All is fine!

"The question is, does a recession seem a
plausible scenario in the current circumstances … with inflation near
post-World War II lows, corporate profit margins at record highs, an
unprecedented global awakening underway, financial signals [credit
spreads] still at good-time lows? Please!"

JPMorgan economist Jim Glassman


The complacent Goldilocks crowd is hoping that if they just keep repeating their mantra "All is well" enough times, people might actually believe it.

That approach has turned out to be less effective than it was in days gone by, thanks to the interconnected nature of global markets — a slowdown in the US economy impacts most other markets, especially those whose economies rely on exporting their goods to us

In other words, mere happy talk here can no longer stave off sellers halfway around the world. With Japan, China and the rest of  Asia getting whacked again, and Europe following suit, the open here is likely to see some bloodshed.

What are the hopeful pleas of the soft landing  proponents? Consider this short list, and our counters:

1) Corporate America remains healthy

The good news is that corporate balance sheets are the best they have been in years. The bad news is that this matters a lot less than you would think. The lift under major corporate strength has been earnings — which have been decelerating for quite some time now, and are likely to get worse, not better in the near future.

The strength there is somewhat deceptive. A vastly disproportionate amount of S&P500 earnings have come from Oil & Material companies. As the economy slows, that will slip.  We also see alot of M&A/Private Equity driving the Financial sector. A shift in Psychology is underway, and that is likely to look different if this selloff accelerates. Third, a lot of financial engineering has occurred. Share buybacks are responsible for about a third of earnings gains. Bottom line: S&P500 earnings remain a lot more vulnerable than most people realize.

Then there’s the profits at a cyclical peak:  Earnings cannot grow faster than GDP + inflation indefinitely. As we have pointed out before, this profit cycle has been driven by cheap labor, cheap money, and tax breaks — not organic demand. 

2) The GDP report wasn’t all bad.

That’s true:  2.2% isn’t zero.

However, it is not 3.5%, either. And, its trending lower. Even more importantly, it does not reflect the thesis that helped the markets power higher from December thru February: That growth was reaccelerating, that the soft patch was behind us, that a soft landing might not even be necessary due to the robust economic environment.

That turned out to be dead wrong: Housing is already in a recession, as is Autos and most Manufacturing that are not cheap-dollar-export-dependent. Durable goods have been weakening along with Housing, and Business Investment — which despite the Bulls forecasting a rebound for 3 years — is now near a 3 year low, with more weakness likely on tap. 

The "contained sub-prime debacle" and the "not dependent on housing consumer" turned out to be Fairy Tales — like Goldilocks herself.

3) Jobs remain key.

Its stunning that this keeps getting trotted out, but let me repeat it in CAPS for those who have have somehow missed it: THIS HAS BEEN THE WORST JOBS RECOVERY IN POST WAR HISTORY.

We’ve mentioned this repeatedly over the past 3 years, most recently here and here.
(Its simply too tiresome to expound on this any further yet again)

4) Federal taxes keep pouring in.

Temporarily true, primarily due to a number of factors and one time events.

But if you want to get closer to where "the rubber meets the road," have a look at State and Local tax reciepts. They are  in near crisis mode in many places, as Income gains, Hiring and Consumer Spending are all off of where they should be at this point in the cycle. Productivity gains are clearly a double edged sword this cycle also.

For The Liscio Report’s prior take on State Tax reciepts plummeting, see #3 here


Of course, whether you should be even listening to the sunshine crowd in the first place is an entirely different story. Consider this last detail, via the Sunday NYT:

"The Economist reported that in March 2001 — the month the last
recession began — 95 percent of American economists believed that there
wouldn’t be a recession. In February 2001, the 35 professional
forecasters surveyed by the Federal Reserve Bank of Philadelphia
collectively predicted growth at an annual rate of 2.2 percent for the
second quarter of 2001 and 3.3 percent for the third quarter. It’s as
if meteorologists stood outside as the storm clouds approached and
informed television viewers that endless sunshine was ahead."

Bottom line: A recession remains a much higher possibility than most economists acknowledge. Watch their ongoing denial for signs of acknowledgement — and then go the other way.


