The very problematic Q2 GDP revision downward from 2.4% to 1.6% is receiving an identical reaction to weekly claims yesterday. The estimates / expectation had been so lowballed that anything north of 1.25% can now be considered “good news” and a knee jerk reaction of “whew!” buying came come in. Which is fine for the next hour but when you take a step back and look at what has been accomplished with a few trillion of national treasure thrown at the economy via Federal government and Federal Reserve, all we had were 2 quarters of GDP in excess of 3%, now bracketed by 1.6% quarters (of course the Q2 GDP still has another revision to go).
The U.S. economy grew at a 1.6% annual rate in the second quarter, less than previously calculated, as companies reined in inventories and the trade deficit widened. Economists projected a 1.4% rate of growth in the second quarter. The economy grew at a 3.7% pace in the first quarter.
Mark Zandi, chief economist at Moody’s Analytics Inc. this week said the likelihood of the economy slipping back into a recession is now 33 percent, up from a 20 percent chance 12 weeks ago. New York University economist and forecaster Nouriel Roubini, who predicted the financial crisis, said the odds of a return to recession at 40 percent.
I cannot stress how poor this is… historically after the deepest of drops the rebounds have been stellar only from a “return to mean” aspect. That is, if the economy contracts 6%, it has often rebounded 8% – and that is with a fraction of the assistance offered by the powers that be, versus the current episode. This time around we had a reading over 3% for one quarter, and a reading over 5% another quarter. And we’re back to square one. Speaking of squares I think that is a viable word for the shape of the rebound: ‘square root’.
I continue to believe this was all just one big ‘Great Recession’, only interrupted by never seen before levels of interference. If those powers had done double the level of intervention, our GDP figures would have surged even higher – and Wall Street probably would have rallied the markets even farther. But we’d be saddled with ever more debt as the cost to the benefit of these few quarters of ‘green shoots’. Go forward the patient has now become dependent on drugs and is building up tolerance. To put it in plain English, we “bought” 2 quarters of good GDP figures for a few trillion bucks.
I once kidded that someday the Fed would be targeting 3.5% mortgage rates as a solution; I now no longer consider it kidding. I see 30 years hit 4.36% this past week. If GDP figures go sub 1% (which I expect) in the coming 2 quarters, and potentially negative in 2011, the bond market could rally even further on an organic basis… and with new rounds of QE surely to follow, that will just add fuel to the fire. So what many are calling a bond bubble today could be labeled with ‘you ain’t seen nothing yet’ if my forecasts come true. The bad news is savers of America will be trashed even further than they have in the past few years; while the debtors will receive more gifts. [Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors]
As for markets we remain in the range between S&P 1040 and 1057, waiting on the magic wand to begin waving from Jackson Hole, Wyoming at 10 AM EST.