Is The Table Set for the Dreaded Double-Dip?

"Brain surgery is not rocket science to a brain surgeon".

The Table is Set for the Dreaded "Double Dip"
Back in the summer I posted blogs about the four questions I/Blue World was being asked most often. One of those was regarding the likelihood of a double dip recession. It would be valuable to go back and review that one now.

http://blueworldassetblog.blogspot.com/2010_06_01_archive.html

If you are not inclined to read the whole post the short answer was "no" if you believed we never really emerged from the first dip and "yes" if you believed a recovery was underway. A lot has happened since then and after the over-important, under-meaningfully-analyzed events of the past two weeks Blue World feels we have enough information to render a more evidenced based opinion.

The National Weather Service in Chicago, IL has issued a Tornado Watch for the following counties ...
Is Blue World definitively predicting a "double-dip"? Of course not. Too many things can change, literally, overnight. Look at this post like the difference between a tornado watch and a tornado warning. A tornado warning means there is a verified tornado already formed and coming. A tornado watch means that all the conditions favorable for a tornado to form exist. Consider this, therefore, to be a "Double-Dip Watch". It is significant because everyone has just started to relax a little bit.

Numbers can be misleading...AND used to mislead.
You all know I write these to cut through the headline nonsense in an effort to offer some actionable intelligence for business managers at any level. There has been a pant-load (my favorite e-trade baby phrase) of economic data that is being spun as positive. It's not positive. Let's summarize some key indicators.

Inflation
This is the condition during which the stuff we buy every day starts to cost more. We are being told it is OK to keep interest rates low because inflation is in check. Really? How do you say that with a straight face to real people who are buying milk, food, gasoline, etc.? Blue World watches the commodity prices every day and, I assure you, nothing is getting cheaper. Have a look at the following links to price charts for some staple items and raw materials then let me know how tame inflation looks to you. Some of these sites have interactive functionality if you care to play with some parameters.

Gasoline:
http://www.GasBuddy.com/gb_retail_price_chart.aspx?city1=USA Average&city2=&city3=&crude=n&tme=1&units=us

Weekly Corn: http://futures.tradingcharts.com/chart/CN/W

Weekly Cotton: http://futures.tradingcharts.com/chart/CT/W

Weekly Live Cattle: http://futures.tradingcharts.com/chart/LC/W


The Fed and Quantitative Easing (QE 2)
Normally we consider increases in personal spending a good sign that confidence is on the rise and, consequently, people are willing to start spending more money. We could believe that even more if we are told productivity is up. Unfortunately, those numbers can mean that the stuff we have to buy is getting more expensive and few people are doing the work of many, respectively. You know the unemployment rate is still hovering between 9% and 10%. After looking at those charts do you think inflation is really in check? That leads us to the double whammy. Not only is the stuff we need getting more expensive, but the money we use to buy it is losing power. The Fed has, inexplicably, decided to make the dollar even weaker than it was by buying long-term debt with short-term money in another effort to "stimulate" the economy. Trading more expensive long-term debt for cheaper short-term debt is roughly akin to paying the minimum on your credit card. It allows you to avoid late charges in the short term but does nothing to diminish the total interest-bearing amount you owe. Therefore, you have made things better in the short term but the underlying long term problem keeps getting bigger. When you hear them talk about "kicking the can down the road" this is all they mean. It is funny (embarrassing) to hear our President scold China for manipulating their currency in order to make their products more attractive and then explaining that our currency devaluation was the unintended consequence of the primary goal of "economic stimulus". HUH?? Net results, my friends. Net results.

Employment (http://www.bls.gov/)
We write about this one almost every month so I won't spend a great deal of time on it here. We'll just hit some key stats. You can review our longer analyses by clicking on the archive buttons at this site. Let's summarize the trends ending with the most recent report. Professionals are still out of work at unprecedented rates. I keep saying that but they are, unfortunately, becoming quite "precedent-ed". The total number of those leaving the hunt for work continues to edge up. That kept the overall rate unchanged even though the picture had worsened. The average time out of work has also increased. So, of the jobs that were created, where are they? The biggest increases came in the private service providing sectors with the largest single sub-piece being temporary services. Not a good growth indicator. Manufacturing lost jobs. That leads us to GDP.

