I agree with the sentiment here. The US economy is likely in a recession but it will be very short and shallow one (perhaps just even stationary rather than an actual recession). All liquidity measures are shooting up strongly which augurs very well for risky assets 9-12 months out. This is especially the case as headline inflation will moderate going forward due to the recent puke in commodities.
The key question is obviously whether the new low reached yesterday was indeed the LOW. However, is the pain trade really up from here? I would doubt it but I would interested to hear other views here.
As for China, well ... I think the key here is that there was too much OPTIMISM in the first place and now everyone seems to be in the hard landing camp. I stick to what I know and people on the ground are pointing out that, for now, China is prepared to sacrifice short term growth in order to clean up off balance sheet lending and flush out overlevered property developers. Make no mistake, if it turns into 2008, they will ease quickly, but this is the point isn't.
We are no where near 2008, so people looking to China and EM for the rescue are banking on too much.
Claus
Marcf said...MM,
congrats on your content these days, I enjoy it. I used to use you as a contra-indicator but lately I am in phase and relate to your analysis and outlook.
I am rather bullish. The main macro reason is what you mention. The sovereign crisis is NOT the subprime crisis. It is one thing to short subprime and force some banks to barf it is quite another to take on the printing presses of the world central banks. Don Quixotism. Of course a more cynical analysis says that some people made a lot of money on the way down and are about to make some more on the way up. Vol is all that counts after all. I think we may be witnessing the impact of internet time noise and trading on markets with much more maniacal trading. There is a lot of headless chicken hysteria going around.
I think the memory of 2008 is still hardwired in many investors memory and so the knee jerk reaction to anything is "oh my gawd the sky is falling AGAIN", it is related to your "i told you so" blog syndrome. The policy mistakes of 1932 were not repeated, we are also not on the gold standard (meaning QE , forget the politicians they are irrelevant). Of course timing the bottom is hard.
Finally the counterpoint is of course that QE2 being finished we are reverting to a more natural level, not propped by asset inflation. We will see. However that the hard deflationary dynamics that are brought about by a liquidity crunch are NOT present today is in evidence everywhere but the chickens are running around, if anything the closest we have seen was the lack of US funding for EU banks, which was solved by other means and, imnsho, may have been a concerted attack.
Skippy said...Thanks for the posts over the past couple of days and the contributions. Much appreciated.
Having been on the short side and had the S&P move down to a level (intraday) that, in my humble opinion, is largely priced for a recession, it is hard to argue with your view.
The reason I remained on the short side until recently is that while some markets had priced a fairly severe growth/risk outcome (e.g. DAX at book value and the 10 year at sub 2%), EM, commodities, and the S&P had not. That potential contradiction appears to have largely resolved itself.
Having said that, if a rally is underway it might still be a counter-trend rally rather than a bull market rally. It has paid to fade every 'hope' rally over the past 18 months.
Afterall, another key difference between 2011 and 2008, is that there are very few conventional policy tools still available for the major economies. In 2008, central banks cut official interest rates agressively and fiscal policy was eased. In contrast, fiscal policy is now detracting from growth. Indeed, the policy prescription in Europe - austerity and bailouts have made matters worse, not better.
Clearly this is no longer a surprise - but even if the EU banks are rapitalised tomorrow it is not going to resolve the growth problem in Europe.
The counter-trend rally may be sharp, but my gut feel is that it will not be durable and one to fade.
ntwsc said...Thanks cpmppi.
I love it when you talk BBBM.
Secret--Sauce said...Not so sure that it was so decidedly anti-bullish. A certain Lefty certainly adds heft to the bullish camp (probably the result of hanging out with other lefties occupying Wall St.).
Still, one hour of market action does not a rally make. Time will tell.
As regards onyx fowls, how about a US-Sino trade war starting tomorrow at noon? Contrary to yesterday's ruminations of a certain currency piss-taker, I think it would be good for the US economy. Look at the US experience in 1929, or Japan in 1980, when we were constantly told they would own all of Hawaii, Manhattan and every N. American golf course within the year. Didn't quite work out that way.
Corey said...GOOBER - Getting Off On Bearishness Expecting Recession. That late session rally really torched some of those GOOBERs. May they continue to feel the heat.
GOOGGETS - Getting Off On GOOBERS Getting Edward The Seconded.
Whats that the contest is over? I need to get back to thinking of trades instead of TMMisms? Sorry, keep up the fine macro, hope you're right.
Hotairmail said...The 'solvency problem' versus 'liquidity problem' much cited (by Merv amongst others) is to me a rather moot point.
They have clearly attempted to solve the solvency problem with liquidity - both by lifting the value of assets and through the inflationary devaluing of debts.
It is a solvency problem. Is the solution insoluble?
Leftback said...Nice one, lads. The call yesterday and the post today were indeed timely. The 1998 analogy is a good one, and will be tested very soon!
For the nippers (youngsters), here is the historical background on the Asian Contagion:
Asian Contagion
I think everyone knows the consequences in hedge land - the classic LTCM Story. An object lesson on the dangers of excess leverage in what are normally calm and highly liquid fixed income markets, not to mention tremendous self-aggrandisement:
LTCM
Interesting footnote is that LTCM was eventually bailed out by Wall St., not the US government, and Bear Stearns declined to participate. Speculation has it that when the time came for Bear Stearns to be bailed out, their brethren were only too happy to see them go down.
Note that the lessons of LTCM were not learned!
Secret--Sauce said...You see, to be quite frank, TMM, the fabric of the universe is far from perfect. It was a bit of botched job, you see. We only had seven days to make it. And that's where this comes in. This is the only map of all the holes. Well, why repair them? Why not use them to get stinking rich?
