End of Recession

I have been hearing a lot of ‘green shoots’ lately, but am also filtering tons of misleading data with my 2 computer screens and 16 windows opened almost every-night. Friends, fund managers and commentators alike are singing praises of recovery and markets are ready to rise. To that, I politely say – RUBBISH!

There will be a recovery but not right now. St Graham said, in the short run, the market is a voting machine, and in the long run, it is a weighing machine. It means that the voting is based on current sentiment, but what the market weighs in the long run is earnings. The market tries to forecast future income streams and it gets it wrong as often as it gets it right!

We have the first balance sheet recession in 70 years, yet they want to compared garden-variety recessions to what we have now. Air, trucking and rail shipping is down 20% year-on-year and global trade is down about 30% in the major exporting countries.

The hidden problem is going to be most evident and painful in the unemployment numbers. The research paper by the San Francisco Federal Reserve generally supports projections that labour market weakness will persist and I believe the relatively low level of temporary layoffs and high level of involuntary part-time workers make a jobless recovery similar to the one experienced in 1992 a plausible scenario.

In the 1970’s and 80s, job losses were quick and deep, but the recovery was also quick. In the last two recessions, job recovery was noticeably slower, giving rise to the term ‘jobless’ recovery. It was the lacking of hiring, not firing, that was responsible for the slow employment recovery. The US now has less manufacturing jobs, so the rehiring process has been much slower in recent recessions.

Personal income from wages and salaries was down US$12bn in May, so how did income go up? A large increase in ‘government social benefits’ and a decline in personal taxes accounted for all the gain and then some. The increase was the effect from the recent stimulus package, which in my view, is transitory. The only different of this method from home equity withdrawal is that taxpayers are on the hook this time.

Final thought for today – The Congressional Budget Office released another report saying that the current deficit levels are unsustainable, either taxes must increase by $440 billion or spending must be cut by a like amount, or some combination. If the new health-care and other program are enacted, the number comes closer to $700 billion! Raising taxes by that amount will dip us back into recession.