Thursday, July 8, 2010

10 Reasons Why We Are Heading Into Recession

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

We have entered another period similar to late 2007 and 2008, when the economic establishment had a rosy view of the economy, but a number of indicators were flashing warning signs that a major downturn was coming. Neither the Federal Reserve, the IMF, nor Wall Street correctly predicted a recession would begin in December 2007. None of these august bodies even realized the greatest economic downturn since the Depression was taking place even months after it had begun. Bullishness once again reigns supreme among the economic elites as one indicator after another is signaling trouble ahead.

Here are 10 reasons to think that a there will be a recession soon:

1. The ECRI weekly leading indicators have dropped to minus 7.7%. There has been no case since its existence when a recession didn't take place if this indicator fell to minus 10%. This doesn't mean that it has to fall that low, a recession is still very likely if it even gets close. Falling below zero and staying in that range for any period of time also signals a recession. In the 2007, the recession began three months after this indicator turned negative.

2. Global shipping has experienced a collapse in the last six weeks. The Baltic Dry Shipping Index has fallen from 4209 on May 26th to 2018 in early July, a drop of over 50%. The BDI is now as low as it was in May 2009. Its high in 2008 was 11,793.

3. Interest rates on U.S. treasuries have been falling rapidly and this indicates a weakening economy. The yield on the two-year note even hit an all-time low recently, dropping below its rate during the Credit Crisis in late 2008 when the global economy was in freefall.

4. The stock market is turning down and the Dow Industrials and S&P 500 have both given bear market trading signals. The small cap Russell 2000 has already experienced a bear market loss. The stock market peaked only two months before the 2007 recession began.

5. U.S. Consumer confidence took a nosedive in June falling 10 points to 52.9. A reading of 90 or above indicates a healthy confidence level.  Confidence hasn't gotten anywhere near that level during the recovery. Prior to the Credit Crisis, consumer spending was responsible for 72% of GDP. The consumer is the 800 pound gorilla that determines the fate of the economy.

6. The jobs picture hasn't improved and isn't likely to get better for a long time. Weekly unemployment claims were 454,00 this week. Anything around or above 400,000 indicates a recessionary environment. Claims have not even gotten that low at any point during the recovery. Surveys indicate that job offers for 2010 graduating students are few and far between. Long-term unemployment is far higher than it has been in any post-War recession.

7. Housing, the epicenter of the Credit Crisis, is getting worse. New Homes sales fell to an all-time low recently.

8. Government stimulus is declining and turning into retrenchment globally. The 2009 U.S. stimulus package's impact on the economy peaked this spring and spending will run out by the end of this year. It is highly unlikely a new stimulus package will appear in 2011. Government spending didn't just stimulate the recovery, government spending WAS the recovery. Without it, there will be a sharp drop in economic activity.

9. Taxes are increasing globally and higher taxes are a drag on economic growth. In the U.S., the Bush tax cuts expire at the end of the year. In the UK, capital gains are going up from 18% to 28% and the VAT is being raised from 17.5% to 20.0%. In Japan, there is a proposal to double the national sales tax from 5% to 10%. In the EU, countries are trying to outdo each other in imposing new and higher taxes.

10. The eurozone debt crisis is not yet resolved, but has been temporarily postponed. Greece could still default and problems are likely to continue in Portugal, Spain, Ireland and Italy. These can continue to negatively impact the global economy for a long time to come.

Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.


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