Leftback said...Here are the charts from 1997-1999. Some elements might be familiar to market watchers.
Note the 25% decline in SPX and the modest VIX surge in 1997 for the Asian crisis followed by the big honking increase in VIX (into the 40s) for the Russian crisis/LTCM in 1998 and a second slightly lower VIX spike afterwards.
1997-1999 SPX and VIX
Thereafter, a monster rally into EoY and selling vol all the way.... not saying this is what will happen but that's why they play the games, innit?
viking said...Beware bloggers talking book
Ben said...Love the blog, always provocative. Respectfully, though, I remain in the 2008 redux camp. The primary reason is that the LCTM bailout did not require the will of the people in any way and bailout fatigue was not yet a diagnosed illness. Now, you could call me naive and say that an ECB bailout doesn't require the will either, but I don't think the German populace are going to swallow this pill on the first offering. A TARP vote replay leading to a bailout seems about the best case scenario for the bulls IMHO and we've got a ways down to get there.
Lastly, the whole China/copper crash seems only tangentially related and presents it's own potential deflationary tidal wave.
Keep up the good work,
BEn
Anonymous said...Amen!
Leftback said...As the Geordie darts commentator might say: "Double Top"?
Double Top?
No. Obviously not. LB is always wrong, after all. No chance of mean reversion....
It's much more likely that 30y yields will go to zero, junk spreads will widen to 25%, China will go from 9% growth to -10% OVERNIGHT, and the repo market will seize immediately leading to a TOTAL crash of CRE, REITs going to ZERO, banks shuttered, and tumbleweeds blowing quietly through the streets of our cities, the silence broken only by the occasional electric cars driven by the Tin Foil Hat Brigade as they venture out from the shelter to forage and barter silver bars for Twinkies, ever wary of small bands of vicious Hedge Fund Zombies roaming the landscape looking for alpha.
chancee said...It's true that history rhymes but doesn't repeat. But the weight of the historical 'event' always has to be considered. Even though lessons have been learned from 2008 and governments and banks alike have instituted policies to help prevent such calamities again, the mental scars on traders, hedge fund managers, and retail investors are still vivid. So in this case, it is hardly a matter of referring to a 'chart pattern' or a 'map' and extrapolating the future. It is the real knowledge that your book can be cut in half in the blink of an eye. Your retirement savings can be wiped out overnight. So, while we don't have the buildup of leverage in the system and some of the conditions that led to the 2008 scenario, we now have something equally as bad... the knowledge of just how bad it can get. We didn't really have that before. As evidenced by the lack of proper tail risk during 2008.
Long story short.. people will sell first, ask questions later. And that will provide the framework for a 2008 type event. Probably also why when you look back through history at events of the 2008 magnitude, there is very often a similar type event a few years after. Traders may have a contrarian gene at work, but the general public does not.
I simply don't think the '30% black swan' is in the picture because while some of the data is 'better', it's all still bad. I'd say about ten or fifteen percent up in the S & P and lots of people will start pointing this out. For the record, I think we're in more of a 2007 type of environment here. I think shades of 2008 will appear in 2012. When else?
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Leftback said...willem said...Phenomenal post. Nothing unusual about post-crisis volatility in the data and participants swoon from panic to euphoria overreacting because of the all too familiar feeling of what happened in '08. That "observation" in and of itself greatly decreases the odds of a repeat of those outcomes.
abee crombie said...regarding the CDS and the 98 crisis, wasnt it conventional thinking at the time that russia would never defualt and devalue at the same time. thats politics in the east
to say that china is default free, we you never do know. I would feel better writing CDS on Australia, US, Canada, UK etc.
I still think a 2008 crash is possible, though not likely. Why? HFT and 100% correlations.
Marshall Jung said...My simple thought was that 2008 would only repeat if and when all the people who got their hair burned off in 2008 are no longer around to apply the brakes tho those that were not around during 2008.
Thanks for the hard work TMM. This is the first blog I open in morning, every morning.
willem said...Claus - re the pain trade, I think that positioning is such that many participants do not realize just how far the consensus has leaned to the bearish side. Yesterday being the perfect example, I think there is a massive constituency of players that are desperately wanting to get long risk assets on the slightest sign of positive news, this makes sense as with ZIRP and twist many don't have much a choice do they? How many times have we all heard lately "If the credit markets look better" "If the data improves" etc. etc. then we'll get long. My sense is this could easily drive the black swan move as referenced in this post.
Per China, my boots are definitely not on the ground there but with food prices coming down in a big way, seems that inflation should be falling rapidly and easing of credit conditions could be much more palpable now, if needed to stem an unwanted collapse in the real economy driven by a (somewhat) wanted slowdown in r.e. development.
Maybe the US is on the verge of recession, or maybe we're all just not used to the massive volatility in the data that comes with post financial crises fear that drives both investors and real economy folks/firms. The really ugly picture is being painted by the sentiment data, but should we expect anything different with the onslaught of bad news from debt ceiling to sovereign downgrades to EZ bailouts? If I were running any type of real economy small business and reading about all that is happening recently, you better believe that I would put off hiring/firing/expansion decisions for now. And i think THAT is exactly why this time IS different (although I cringe whilst typing that). We must know that psychology is much different now and thus the inputs to the cycle are different and the data outputs are going to be much different. the rules of the game have changed.
As for market participants, in my view, the fact that we're so readily aware of those recent events specifically means that it is already 'priced in' per se. Not saying that things only look great from here, but i agree firmly with this post that blindly laying over charts and data to recent events is not the way to determine the most probable outcome from here.
