Is the Great Recession Over?

Good Evening: In the wake of yesterday’s beating, U.S. stocks were mostly unmoved today by a series of new stories and economic releases. Much of today’s trading desk debates centered on the current Fed meeting and the exit strategies from quantitative easing the FOMC may or may not announce tomorrow. Given the uncertainty ahead of tomorrow’s Fed decision, it is quite possible investors decided to sit on their hands while waiting to hear from our central bank. Let’s use the momentary lull in trading to examine a surprising assertion by the BAC-Merrill economics team that the Great Recession is either already over, or soon will be.

U.S. stock index futures were fairly well behaved last night, probably since overseas bourses weren’t hit too hard in response to yesterday’s sell off in Wall Street. As for today’s economic data, existing home sales rose, but econo-watchers were disappointed. The 2.4% increase didn’t match expectations for 2.9%, nor were analysts thrilled that it took a hefty amount of foreclosures to achieve the smallish gain (see below). Boeing also dashed hopes for a quick rebound today – at least in the Dow – when it reported yet another delay in its 787 Dreamliner program. Still, the major averages never did wander too far from unchanged during the session, as a weak dollar sparked some strength among yesterday’s hard hit metals, mining, and materials names.

President Obama did create a bit of a stir when he took to the podium for a press conference this morning. Though it seemed as if his primary intent was to forcefully speak out against Iran’s clerics for their heavy-handed tactics after that country’s presidential election, it soon devolved into questions about Mr. Obama’s struggles with smoking. Sandwiched between these topics were a few swipes at the healthcare insurance industry and our nation’s smokestack-belching corporations. Mr. Obama wanted to remind everyone of the legislation he has sent to the Hill in answer to these perceived ills. I will try to tackle the policy aspects of these proposals another day, but the sheer cost of these ambitious programs will only complicate future policy decisions for the Federal Reserve. They finish up their two day meeting tomorrow, and one of the main topics is quantitative easing. Some observers want the Fed to press its bets in support of lower interest rates, while many more would like the central bank to announce a clear exit strategy from all the money printing and bank reserve creation. The debate alone gives me comfort holding my precious metals exposure.

Equity market participants felt less comfortable and it was easy to see in today’s market action. Volume was on the low side and the major averages finished mixed. While the S&P and Dow Transports managed small gains, the other indexes finished with similar sized losses. One of the other factors causing equity investors to question themselves was today’s 2 year note auction. A full $40 billion went under the electronic gavel today, and the results seemed to give the lie to the notion that Treasury supply will soon swamp demand. In every respect — from the low winning yield, to the strong bid-to-cover ratio, to a high percentage of indirect bidders — the two’s enjoyed a blowout auction. Other Treasurys benefited, too, and yields fell between 2 and 7 bps across the curve. The dollar’s 1.2% drop took back yesterday’s gain and then some. The greenback’s woes helped commodities perk right back up, though. Nice upticks in energy and metals prices propelled the CRB index to a gain of 1.5%.

Now that noted bear on the U.S. economy, David Rosenberg, has departed BAC-MER and New York for a similar position in Toronto, the economics team he left behind is taking a more optimistic stance. In the piece you see below, BAC-MER economist, Neil Dutta, steps out of Mr. Rosenberg’s considerable shadow to proclaim the Great Recession is all but over. He says the turn in a number of different statistics that have historically marked the end of recessions suggest the one that began in December of 2007 probably ended in April (or will end this summer). All that remains is for NBER to affix a toe tag and submit the paperwork. Mr. Dutta’s piece is well reasoned and leaves any bear on the U.S. economy in the unenviable position of arguing against history.

Mr. Dutta may well prove right with this call, but I question the underlying premise of his argument. History has been a poor guide during the 2007-2009 period, a stretch of time that has seen quite a number of “firsts”. The economic weakness hitting the U.S. and global economies is not due to a typical, post-WWII, over-heat and cool-down cycle. This downturn is the result of a broken credit bubble, one so large that the housing bubble was only a subset of the ways in which capital was grossly misallocated. Broken bubbles are not easy to patch and reinflate — just ask Japan. I will admit that our fiscal and monetary responses to this credit crisis have been every bit as unprecedented as the problems they are meant to address, but if it was possible to print one’s way to prosperity, then wouldn’t Zimbabwe be the richest nation on earth?

I do agree with one aspect of Mr. Dutta’s analysis. He says that the end of a recession does not mean a return to growth, and he cites the 2001-2002 period as an example (which, appropriate to this discussion, followed a broken equity bubble). He fears a sluggish economy lies on the other side of the Great Recession. I fear what lies on the other side of the overly activist policy responses. And therein lies the trouble with allowing bubbles to inflate in the first place. The resulting decision sets are somewhere between poor and horrendous. I’m sure David Rosenberg would find a better way to say it, but when it comes to the economic disease that takes hold once a bubble pops, an ounce or two of prevention is indeed far less costly than the many, many pounds of cure administered afterwards.

— Jack McHugh

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The end is near or nearly here

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