V-shaped explosion [WILL LEAD TO COLLAPSE]

ASIA Times ^ | Apr 21, 2010 | Martin Hutchinson

[expat_panama]

Commentators, including the egregious Federal Reserve chairman Ben Bernanke, are increasingly claiming that the United States is in the process of a V-shaped recovery from the Great Recession. Certainly first-quarter gross domestic product (GDP), to be announced next week, is likely to show a substantial bounce, albeit not quite the inventory-driven 5.6% annualized growth of the fourth quarter. Yet commentators should be careful what they wish for: a V-shaped recovery is likely to lead not to a prolonged period of healthy growth, but to an economic explosion and collapse.

This may seem counter-intuitive. You would normally expect a period of above-normal growth after such a deep recession, whatever the political environment. After all, even in 1934, a year in which the federal government was taking a hatchet to the banking system and capital markets through the Glass-Steagall Act and was micro-managing wages, prices and product specifications through the National Recovery Administration, US GDP, it is now estimated, rose by an extremely healthy 10.9

[snip]

The recovery may be V-shaped in the next quarter or two, but it is very doubtful indeed whether it can continue to be so for long enough to define itself as a true recovery rather than merely an intermediate bump in a "double-dip" recession.

[snip]

In other words, a true V-shaped recovery is impossible, at least without some very unpleasant consequences indeed. Presumably in the latter stages of a rise in inflation towards 20-25%, even Bernanke would be forced to recognize its existence and raise short-term interest rates from their present derisory levels - which would itself cause a crisis in the financial and housing sectors.

[snip]

[EBH]

are the beginnings of the inflation that our execrable economics reporters are claiming doesn't exist

The inflation is there and for these experts it seems to be hidden or they are in denial. A website I visit has a $45 Emergency meal plan posted and now that plan has been price corrected to a little over $70 for the exact same foods. The menu plan is not anything at all fancy. Lots of bean, tuna, peas etc.

Gas is already approaching $3@gallon here in my area and suspect for some is already more than that.

My budget has been tight for the past year and prices are forcing me to look for other work to keep my head above water.

I am very worried about the financial events 6 months from now. All these new taxes on the horizon for who knows what new causes/crisis.

I don't think the experts see it yet, because they don't feel the effects yet.

[Cheetahcat]

There is no industrial base and the energy keeps going up with more taxes on the horizon,That guy is deaf and blind!

[NVDave]

This will be a concern going forward. Already we’re seeing the “miles driven” stats from the DOT is down in the last two months. Here’s last month’s report:

http://www.fhwa.dot.gov/ohim/tvtw/10febtvt/10febtvt.pdf

and some more for January:

http://www.fhwa.dot.gov/ohim/tvtw/10jantvt/index.cfm

I like to use three months’ data before calling anything like a trend, but it appears to me that people are noticing that fuel prices are going up. I can tell you that diesel has gone up very rapidly here in the west - I used to be able to find #2 on-road fuel for only $2.40 +/- as recently as last October. Now... it is over $3.00 and climbing fast. Over $3.00 and the truckers start to notice it very quickly.

[Buckeye McFrog]

the source for this is The Asia Times. I am sure from an Asian perspective this does look like a robust V-shaped recovery, as American businesses are trying to offshore jobs as fast as they possibly can to escape crushing Obama taxes and regulations.

[blam]

“Why don’t they seem to care?...”

America’s Economic Recovery Is a Rotten Sham

"The economic "recovery" we are now witnessing is based on theft, greed and deceit. It's a giant rip-off, a rotten sham. In this sleazy imitation of a free market economy, liars, cheats and deadbeats are the ones getting rewarded."

[sickoflibs]

RE :”Somehow, somewhere in there, there's an analogy for the coming crisis...Simple folk happily staying warm and snug, never bothering to educate themselves. ‘

I am sure that this situation is much worse than the last one (in 2002) . But we can still look back at the crash of 2007-2009. It was only slow economic growth and fear of banks closing that kept the dollar from crashing the past year or so. But anything that looks like a recovery will cause increases in food, energy and raw material prices to skyrocket threatening the recovery (ala 2007-2008.) Raising interest rates by pulling back money will cause a crash too.

Peter Schiff was right, our elected (esp Obama) have not found the magic free lunch they promised us. But Obama just wants to get through the November elections as with that text you posted.

