic and more open about their policies and in period like this shouldn't allow speculations about rates: up, down or neutral. It should be stated clearly and not left to someone interpretation. Volatility makes the market and volatility is the main factor that leads Hedge Funds to invest and make (or lose) money.

These profits normally go to those who accept the fact of being acrobats without nets and I do not understand why, when the game becomes too risky, banks are there supporting them damaging even those account holders that didn't have the money nor the spirit to enter risky operations. At the end it will always be investors to pay for the cost of this huge bullshit.

I am mesmerized by the comments I read around Financial Fora but I do understand that at the eyes of common people it seems all like a big cheat and I think that if the Financial Community wishes to gain the trust of the world, draining or pumping liquidity is not the right signal. in the most important financial forum in Italy, Finanzaonline.com, there are people that even accuse the market player of changing euribor rates published the day before as an attempt to smooth the crisis when it is evident that it was a typing mistake... Only singling out the crooks and naming the errors, for what they are, is the solution. The temporary rescue from Fed, ecb, BOE, Q8, Dubai, China and Singapore can only offer a temporary relief but it wont solve the issues on the long run and people will continue expecting a recession and the fall of this castle made of sand... People deserve more guarantees in their lives and they need to know that the State and the authorities are on their side and not on the crooks'.