Don’t Use the Market to Predict a Recession
James Pethokoukis
US  News & World Report, February 28, 2007

The Forecast for the Forecasters Is Dismal
NYT, March 4, 2007

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  1. jmf commented on Mar 5


    here is another piece from business week that is way too optimitic

    business week cover story ” what the market is telling us” and business week isn´t……

    highlight is this quote from a guy named jason trennert (must be a comedian…)

    “He goes so far as to suggest that the Standard & Poor’s 500-stock index
    itself, if it could be packaged into a single entity, would be a screaming LBO candidate”

  2. dblwyo commented on Mar 5

    Barry – here, here. That said, and for the record, YOY GDP growth in Q4 was 3.07% while Q3 was 2.95%. Consumption rose while investment fell, mostly due to real estate but with a suprising drop when you look under the 3rd layer of covers in business spending. Corporate profits have been high because they’ve re-direct those huge cash flows away from capital spending and hiring – the two future oriented decisions. That is growth is not organic. Whether this turns into something more depends on whether or not Consumption turns down seriously. So far it hasn’t but watching for early warning signs will be useful.

    Meanwhile the Housing ATM (the Fleck meme) will dry up as the credit crunch of rising standards and resets rolls out. Here’s the really interesting question though, or series: will the contagion spread into the financial sector as CDO/CDS leverage unwinds ? Will the Yen – and related carry trade unwind ? Will the buyout market, where the funny money for the Hedgies and PEGs is as funny as housing follow suit ?

    If Gross is right that this has been a financially driven market rather than a fundamentally driven one, based on liquidity, what happens as it drys up ?

    Now there’s a topic worth investigating.

    Bon Appetit’ et Bonne Chance.

  3. jagmohan swain commented on Mar 5

    If the rest of the world market didn’t exist the Goldilocks crowd would have gone on beleiving and trumpeting the phony statstics published by Govt officials.So you could bet that they would have continued taking the Dow to 14000 or may be more.Everytime market was attacked by bears since summer rally started Goldilocksters ably aided by Plunge Protection Team ensured that 401K accounts remain bloated, ensuring a smooth landing for MEW-addicted US consumers.While PPT can save US market when Global markets are doing fine they can’t save it when world markets all around
    started crumbling.It’s amazing that Hedgies who are supposed to do their research are becoming aware of all the bad news surrounding the economy now that market worldwide is beginning to plunge.One wonders why ’cause these are the same news that got trashed out in disdain by the same crowd earlier.As Flick says there are plenty of Dead Fish among hedge fund community, fortunate we are that
    Barry isn’t one of them.

  4. kharris commented on Mar 5

    The excellent circumstances cited by Glassman have been sufficient to provide growth in the 3% to 3.5% range. Presumably, less than excellent conditions will lead to slower growth. It seems an open question whether historically “good” cost of credit is sufficient to stave off recession when historically “excellent” cost of credit got us less than historically excellent growth. Fact is, it took historically large fiscal and monetary stimulus to engineer historically normal growth, and both forms of stimulus are now reduced.

    It is also seems rather like whistling past the graveyard to ignore the implications of very low credit spreads for risky classes of debt. Less risk appetite will change the cost of doing business for risky enterprises, and that itself will presumably lead to reduced growth.

    When looking at historic norms offers comfort, we should look at change from recent conditions. When looking at change offers comfort, we should look at historic norms. That is how we make sure we aren’t kidding ourselves. We may still choose to take on risk, but at least we’ll be fully informed when we do so.

  5. Josh commented on Mar 5

    Reminds me of the guy in Animal House telling the crowd “All is Well, there is no need to panick” just before he gets trampled.

    At least Barrons ran a story this week that this is not a bear market based on two key points: “We ran a similar article in July and we were right” and “Warren Buffett bought stocks in the 4th quarter (which was 3-5 months ago) and you can bet he will be buying again”.

    Someone telling its readers that they were right before so they are right now, and the threat that Warren Buffett will be buying. I took 1 logic class in college and that was enough to dispel that worthless cover article. They should be ashamed.

