Biotech Values

[bladerunner1717]

Are we in a depression?

Are we looking at a Japan-like scenario in the U.S.?

It doesn't get much more bearish than this.


MARKET MUSINGS & DATA DECIPHERING
Breakfast with Dave Rosenberg (August 24, 2010)
WHILE YOU WERE SLEEPING
It’s a tad brutal overnight, with most Asian markets in a sea of red, and Europe seemingly following suit. The Asia-Pacific index sagged 0.8% today with the Nikkei off 1.3%, to 8,995, which is the lowest close since May 1, 2009 and now officially in bear market terrain with a 21% slide from the April peak. Watch the U.S. indices play catch-up.
Bonds are also rallying hard despite all the bubble talk — 10-year German bunds are a snick above 2¼%, a new record low, and 30-year bunds have rallied to 2.83% (long Treasuries in the U.S. need to rally nearly 80bps to catch up). As we have said time and again, in a deflationary backdrop, safe income is king (long governments are carrying extremely well and not only that, long-dated investment-grade corporates still command a nice 200bp premium over Treasuries).
Caution is also evident in the FX market as the yen has strengthened to an eight-year high against the euro and to a 15-year high against the U.S. dollar. At the same time, the cyclically-sensitive commodity currencies are taking it on the chin this morning, so even with the slide against the ultra-defensive yen, the DXY has rallied this morning and broken back above its 50-day moving average (of 83.3)!
In the commodity complex, look no further than the oil prices, which are slipping for the fifth day in a row; ditto for industrial metals (nickel is off 2% today; copper by nearly 1%). Nobel laureate Joseph Stiglitz is on the tapes saying that with all deference to the blowout Q2 German GDP data, the continent is facing growing recession risks amid the radical cutbacks in government spending. Bank of England official Martin Weale pretty well told the London-based Times the same thing about the U.K. economic outlook. Have a look at Eurozone Growth Loses Impetus and Doubts Over Paris Outlook for Economy on page 2 of the FT. And don’t look now but credit default swaps in poor Ireland, which has tried to do everything right to turn its fiscal ship around, have widened 100bps in March to nearly 300bps, which implies a 22% chance of default within five years. Hey, where is its bailout?
Meanwhile, long-time bull, David Wyss, who is Chief Economist at S&P, said at a Tokyo speech (how a propos) that “I think there is still a realistic possibility in the U.S. that it’s slipping into this pattern like Japan has – 10, 20 years of stagnation.” Sacrilege! How can he get away with saying such a thing? And, if you want to know what Japan looks like — a decade after rates went to zero and with a 200% government debt-to-GDP ratio — have a read of the tear-jerker on page B3 of the NYT (Japan Finds It Has Few Options in War Against Falling Prices).



But look at the bright spot, we are finally exiting the denial stage and heading towards acceptance. That, my friends, is progress in its own right. When Washington realizes that the solutions lie in supply-side policies that will promote growth in the capital stock and hiring/work incentives — education, infrastructure, payroll taxes, a coherent energy strategy (nuclear!) — and begin to abandon failed policies such as this ongoing emphasis on Keynesian short-term spending quick fixes, the adoption of “too big to fail” strategies, initiatives aimed at bailing out delinquent homeowners, measures that actually try to prevent market forces from working, initiatives that pay people to stay off work for 99 weeks with no thought behind skills improvement and training in return, and attempts at influencing the equilibrium level of asset prices, such as real estate, then indeed, when we have finally broken free from these failed interventionist and distorting manoeuvres, then we will likely have much more reason to turn optimistic.
CHICAGO!
The Chicago Fed National Activity index came out for July and rang in at a stagnant 0.0 after hitting a recession-like -0.70 print the month before. The chart below just about says it all ... the consumer/housing segment has been below zero now for each of the past 43 months, which is unprecedented.

Now we’ll tell you why this is a depression, and not just some garden-variety recession. For all the chatter about whether the recession that started in December 2007 ended sometime last year, here is what you should know about the historical record. The 1930s depression was not marked by declining quarterly GDP data every single quarter. In fact, the technical recessionary aspect to the initial period following the asset and credit shock goes from the third quarter of 1929 to the third quarter of 1933.

