Wednesday, November 14, 2012

The 2013 Recession - Part II

(perma-link: )
Now that the election is over, everything is looking rosy for a slow but steady emergence from the Great Recession.

On the other hand...
Another crash would result in an even bigger increase in pension unfunded liabilities which this coming year will take $30M out of Sunnyvale's General Fund city budget of $150M.  This is up from nothing a few years ago.  (There is another city budget which is bigger but it includes money from other governments usually earmarked for specific activities like Nova).  The general Fund is what pays for street maintenance, libraries, police and fire protection.

On the plus side, more CA city bankruptcies will clarify the law as to who owes what to whom and how much of a debt obligation a city can wiggle out of before it is Sunnyvale's turn to confront the pension issues.

A look at the stock market suggests things may not be looking great for 2013 - as in really, really bad.

If you look at the S&P 500 going back to 1994 on a chart like for SPX ( ) you see what is called a head-and-shoulders pattern described nicely here:

This is absolutely not a good sign - the "neckline" they mention is at Dow = 7,000-8,000 vs. 13,000+ a few weeks ago.  So we're talking a 2008 crash (as in "oh-my-gawd-we're-all-gonna-die") all over again.

One of the signs of this pattern is declining volume after the "head" which in fact is absolutely the case adding a confirming note to our pattern.  Volume is half what it was before 2008 and has been declining continuously since then.  

As long as we're looking at patterns, look at the last few years since 2009 and you see another bearish market pattern called a "wedge" described nicely here ("rising wedge in an uptrend"):

So a bearish pattern on top of a bearish pattern.  Ugh.

If the stock market volume is declining, where has the money gone?  The money has gone into US Treasuries and the British equivalents called "Gilts" which are showing their lowest rates ever.  For Gilts, "ever" means back into the 1700s before the US revolution.  The inflation protected US treasuries, "TIPS", are actually paying negative interest - meaning that investors are willing to take a small loss just to have some place safe to store their money.  That isn't you and me - our money in banks is insured by the FDIC.  These are big investors (mutual funds, pension funds) with many $ Billions who are sitting tight waiting for the next crash.

Where might the next crash come from?  The Euro is #1 on my list.  Spain, for example, is suffering 25% unemployment (50% among those under 30) and it just keeps getting worse.  See the Financial Times here:

What the FT seems to be saying is that Spain's forecast of budget gaps of 4.6% of GDP is such a rosy scenario compared to what the European Central Bank is forecasting that the ECB feels it would be a fool to loan it any more money. The IMF in turn, thinks the ECB is being unrealistically optimistic.  Which means Spain will pay even more for loans which will make it's budget deficit worse.  Rinse, repeat.  And there are rising mortgage defaults in Spain where even a default doesn't get you out of debt.  Sound familiar?

Greece is at the point where it is hard to see how leaving the Euro could be any worse than staying in. 

Economics Nobel laureate Dr. Krugman of Princeton and NY Times doesn't see any way out of it.  

More hopefully, the most recent edition of The Economist suggests Germany can keep the Euro together by giving Greece really low interest loans to essentially subsidize their debt until they can get their act together and pursue growth policies - like for example, actually collecting taxes.  Sounds good if you think Germany has any stomach for subsidizing Greece and that Greece has any ability to behave like a responsible government after many years of not doing so. 

Maybe Germany will leave the Euro and solve things: 

Or maybe all that money sitting on the sidelines will decide to buy stocks and send the market soaring.  I can't see why that would happen, but its hard to make predictions, especially about the future.

The 2013 Recession - Part I


Typically the stock market has a 4 year cycle with the presidential election year being the top and the year after being the worst.  Usually the decline comes from the Fed fighting inflation by raising rates but that seems unlikely soon.  So, where will it come from this time?

No matter who wins the presidency, the "Fiscal Cliff" will be only partially averted and there will be some combination of reduction in spending and increase in taxes which will take some money out of the economy in January.  Regardless of whether that is necessary for long term debt reduction, it can't be good short term.  

Germany has elections somewhere in August to Oct. 2013 so they will try to keep the Euro afloat until then.  I can't see how they can manage that for very long without writing off big loans to Greece and no one wants to do that any more.  So, the Euro starts collapsing before 11/2013 with a dramatic drop in their stock markets.  They will be weakening well before that so the International markets and European economy simply accelerate their decline after late Summer 2013.

The Fed's "quantitative easing" (QE) (printing money to increase investment and get the economy moving) by buying mortgages has driven mortgage rates to historic lows driving income investors to dividend paying stocks.  Growth investors are then driven to riskier stocks and so on down the line so all markets look better.  This has kept the market indices from falling (since those are mostly dividend paying stocks) but at some point QE stops working if everyone sees even the dividend paying companies aren't doing well because markets are collapsing around the world.

So we have a recession on top of the Great Recession.  More CA cities go bankrupt, CalPERS does even worse on investments, CalPERS unfunded liabilities explode, LA votes all their employees into 401(k)s, and every other city starts wondering why they don't either file for bankruptcy or shift everyone to 401(k)s (or both).

On the bright side, ah, well...