Bill Gross argues that the US has already entered in a recession in December…  http://www.ft.com/cms/s/0/d8943514-af66-11dc-880f-0000779fd2ac.html  Fund chief says US in recession  By Matthew Garrahan in Los Angeles  Financial Times  Published: December 21 2007 02:00  Bill Gross, founder of Pimco, one of the world’s largest fixed-income managers, sounded a downbeat note on the US economy by saying it had gone into recession.  ”If I had to be bold I’d say we began a recession in December,” he said in a Financial Times interview, in which he called on the Federal Reserve to bring interest rates down to 3 per cent. The recession would last “four to five months”, he thought, but would be prolonged if the administration and Congress failed to “take some rather unperceived and unforecasted measures in terms of fiscal stimulation”.  Mr Gross, whose company has $750bn of assets under management, was critical of US attempts to stabilise credit markets, describing the “Super Siv” and plans to freeze mortgage teaser rates as a “temporary fix”.  He said: “What needs to be done is something fairly radical compared to Republican orthodoxy, which means spend money and absorb the deficit as opposed to pretending that you’re fiscally conservative.”  He was highly critical of the complicated financial instruments that have exacerbated the credit squeeze, saying the trend of over-leverage was a “dying concept” that would “lead to an implosion at the edges . . . of this new financial marketplace”.  He also had stern words for hedge funds, describing them as a “con”. A hedge fund, he said, was “an unregulated bank. A bank isn’t a con but a bank is a regulated entity. A hedge fund is not . . . it’s been a con on the government in terms of their unwillingness to regulate the industry.”  Mr Gross founded Pimco in Newport Beach in 1971, building it into a powerful bond manager that continues to operate from southern California. With California one of the first places to feel the effects of the subprime crisis, Mr Gross said, the company’s location alerted him early to the danger that has since wreaked havoc in world markets.  Pimco switched out of mortgage-backed securities in 2006 and for the first half of 2007 fell behind its competitors. However, in the second half it has out-performed the market as Wall Street has racked up billions of dollars in subprime losses.  He said: “I think we had the strategy correct for a good 12 months. It’s just that the markets and the economy didn’t come our way until the last six.” 

The ECRI weekly leading index fell to a six year low today, levels not seen since the 2001 recession! Oh yeah, sorry I forgot, that doesn’t matter, stocks are up big time…

 Latest from Peter Schiff, http://www.europac.net/newspop.asp?id=11164&from=home  The real risk of course is that the Fed gets more aggressive as it realizes that the additional credit it is supplying is not flowing where it wants. If the Fed drops enough money from helicopters it will eventually reverse the nominal declines in asset prices. Unfortunately, that road leads to hyper-inflation and disaster. No matter what, even if the Fed succeeds in propping up nominal asset prices, they can do nothing to sustain their real values. Consumer goods prices will always rise faster, leaving the owners of those assets poorer no matter how high their nominal values climb.  The big problem politically is that hyper-inflation may superficially appear to be the lesser evil. If asset prices are allowed to collapse, ownership of those assets will pass to our creditors. If instead we repay our debts with debased currency, we retain ownership of our assets and shift the losses to our creditors. Since American debtors can vote in U.S. elections and foreign creditors can not, the choice seems obvious. Of course there are some American creditors as well, but since they comprise such a small percentage of the electorate, my guess is that their losses will be seen as acceptable collateral damage. 

 Bernanke Printing Press on Hyper-Overdrive to prop Stock Asset prices. – Dave C.  Fed to hold special auctions ‘as long as necessary’ http://www.marketwatch.com/news/story/fed-hold-special-auctions-long/story.aspx?guid=%7BFBF127E0%2DA974%2D49C4%2DAFC0%2DD43E95B1ECC7%7D&siteid=yhoof  WASHINGTON (MarketWatch) — The Federal Reserve said Friday it would conduct biweekly auctions of short-term funds for “as long as necessary” to alleviate a credit squeeze.  The Fed auctioned $20 billion in 35-day credits at a stop-out interest rate of 4.67% in the auction held Thursday. A total of 73 banks submitted bids for $57.7 billion in the dutch-auction. The bid-to-cover ratio was 2.88.   On Monday, the Fed auctioned $20 billion at 4.65%, with 93 banks submitting bids for $61.6 billion. The Fed has provided extraordinary amounts of short-term funds to banks to alleviate a credit crunch.  