[HereInTheHeartland]

“Dead cat bounce.................. “

Don’t be to sure about that. Companies have put a lot of bad times behind them; the economy is showing many solid signs of improvement.
The consumer is in a much better place than 2 years ago.

Also many companies have taken write offs for bad debt the past 2 years. The still hold that debt; and some of it will come back on their books as earnings.

[Red Badger]

I wish I were as optimistic as you.........................

[MeneMeneTekelUpharsin]

More lies. Only when almost everyone begins to say we are recovering will any downturn occur. People who invest in securities which do well on a downturn are abosolutely losing their shirts right now.

[HereInTheHeartland]

I'm trying not to be optimistic or pessimistic; just trying to observe what is really going on.
I don't want my dislike of Obama and his policies to get in the way of making good financial decisions.

We survived Jimmy Carter and FDR (and prospered); hopefully we will survive this guy.

Many people don't give enough weight to the “crap” that has been cleaned out of the financial system; and Americans lower debt load, in my opinion.

Also company balance sheets reflect at lot of past pain and write offs. There isn't a lot left to write off going forward. Again in my opinion.

[combat_boots]

Great post, blam

[Toddsterpatriot]

First, it would remove the subsidy for banks to “borrow short and lend long” by investing their balance sheets in Treasury securities

and they’re happy to sit on the sidelines, borrow short and buy long risk-free paper to create profits out of nothing.

Can you show me this supposed risk-free profit trade I keep hearing about?

[NVDave]

Borrow from the discount window, buy T-bills further out the curve.

[Toddsterpatriot]

Borrow from the discount window, buy T-bills further out the curve.

T-bills are only up to a year.

[GOPJ]

Thanks for sharing NV - as usual - interesting stuff.

[NVDave]

Or notes. The basic idea is you borrow short, go to the longer end of the curve.

Same deal with the TALF. The Fed is giving out money for non-recourse loans at very low rates, which the banks then lend out at the same term or longer, at much higher rates.

[Toddsterpatriot]

Or notes. The basic idea is you borrow short, go to the longer end of the curve.

You want banks to borrow overnight and buy long bonds?

If you did that a year ago, anywhere on the Treasury curve, do you think you'd have a profit today?

Which bonds and how big your profit?

[SAJ]

Todd, yes, you probably would be showing a profit right this minute. However, this is only courtesy of the Eurozone debt bomb; **temporarily** (make no mistake about that!) US long debt is being viewed as safe-haven, as are JGBs.

If the Eurocrats fumble the debt problem (I'm quoting 7-4 in favour, btw), US long debt will continue to prosper to some extent. If, however, the Euroweenies get the weaker nations' debt under control, 30-year and 10-year will be utterly destroyed. Supply and demand and all that, right?

A very good play right now is to buy June 2011 Eurodollars (that's the interest-rate strip, not Eurocurrency) and write 2 June 2011 9925 calls against each contract, intending to hold the trade until about November. On the simple assumption, with which I think you'd agree, that Helicopter Ben and his cronies will NOT push Fed Funds to 1% or higher by November, this trade should make something on the order of 40-50 basis points with an extremely low risk.

Good trading to you, m'FRiend!

[Toddsterpatriot]

Todd, yes, you probably would be showing a profit right this minute.

Are you sure? How much did the 1 year yield on this date last year?

What was the 5 year yield on this date last year? How much is that bond (4 year now) trading for now?

What was the 10 year yield on this date last year? How much is that bond (9 year now) trading for now?

Am I the only one who noticed that yield isn't the only factor in this "risk free" trade?

Thanks for the trading tips. Your posts are always informative.

[SAJ]

On a 1-year basis, the strategy would NOT have been profitable. Using June futures as a proxy for cash, the 10-year would have lost about 6 handles.

However, the Greek debt problem (and the PIIGS generally) did not manifest itself until late in 2009, so a fairer analysis in light of my comment would be to start the comparison period in November or December, in which case all of the 30-year, 10-year, and 5-year would be showing profits.

As ever, it's not only a question of WHAT to compare, but OVER WHAT PERIOD to compare.

Keep in mind, though, that -- as noted -- this situation is entirely temporary. The very minute that Euro PIIGS debt looks like it may be starting to normalise, US debt, especially the long-dated paper, is going to take a huge hit.

FReegards!