There was another deep downturn in 1937-38, but the initial recession lasted four years and if you read the Benjamin Roth diary, you will see the euphoric response to any piece of good news — as brief as they may have been. Such is human nature and nobody can be blamed for trying to be optimistic; however, in the money management business, we have a fiduciary responsibility to be as realistic as possible about the outlook for the economy and the markets at all times.
What is important to know is this. In that initial four-year economic downturn, from 1929 to 1933, there were no fewer than six — six! — quarterly bounces in the GDP data. The average gain in these up-quarters was 8% at an annual rate! But because they proved not to be sustainable, the National Bureau of Economic Research (NBER) refused to declare that the recession officially ended, even though the stock market rallied 50% in the opening months of 1930 on the belief that the downturn was about to end. False premise. And guess what? We may well be reliving history here. If you’re keeping score, we have recorded four quarterly advances in real GDP, and the average is only 3%.
It wasn’t really until we could put together a string of very solid GDP data in 1934, 1935, and well into 1936 that the recession definitely had come to a close and at least an intermitted period of solid growth took hold. That is, until the policy mis-steps of 1937. All that second recession of the decade proved was just how fragile the post-bubble recovery really was.
The 80% rally of 2009 that whipped up so much excitement at the time and reignited all the criticism over the “bears” and how they didn’t understand the power of stimulus and how their call over the 2007-08 meltdown was just dumb luck, will be remembered in the future about as much as the 50% rally of the 1930. It’s funny how nobody seems to recall that massive dead-cat bounce off the lows; people just remember 1930 was a period of soup lines, bread lines, and unemployment lines. Maybe it’s because we ended up with a classic Bob Farrell-like third wave — the fundamental downtrend to a new low over the next two years, and the overall economic malaise with double-digit unemployment rate lasted for another decade even with massive doses of government intervention.
We can understand how emotional the debate can get over whether or not we have actually just stumbled along some post-recession recovery path or whether or not this is actually a depression in the sense of a downward trend in economic activity merely punctuated with noise that is influenced by recurring rounds of government intervention. The reality is that the Fed cut the funds rate to zero, as was the case in Japan, to little avail (perhaps only making a bad situation less bad). Then the Fed tripled the size of its balance sheet — again with little sustained impetus to a broken financial system (see the op-ed on page A15 of the WSJ by George Melloan — The Fed Can Create Money, Not Confidence).

For all the chatter about whether the recession that started in December 2007 ended sometime last year, keep in mind that the depression in the 1930s was not marked by declining quarterly GDP every single year
What is important to know is this. In that initial four-year economic downturn, from 1929 to 1933, there were no fewer than six — six! — quarterly bounces in GDP



In fact, we could see a situation where another 4 to 5 million jobs could be shed in the United States — and in the three sectors that were, and remain, the most affected by the housing crisis and financial collapse.
For example, historically, the construction industry employed three workers for every housing start. Today, that ratio is closer to 10. This could easily mean that we see 3 to 4 million construction jobs being lost going forward, barring a major revival in the housing market, which isn’t happening.
The ratio of employees in the financial sector to outstanding private sector credit is at a new and lower level that would warrant around a workforce 500,000 lower than is the case today — just to get to productivity ratios that prevailed in the pre-bubble era. And the third sector, which is the fiscally-challenged state and local government segment, for payrolls there to mean revert to the level commensurate with the ever-declining level of public spending would also mean roughly 500,000 employment cutbacks. No doubt there are other sectors that will provide some offset in health and education and even manufacturing, but it took 25 years for these areas combined to rise five million and something tells us that the downsizing that is left in the housing, financial and state/local government sectors will occur in a much shorter period (and the latter too, if what happened recently in New Jersey is any indication, the social contract with public sector unions will soon go the way of the dodo bird).
Note that the year-on-year trend in layoff announcements, after a brief period of declines, is now re-accelerating in the three above-mentioned affected sectors. For the first time since late 2007, the financial sector posted no hiring announcements in each of the last two months and this has also been the case in three of the past four months in the real estate sector. Government sector hiring announcements, as an aside, have plunged 75% from year-ago levels. The signs are already there — get ready for another downleg in employment as the jobless claims are now suggesting — especially as it pertains to this 33 million or 25% chunk of the total workforce.


Bladerunner