Gold market closed-time for Dow run to +400 for the day…

Real consumption spending in November was better than expected after flat readings for September and October.   What is this crap? You’re just making things up now. September real PCE was up .2% and October was up .1%

Yesterday, the Toronto-based Globe and Mail reported that a Merrill Lynch recession probability indicator is now signaling a 100% chance of a U.S. recession within the next 12 months.  ”Merrill Lynch, PIMCO: No Avoiding Recession” http://boom2bust.com/2007/12/20/merrill-lynch-pimco-no-avoiding-recession/

Boom2Bust, doesn’t matter what the smartest financial minds say about a recession because stock say no recession and according to Greenspan, you don’t want to bet against all those intelligent day-traders! LOLOL

@Boom2Bust.com  I wonder what sort of indicator can say 100% chance of recession. If things get a bit worse will it say 120%?  If I recall correctly, they had another indicator that was predicting a much lower probability of recession, in the 40-50% range. I don’t know what to make of all this. Do they think we will have a recession, or not, or they are arguing with each other?

You might be correct in saying soon “RECESSIONS IN THE US HAVE BEEN ELIMIATED FOREVER!!!!”

History sure does rhyme.  http://www.house.gov/apps/list/hearing/financialsvcs_dem/testimony_-_kuttner.pdf 