Gross Domestic Product (GDP) (http://www.bea.gov/)
They reported a rise in GDP. Be careful. As always, the truth hides in the detail. GDP includes everything produced whether it was sold or not. A big piece of the increase was inventories. In other words, a lot of stuff was produced but not sold so stuff is piling up. Remember what we said about manufacturing losing jobs? That does not bode well for demand and inventories could start collecting dust...and interest.

Bush Tax Cuts
First, inoculate yourself against the "language". The administration would have us think that they are offering tax breaks for the middles class. They are not. They are only arguing over keeping rates as they are. There was tremendous optimism in the business community that the White House position on extending the Bush tax cuts would apply to everyone following the election. Since Wednesday, November 3, 2010 the song sounds the same. The President continues to favor the extension for the "middle class" but not the "wealthy". Please remember that the definition of "middle class" and "wealthy" has been ARBITRARILY defined for purposes of this conversation. So, if we take those making $250k+per year, call them "wealthy" and let their taxes go up what effect does that have? Simple, really. You are extending existing income tax rates for the body of people who don't have any income. How will that help? This is the largest out of work group for over 27 weeks.

Job Creators
The statistic you hear about jobs is absolutely true. Seventy percent of new jobs come from small business. Small businesses usually operate as a Sub-Chapter S corporation or LLC. That means that the business pays no income tax. The owner does. If the owner's clothes and food prices are rising, demand for his products and services are declining and the tax bill is going up there is NO opportunity for growth and job creation. These are the very people we rely on to create jobs! They will be stifled even further by these conditions. Please follow this link to read the article after you finish reading this post.

http://online.wsj.com/article/SB10001424052748704648604575621061892216250.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsThird

Presidential Asian Trip
The last straw, I fear, is getting the least meaningful analysis. Our President has been on an extended international tour whose express intent was to strengthen the U.S. economy by, and I'm summarizing here, getting strong consensus against Chinese currency manipulation, lay a foundation for new open trade agreements in India and, the marquis item, seal the trade agreement with South Korea. 0-3. This is a HUGE deal for very practical reasons. Unfortunately, the "analysis" we are fed is focusing on politics and his competence as a world-stage player. Well, talk about that all you want but the analysis that matters is that the agreement with Seoul would have been an almost immediate benefit to our economy as we could have started setting up trade right away. I know the President says he is still confident we'll get something done. When? We don't have time to wait and now European countries with similar ink-ready deals will beat us to the South Korean market. That's a big problem.

The "Hows", the "Whys" the "Do You Mind If I Don'ts"
I am very aware of the socialist theories regarding Mr. Obama's desire to tank these deals, weaken our currency, set a new "normal" for unemployment, etc. all on purpose in an effort to further weaken America and bring her down a notch. I am equally aware of the theory that he is just incompetent and in way over his head. This would be a good time to review the post regarding blame and inheritance (http://blueworldassetblog.blogspot.com/2010_08_01_archive.html). None of the reasons "why" really matter. The relevant point here is that we really don't care if he is doing this on purpose or he is just incompetent. The net result of either is the same. The net result of either is bad.

For the reasons stated above we feel the table is now set for the double dip recession everyone had begun to become less concerned with. Businesses are sitting on cash with no incentive to do otherwise. Banks can't lend in spite of all the "stimulus" because their asset reserve ratios will not support lending. Massive commercial defaults are waiting in the wings. The financial reform bill has passed but many of the new rules are as yet unwritten. Businesses are proceeding as if the Healthcare law will stand but no one is sure if it will. If it does no one is sure what it will mean. A major tax policy is mere weeks away from hitting with no clear indication of what will happen. Uncertainty is an enormous impediment to growth. The stock market, which was the only place anyone was making any money, seems to have taken notice of all of the above in the past week. Profits were good. That dominated the headlines but corporate guidance was very weak. Why? Because all those CEO's and CFO's have already analyzed the same information you are right now.

With regard to your personal financial, business and investment decisions and strategies we feel it is still a time to be prepared for the worst while hoping for the best. As a nation we didn't get where we are by being lucky. We are smart, motivated, resilient and eternally optimistic. We'll be back on top. It's just that right now it couldn't seem soon enough.