  6. Barry Ritholtz commented on Mar 5

    That was where I pulled the quote for the post title from

  7. Dan commented on Mar 5

    The global selloff continues this morning, as both Asian and European mkts are hit again. The Nikkei is down 3.3%, the Hang Seng is down 4%, the CAC is down 1.7% and the Dax is down 2%. The Yen continues to rally in tandem, up over 1% against the $, bringing it to levels not seen in three months, and up over 2% against the Pound.

    All the while, we enter a week heavy with economic data, beginning today at 10 with the ISM non-mfg index, exp 57 down from last month’s 59. Over the course of the rest of the week, the mkt gets Productivity data, Factory orders, Pending Home Sales, Jobless claims and then on friday, the “all important” Employment report.

    And lastly, with respect to the subprime mkt that has caught so many people by surprise (we wonder why?), NEW is the subject of a criminal investigation, and FMT agreed to a cease-and desist order from the Govt, and is now looking to sell its subprime unit.

  8. MarkM commented on Mar 5


    Sounds like a formula to RALLY IT UP!

  9. brion commented on Mar 5

    a comment by China’s top banker that the yuan’s trading band may widen gave another excuse for traders to unwind the carry trade.
    Zhou Xiaochuan, governor of the People’s Bank of China, over the weekend said that China is willing to considering widening the yuan-dollar trading band, which currently is limited to moves of just 0.3% in each direction daily.
    “It adds to the perception that Asian policymakers are giving concessions to U.S. Treasury Secretary Paulson on the eve of his trip. In the current carry-unwind environment, it is positive for yen.”
    The yen usually trades as a proxy for the yuan due to the limitations of the Chinese currency’s movement. The dollar on Monday fell to 7.7445 yuan.”

    Question: Is that a concession to Paulsen or a kick in the ass?

  10. donna commented on Mar 5

    If JP Morgan thinks things are so great, maybe they can FINALLY settle my mom’s estate that they’ve been sitting on for over three years now, send us the rest of our money they’re stealing fees on, and we can be done with them.

    Did I mention I hate JP Morgan with a passion?

  11. yc32 commented on Mar 5

    In China, India, Brazil, Australia and Europe, growth has not decelerated. It doesn’t seem likely US will go into recession soon while global economy is healthy.

  12. angryinch commented on Mar 5

    Glassman doesn’t exactly have a sterling track record for his timely soothsaying. Anyone remember his call for Dow 36,000 in 1999?

    Odd that he should publish a book entitled “Dow 36,0000—The New Strategy for Profiting from the Coming Stock Market Rise” at a time when the Dow had already risen 400% in the prior nine years, not to mention 1,400%+ in the prior 17 years.

    Hard to fathom someone talking about the “coming” market rise when you look at numbers like that.

    I have no idea where the market goes from here. Maybe it goes to 36K directly with no more than a minor 10% drop every so often.

    But I can guarantee you that the next time we make an important top (like 1929, 1937, 1973, 2000, etc), we should expect to be hearing exactly the sorts of things we are now hearing from Glassman, Krudlow, Laffer and the rest of the bullyboys.

    That’s how it worked in 1929 and in 1999. It’s the nature of things for folks to think the future looks bulletproof at the top.

  13. howard commented on Mar 5

    angryinch: it’s a different glassman.

  14. angryinch commented on Mar 5

    Well then, never mind.

    But the same point holds. Market tops are ALWAYS characterized by rose-colored pundits promising “acres of diamonds” ahead. The kind of puffery we have been hearing is EXACTLY what should be expected at important inflection points. Whether this will turn out to be one of those times is impossible to know right now.

  15. Bob A commented on Mar 5

    And then there was Bob Pisani the other day on Fast Money telling us the subprime problem was due to “a couple of twenty year olds making loans to unqualified buyers”.
    Excuse me… a couple of hundred thousand twenty year olds sponsored by Alan Greenspan, The Federal Reserve with minor roles by MER HSC WFC C WM CFC NEW NFI IMH etc etc etc etc….

    And these were the guys who held the 80% part of the 80/20 loans that were commonplace for the last few years. The 20% part, the floating rate subordinated part of the loan for the equity that in most cases has now e V A P p O r a t e d … wait till the cows come home on those lenders, who have somehow mangaged to stay out of the spotlight so far. Lots of smaller and more local banks involved in that side of the loan. It ain’t over yet folks.

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