Guest on 2007-12-21 15:37:39,  Thanks for the intro which permits me to repost something composed last month. I would say that official recessions have become fewer and shorter, and that this has taken place within a long-run crisis of the capital system.   A few bits of data:  Annual real GDP growth in the world economy averaged 4.9% in the Golden Age years from 1950 to 1973, but slowed to 3.0% in 1973-92.   Western European growth rates fell from 4.7% in the early period to 2.2% in the latter.   Latin America’s growth averaged 5.3% from 1950-73, but only 2.8% from 1973-92.   Africa grew at a 4.4% pace in the first period, but at a 2.8% rate in the second one.   Asia was also the only major area not to experience a significant post Golden Age slowdown, maintaining growth between 5% and 6% for the entire era.  We get the same results if we focus on the 1990s:   World GDP growth averaged but 2.2% from 1990-98, the slowest growth of the post war era. Developed nations had an average GDP growth rate of only 2.1% from 1991-98.  Latin America growth averaged 3.2% from 1990-97, marginally better than in the “lost decade” of the 1980s, but much lower than in the Golden Age.   Africa showed GDP growth of only 1% a year from 1990-97.  Asian economies grew by 6.5% from 1990-96, prior to the outbreak of financial crisis in that region.  Other performance indicators, such as average unemployment and productivity growth rates, show the same pattern.  OK,,, US GDP growth averaged 4.2% a year from 1959-73, but only 2.6% in the Neoliberal years from 1980-98.  From 1990-98, growth was only 2.5% per year.  Annual growth in labor productivity fell from 3.2% from 1959-73, to under 1.3% from 1980-98; it was 1.4% in the nineties. And the average US unemployment rate, which was 4.8% from 1950-1973, rose to 6.6% in 1980-98.  [-Angus Maddison, Monitoring the World Economy 1820-1992 (Paris: OECD, 1995), p.60. -World Development Indicators 1999 (Washington, DC: World Bank, 1999), p. 4. -United Nations Conference on Trade and Development, Trade and Development Report (New York: United Nations), various issues. -Council of Economic Advisers, Economic Report of the President (Washington: United States Government Printing Office, 1999) In Crotty, 2000]  The progressively greater shift into credit inflation driven finance and attendant building of bubbles has been a reaction to long-run, not just U.S. but systemic, decline which, at least for many in the developed nations, has been more less hidden behind the Casino’s flashing bright neon.  If the now globalized credit structure with its generation of artificial demand breaks down, what has been a long-run ‘managed depression’ becomes perfectly overt. Much would have been avoided had the ‘managers’ stepped aside in 1979. Yes, the Volker Fed helped bring down the rate of inflation but this had most to do with salvaging bank capital’s rate of profit just as Reagan’s investment tax credits and accelerated depreciation allowances were meant to prop up industrial capital. The 1981 Tax Act was bailout through other means and added fuel to globalization.  I get the feeling that we’ve run very low on, or out of, options…which doesn’t mean that even such as direct nationalizations won’t be attempted.  From a more current perspective, lets consider 3Q07 GDP which, if I recall, was initially reported as 3.8 then revised to 4.9 percent, even though as Ritholz and others noted:  ’Residential fixed investment, the GDP component that includes spending on housing, plunged by 19.7% in the third quarter (but Investments in structures increased 14.3%).  Profits for the 3rd quarter flipped negative, dropping 8.5%.  [C]onsumer spending falter[ed], with the crucial opening salvo of the holiday weekend down 3.5%.  [S]econd-quarter wages were revised lower by $44.8 billion.  [R]eal disposable incomes fell 0.8% in the second quarter, instead of rising 0.6% as the Commerce Department had previously reported.’  How could growth have been so strong? Easy. ‘Q3 prices saw significant increases, yet the price index deflator was a 9 year record low of 0.9%.’ By understating inflation, GDP is overstated and, from what I saw at the time should have come in around 1.1 percent, which is fully within ‘growth recession’ territory.  But, how about all that supposedly strong employment?  Well, turns out that the same BLS which provides the heralded monthly figures also publishes a more complete quarterly series, Business Employment Dynamics (BED). Or, from Yves Smith (5/30/07):  this series reports detailed gross job gains and losses in the private sector based on nearly complete coverage “of the employment universe provided by the unemployment insurance system.” More painstaking than the familiar monthly surveys of employment, the tally is published with a lag of several quarters; the one released earlier this month, for example, was for the third quarter of 2006. What it showed, though, was eye-opening.  Thus, compared with a gain for the quarter of 442,000 jobs reported in the so-called establishment survey, the Business Employment Dynamics, or BED, reckoning was a scant 19,000 additions. In manufacturing, the 9,000 jobs lost according to the payroll figures balloon into a loss of 95,000 jobs in the BED data; the improbable 20,000 additions in construction (think: housing) turns into a loss of 77,000 by BED’s measure; the 507,000 gain in private services shrinks to 108,00. And so it goes. Or, more accurately, so goes the job mirage.  One likely culprit, Philippa and Doug suggest, is that curious concoction known as the “birth/death” model used by the Bureau of Labor Statistics to estimate the gains/losses in jobs from the launching and demise of businesses. Thanks to this voodoo calculation, 156,000 were added in last year’s third quarter and a hefty 388,000 in the opening four months of this year. Nice going, indeed, considering that first-quarter GDP growth probably, when the dust clears, will have fallen below 1%, and April was a punk month.  All of which, among other things, solves a puzzle that seems to have bothered quite a few people: namely, how can the economy be running out of steam when there’s relatively little unemployment? The answer, pure and simple, is that there are significantly fewer folks working and significantly more folks out of a job than the official payroll numbers would have you believe. The next time someone assures you that the employment picture is bright, make sure he smiles when he says that. (emphasis added)  As we have laboriously argued over the past few years, this has not been a great post-recession cycle for private sector job creation. It has been a boom time, however, for creative accounting in government measurements.   The bottom line: New job creation has been mediocre, and wildly overstated by BLS since changes made to measuring jobs in 2001.‘  My oh my — overstating growth (and the above is not the only example); overstating employment; downplaying weak nonres investment; hyping so-called record profits even when, if properly calculated as a relation to total capital rather than GDP or national income, the rate has been low and anything but ‘record’ — I can only say that the U.S. has never in fact recovered from that ‘b
arely noticeable’ 2001 recession.  The so-called recovery has, as we all should know, been almost perfectly a function of credit supported unproductive consumption, itself dependent on that which has ended, an extreme house price inflation and ability to monetize this.   Uh, central banks to the rescue? Sure, but you see, the decades of financial deregulation and rise of non-bank banks as financial intermediaries, well, threw a big wrench right into the guts of central banks’ abilities to control anything, including inter-bank rates among members.  Differently, counter-cyclic policy use has a lifespan. Theoretically, governments and central banks might overcome this but even within theory only at cost of internalizing it and a self-destructive internalization which could take down govts as well. NB that there is no global central bank, no real lender of last resort as, no matter the partnerings, every CB is a national entity which seeks to displace problems to others. 

THE UNITED STATES IS A MORTAL THREAT TO IRAN!    Per capita military expenditure in Iran is $92 compared to over $1500 in the USA. There is no question that the USA is a much, much bigger threat to Iran – occupying countries either side in Afghanistan and Iraq – than Iran is a threat to the USA.   Iran has not attacked another country for over 100 years compared to the history of agression against many other nations by USA.  On the other hand, those pesky Iranians are sitting on the second largest oil reserves in the world.