Our continued gratitude for reading. We always hope we add value to your wealth building and asset protection outlooks. Stay tuned...

Q4 Is There Still a Risk of a Double Dip Recession?

"Brain surgery is not rocket science to a brain surgeon".

In recent weeks I have been answering the questions we are lately being asked most often. If you have found value in what you've read from us we would be privileged to have you click the "follow" button.

These questions are regarding issues that are billed by "experts" as complicated or hard to understand for us laymen. Hopefully I have succeeded in proving that these issues are neither complex nor difficult to understand at their most basic levels. I have come to believe that nothing is really all that complicated at its core once some common language, a little education and some basic experience is applied hence my observation "brain surgery is not rocket science to a brain surgeon". Said another way, for those of you old enough to remember these commercials, magician Marshall Brodien (Wizzo on Bozo Circus) always said "Most magic tricks are easy...once you know the secret". It's funny. I never have any trouble answering trivia questions...that I ask!

I admit that one of the phrases I hear most often from my wife and closest colleagues is "Matt, you use a lot of words". So, all of the above reviewed, I'd like to take a stab at the fourth question whose answer many of you will likely consider mercifully short.

Question 4: "Is there still a danger of a double dip recession"?

Short answer: No...and Yes.

Long (ish) answer: Please, read on.

Please begin with the understanding that the following is not political commentary although our skepticism of current and proposed policy is clear. It is not offered to foster optimism or pessimism. It is simply our opinion on the direction of the economy based on internal analysis of objective, publically available data that leads us to conclusions regarding spending decisions and investment strategies.

It can be said that recession is the significant and/or extended absence of meaningful economic growth. If you have been following the earlier stuff you know that two of the most instructive measures of economic health are the Employment Situation Summary (http://www.bls.gov/) and the Gross Domestic Product reports (http://www.bea.gov/). These, as well as most other indicators, in their detail tell us that there is no momentous recovery out there and Blue World analysts see no catalyst for one to take hold. If we (Blue World) have seemed rather cynical about the U.S. or global "recovery" is it because we do not see any objective evidence of a meaningful one occurring. So, from a really twisted perspective, I have to admit that we CAN'T see a chance for a second dip if we don't think we have emerged from the first one.

So, change the question for me a little bit. Ask "Is there a chance things could get worse?" Now the answer is a resounding and unfortunate "YES." Other posts have given some detail so I'll just offer a quick list here of what we see as ominous threats. In the face of rising deficits, rising unemployment and decreasing federal revenues I'm not sure who first said "Hey, I have an idea. Let's borrow more cash, add massive entitlements, keep interest rates low and...just print a bunch of new money to pay for it all" but it is unsound fiscal policy for reasons too numerous to list here. Taxes are going up. The increase in capital gains tax alone will retard investment. Add to that a looming commercial debt crisis, slowing construction, inflation and interest rates that can only rise from here and we already have a recipe for further economic deceleration. That's not the worst part. The worst part is the effect all this has on jobs.

Pay attention here. This is not difficult material. A full seventy percent of our economy is driven by you and me, the consumer. If we are nervous we don't spend. If we don't spend demand falls. When demand falls production slows. When production slows consumers lose jobs. When consumers lose jobs everybody gets nervous. When we are nervous we don't spend. Simple as that! The employer base, the only entities that can actually create jobs by increasing production and hiring people, reads the same data that I write about. They are powerless to increase production and add jobs if consumers are nervous and failing to spend. With unemployment near ten percent and more mass layoffs being announced every week where do we think this "recovery" is happening? Sure, there are those who point out the government is hiring. The government is no exception to these laws of economics. For the government to be an employer it can only get the money to pay employees from the private sector. If the private sector is not producing then the revenues to the government decline and they, eventually, have to effect mass layoffs just like any other major employing entity.

The private sector depends on demand. The government depends on the private sector. I'm afraid we just don't see fiscal or economic initiatives that will serve either well so we remain, as all who invest and spend real money are, very nervous and defensive for the foreseeable future...and that's exactly why things could get worse.

Short (ish) answer? I tried.

Again, thank you for reading and...stay tuned.