8 More Reasons Why a Double-Dip is Coming

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.


As earnings season continues and one company after another beats expectations, the economic numbers are continuing to come in below estimates. The data and indicators are increasingly painting a picture of an economy that is falling apart. Here are a few of the reasons why another recession is imminent:

1. U.S. orders for durable goods fell 1.0% in June. Economists expected them to rise 1.0%.  Excluding the volatile transportation sector, orders fell 0.6% and shipments were down 1.3%. Inventories rose for the sixth month in a row, indicating goods are being produced, but they're not moving out the door.

2. Industrial output in China fell 2.8% in June. A "potential weakening of the global economy" was cited as the cause.

3. The ECRI (Economic Cycle Research Institute) weekly leading indicators index has fallen as low as minus 10.5. There has never been a case when it has gotten this low and there hasn't been a recession.

4. The Consumer Metrics Institute's Growth Index has been negative since January and is now around minus 3.0 (it fell to around minus 6.0 in August 2008). It leads U.S. GDP by approximately two quarters.

5. The U.S. trade deficit widened in May and was the largest in 18 months. This happened even though oil imports fell over 9%. Rising oil imports are usually the factor that makes the trade deficit go up. The trade deficit subtracts from GDP.

6. After a sharp drop in June, U.S. consumer confidence fell even more in July. The Conference Board's latest reading was 50.4. As usual, economist's estimates were on the high side. A reading of 90 or above indicates a robust economy. Before the most recent recession, consumer spending was 72% of GDP.

7. U.S. weekly unemployment claims refuse to drop below 400,000, the approximate dividing line between recession and non-recession. At no point during the current 'recovery' have they gotten that low. The unadjusted number of claims for the week of July 17th was 498,000. Even though companies are reporting huge earnings increases and raising estimates for next quarter, more and more workers continue to lose their jobs.

8. The economic cheerleader-in-chief, Fed Chair Ben Bernanke, gave a gloomy report on the U.S. economy last week in his bi-annual testimony before congress. Bernanke didn't see the subprime crisis coming, nor did he realize the U.S. was in a recession in the spring of 2008, months after the recession had begun. So if even he admits the economy is weak, it must really be in bad shape. Bank of England Governor Mervyn King, has also recently stated, "Britain can't be confident that a sustained recovery is under way".

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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.

More Evidence for a Double Dip 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.


The U.S. economy continues to look weaker and serious problems with the financial system are still lurking in Europe. EU countries are trying to outdo each other to see who can increase taxes and cut spending the most. Copper, known as the commodity with a PhD in economics, is in a confirmed sell off.

U.S. Existing Homes Sales were released this morning and they came in well below expectations. This is only one of a number of reports lately where analysts have proven to be much too bullish. Despite the federal government tax credit that was juicing up home sales, they still managed to drop 2.2% (the credit expired on April 30th, but buyers have until June 30th to close and the sales figures are based on closings). The annual sales rate in May was 5.66 million units, compared to over 7 million in 2005. Inventories of homes for sale managed to drop just below 4 million last month. In 2005, they were under 3 million and the year before barely over 2 million. So a lot less homes are being sold now and there are a lot more homes available for sale. A number of sources are claiming that both HUD and the big banks are holding back on foreclosures to prevent the inventory of unsold homes from becoming even worse.

In a separate report, more people have dropped out of the Obama administrations HAMP (Home Affordable Mortgage Program) that have stayed in it. At best, this program is delaying foreclosures and it appears unlikely that it will ultimately prevent very many - all at a huge cost to the American taxpayer of course.

Meanwhile in Europe, the future stall engine for the world economy, the UK announced its plans to eliminate its budget deficit in five years. Higher taxes and big spending cuts are the approach it will be taking. Capital gains taxes will be raised from 18% to 28% (investing capital will flow to countries with lower rates) and the VAT will go up from 17.5% to 20%. Similar moves are taking place throughout the EU.

There seems to be no realization on the other side of the pond that higher taxes are a negative for economic growth. The proposed spending cuts will also have the same impact. Significantly lower economic growth and lower tax receipts are not being projected for the future however by the Europeans. Obviously they are going to be as surprised as they were by the euro crisis. Problems in the region's financial system have not gone away as is.  Fitch today slashed its view on BNP Paribas, the largest bank in the eurozone.

The augurs of a renewed recession can also be found in the ECRI weekly leading indicators, which indicated a growth rate of -5.7% last week (this number shouldn't be interpreted literally) and by looking at the price of copper. It is amusing to see the spokesperson for the ECRI trying to explain away the negative implications of the ECRI's leading indicators after the company has spent decades building up their credibility. It's enough to make one wonder if the company is changing its emphasis to providing economic cheerleading instead of an accurate view of the U.S. economy?

The price behavior of copper is confirming the ECRI data. Copper is more sensitive to economic activity than any other commodity. If you look at a chart of its ETF JJC, you will notice that the 50-day moving average crossed the 200-day on Monday producing a classic technical sell signal. Over time, copper has proven itself to be a lot smarter than the politicians that run the world's economies.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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.