Brian Wesbury’s commentary on the economy and markets will be one of the 2008 candidates for the “Can’t See The Forest Thru The Trees” Blooper Award, no doubt. Love the “ex-housing and banking, the economy’s booming!” comment….Hmmmm, yeah, oil and food/staple stocks are skyrocketing thanks to a 7-10% inflation rate here in the US…It’s ALL GOOD!!  And this guy actually makes a living spewing such garbage to the public herd?   Save the video, it’ll be priceless in due time…  IMO

I would say that it should be admitted that economical system is like any highly complex system http://en.wikipedia.org/wiki/Complexity_economics . Other analogy in terms of complexity would probably be climate system. How easy it is to predict how many hurricanes there will be in a season and how severe they will be? How easy it is to time a recession exactly and it’s severity and duration for example year before? Has anybody succeeded perfectly or near perfectly in either of these? Has this individual then been able to repeat their predictions accurately later on with another incidents?  The inherent complexity of economics explains why it is at least very difficult even if not impossible to predict economical phenomenom within one trading day in stock exchange to not to talk about predicting economy in terms of months or even years. To count out luck one should be able to succeed in predictions several times one after another.  Think about behavioural patterns of one individual person in economics not to talk about herd behaviour of people counted in thousands, millions or billions. How people react to good or bad news and adjust their behaviour counting that every human being is different, reacts differently and influences differently to other persons around. There are large amount of economical motivation factors affecting one person not to even to count the interactions of these factors over a network of people. Any model need to reduce the amount of variables to retain computability. But as in any non-linear model the limitations in terms of used information highly reduces the capabilites to predict future. Think about weather forecasts. People believe in them and later on wonder why they are giving so lousy forecast for the next day. These models are just limited in terms of information even huge amount of information is processed to produce a prediction for the next day or few. Further in time you try to predict and more complex the system is higher the inherent complexity will be and there is very little that can be done nowadays about it.  Then ask why there is need to estimate outcome of economical activity and ask could you live with the fact that persons with the best expertise and highest power would say: we don’t know where the economy is going and we are just doing a best guess. Think about the effect to an average citizen. Wouldn’t one be scared and might start behaving against the common economical interest of nation? Maybe you as leader just say that economy is fine or economy is strong and if there are problems you just say that we have reached bottom and are already on our way back up. This given even models or predictions would be highly contradictive or not really giving any clear picture about the future.

INSIDE VIEW: Rate Cut Emerges As Option For BOJ  TOKYO (Nikkei)–Although the Bank of Japan left its monetary policy unchanged Thursday, the possibility that it may cut interest rates is becoming increasingly real in light of growing uncertainties over the economic outlook.  http://www.nni.nikkei.co.jp/  What is left to be cut?

J. on 2007-12-21 16:35:47  Many thanks for another great post! I truly enjoyed reading it!

Guest: “You may be a serious economist but your blog is followed by a bunch of survivalists and kooky anti-government Peter Schiff followers. “  Well, let’s look where we wound up at the end of 2007. And keep in mind, lots of “perma-bulls” said the Dow would be heading to 20,000 by this time.  * Many of our US largest investment banks are now insolvent, if they were to mark down all their assets to actual market values. Right now they are scraping by – by bending the rules, pretending the assets are worth more, and passing off their worst debts to the Fed as collateral. Consider this. Suppose you went down to your local bank and offered your current used car as collateral on a loan – but you insisted the bank give you full value if it was brand spanking new. How far would you get?  * Tent cities are starting to spring up on the edges of US towns, and even in some cities. These are people made homeless by foreclosures. Yet at the same time, Wall St is preparing to pay itself many billions of dollars in Christmas bonuses. Billions. A paltry bonus of $20,000 is considered an insult. But … don’t some of these very same people work at the banks and brokerages that are actually insolvent??  * Our banks don’t trust each. In fact, since they all know that their mortgage-based assets are nothing but a shell game, they are not even willing to trade with each other in the money markets.  * Real inflation is running at probably 8-10%, but the Gov’t is claiming only 2-3%. This is putting Americans on fixed incomes in economic distress. Right now one category of people who are going bankrupt the fastest in the USA are people over 65 years of age. But these are the same people who worked in their youth to make America a strong country. They didn’t create massive Gov’t deficits. In fact, they worked hard to try to avoid them.  The America that you see today is a far cry from the America that existed even 40-50 years ago. Under the current trend, our middle class is going to be slowly but surely eliminated. And many of our citizens will be working for foreign bosses. Is this “freedom and opportunity for all?”. Sadly, the people in charge of our country are figureheads and aristocrats. We have no real leaders any more.  And these words … from someone who tries to keep a balanced view of things.  PeteCA 

PS He says the same thing every month about consumer spending.

PeteCA  Time for another cocktail, Pete!  Season’s Greetings.

$VIX sorta broke down today. $GOLD should be trying a break out next week. 10 and 30 yields moving up off higher low. NR, you are wrong. no recession. for god sake, burn your degree and resign as economist. two years of recession not getting right is just too insane.

