Grandfather’s Recession

Financial sector credit spreads led credit markets wider as plunging equities reflect growing uncertainty over government intervention in financial market. The risks shifted to government, a transfer highlighted by the quintupling of sovereign CDS spreads. Prices on defaulted corporate bonds and loans continued to trend lower over the course of last year and fell of a cliff in the past few months. As we move forward, these rates are likely to be pushed even lower and the primary reason for this is the inverse relationship between recoveries and defaults – as defaults rise, recoveries are invariably pushed lower and vice versa.

With delayed balance sheet repair in the financial sector, in a dramatic change since mid-January investors now expect no further improvement in the short-term markets this year judging from forward starting LIBOR spreads over expected Fed Funds.

US real GDP is now forecasted at -3% - the worst since 1946. Capacity utilization rates break below 70% - bad news for capex. Cup half full – near-way point of the recession.

Housing recession continues unabated with unsold housing inventories still near record highs. Home sales hit new cycle lows with vivid signs of mortgage market contraction. Based on the University of Michigan Consumer Sentiment Survey that less than 3% of respondents saying housing are a good investment and prices are going higher.

Gold is in secular bull market with bullish call on gold supply that reflects relative supply and demand.

Although Chairman Bernanke argued that the economy could see stabilization this year, he also noted that an unemployment rate above 10% was possible. Additionally, he also noted that the fiscal stimulus will make a ‘significant dent’ in the economic downturn and went on to say that he was not worried about inflation or deflation, but growth. After all, this crisis was not a housing crisis, it was the long-discussed current account imbalance story come due.

Many experts are now calling for the Obama administration to focus on the fundamentals. They want him to drop some of its ancillary pet projects such as healthcare reform and are telling President Obama to focus all his time and resources on arresting the economy’s slide and hastening its subsequent rebound. Economists and other experts are already calling for the recession to last longer than had been expected; some are even calling for four more years of pain; a longer recession, followed by slow recovery that could have the malaise afflicting global economy until 2013.