“* Our banks don’t trust each. In fact, since they all know that their mortgage-based assets are nothing but a shell game, they are not even willing to trade with each other in the money markets. “  true, that is why they have to go to FED for money. well, may be this time is different. banks don’t have to trust each other. they just need to borrow from FED. hey, FED keep the discount window open and wide.

“But here is the problem: who has the ability to borrow any more? “????  Are you saying no one is borrowing from FED? quite contrary, alots of banks borrowed from FED. at least 40billiion+. not only they borrowed from FED. they borrowed from foreigner. trust me, no one can refuse cheap money. the only thing matter, is there anyone willing to lend, yes that will be FED.

Octavio Richetta on 2007-12-21 18:48:10,  Thank you, I guess it’s evident that context is important to me, sometimes too much so but at least that perpetuates the beneficial tensions between determinism and the uncertainty of possibilities.  Please have a good holidays

Slumlord on 2007-12-21 16:16:54   This should be a relevant follow up to your Kuttner link.    http://www.nytimes.com/2007/12/18/business/18subprime.html?fta=y

  Barron’s cover this week (if a bit too late) deals with the rating agency monopoly:  http://online.barrons.com/article/SB119809206941640049.html?mod=9_0031_b_this_weeks_magazine_main ($)  Failing Grade By JONATHAN R. LAING  THOUGH WALL STREET WAS SLOW to realize it, July 10 turned out to be Pearl Harbor Day for the global credit markets. On that day, credit-rating giants Moody’s (MCO) and Standard & Poor’s both shocked investors by announcing separately that they were taking negative rating actions against nearly $20 billion of 2006-vintage subprime-mortgage bonds because of spiraling delinquencies and foreclosures on the loans.  The credit downgrades have only increased since then, with Moody’s alone chopping the ratings on more than half the 2006 subprime residential-mortgage-backed securities it had rated, including a whopping 97% of the slices, or tranches, it deemed single-A or below, according to a compilation made by Morgan Stanley Fixed Income Research.  Even worse has been the stunning speed with which the ratings agencies have acted. Investors in some $800 million of asset-backed commercial paper in Rhinebridge LLC, a bank-sponsored structured investment vehicle, or SIV, filled with U.S. subprime debt, suffered whiplash when the paper and related medium-term notes swung from S&P’s highest credit ratings to default in four days in October. And this followed a Moody’s report in July titled “SIVs, An Oasis of Calm in the Sub-Prime Maelstrom.” Such precipitous ratings declines have come to be known as express-train downgrades, since there are no stops between Blue-Chip Land and oblivion.  All of this has landed the credit-rating agencies in the crosshairs of Congress, the Securities and Exchange Commission and several state attorneys general, just five years after the industry was taken to the woodshed for its failure to suss out the impending collapse of companies like Enron and WorldCom.  That spasm of reformist zeal resulted in the 2006 Credit Agency Reform Act — but the law clearly didn’t go far enough. That’s why Barron’s now proposes some fresh and far-reaching measures to fix the rating system, starting with steps to greatly increase competition. Moody’s and Standard & Poor’s have held far too strong a grip on the industry for anyone’s good. It is high time for a change.  …

@Bender on 2007-12-21 22:34:30  SDS on margin is probably a good bet!

Although I am no economist, but I think restaurant business tells you a world about the current state of the economy. If you are feeling financial stress, you start cutting back first with luxuries like eating out. http://biz.yahoo.com/ap/071220/apfn_casual_dining_sector_snap.html?.v=2

You don’t need me to tell you that you are right, but I do have a quibble with the “suckers’ rally” explanation of the strength in the stock market that you introduced on the Kudlow show.  The strength in all the “safer” markets, bonds, stocks, commodities, even currencies is a demand side phenomenon. I wouldn’t put my own money on the bet, but it looks to me that this will be the first significant recession where the markets don’t tank. That is, the stocks aren’t worth much, but there is a need for some place to invest in real stuff that may be safe from inflation. In its own way, stocks could be considered a leading indicator of inflation, rather than, as usual, a leading indicator of recession. 

  Ambrose Evans-Pritchard quoting, Peter Spencer, chief economist for the ITEM Club:   ”The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard.They still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don’t think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park.”    E-P later adds: The risk is a Japanese denouement across the Anglo-Saxon world and half Europe.  

What amazes me is that Crudlow would actually invite someone to appear on his show who really knows something. Most cable news/economy shows use hacks that the channel already has hired and is paying for and who don’t need to know much of anything.