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The "Y-shaped Depression" ?

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The "Y-shaped Depression" ?

Time to add a letter to the economic alphabet ?

===============================

 

zzz2h.gif :

 

I don't think it will be W-shaped, since the second drop may be much deeper than the first one.

 

(Later, I wrote an article on the idea that we would see a "Y-shaped" Downturn in the Economy.)

 

Added, LINKS:

==========

 

Y-Shaped Downturn thread :: http://www.greenenergyinvestors.com/index.php?showtopic=9215

Y-shaped article, for FSU ... :: http://www.financialsensearchive.com/fsu/e.../2010/0210.html

Y-shaped thread, on HPC .. :: http://www.housepricecrash.co.uk/forum/ind...howtopic=136648

MJH archive on Fin'l Sense . :: http://www.financialsensearchive.com/fsu/e...on/archive.html

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Tuesday, July 28, 2009

 

Newsweek Declares Recession Over!

18678610.jpg

 

This rash call from Newsweek will probably make the future headlines, like the 1948 Chicago Tribune's "Dewey Beats Truman!" or the 1980 Boston Globe's "More Mush From the Wimp!" leaked internal headline on a Carter editorial. After the dead cat bounce off the 1929 crash, the punditry from the President on down declared that recession over, too. Yet before we declare the top in (ie Newsweek as a contrary indicator), we might wait to wait for Obama to make a "Mission Accomplished!" speech.

 

What the indicators Newsweek is counting on might be signaling is a W shaped drop. We have had the first down wave of the W, and might have a slight uptick in Q4 or Q1 where GDP goes positive before we have the second down wave. This would not be due to a sustained reversal but the stimulus payments kicking in and putting the economy momentarily on life support. It would fit a stock market drop off an Aug or Sept high, than a seasonal rally from Nov to May riding the rising trend to GDP reports from Q3 and Q4; but then a sinking slide after a Summer of Disillusionment in 2010 as the realization kicks in that we are still in a sinking economy.

 

/see: http://yelnick.typepad.com/yelnick/

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Someone else has used the phrase, but not in the same way

 

Will this turn out to be a Y-shaped recession?

 

Saturday, April 25, 2009 .. by Jim Riley

 

Just a brief piece on some sales data which highlights an interesting feature of the current recession in the UK. You might think the analysis is pants, but still possibly of interest…

 

According to leading department store retailer Debenhams, sales of Y-fronts have increased by 35% since the recession began.

 

The rise in demand for Y-fronts, which are being substituted for boxer shorts and slimline trunks, is attributed to the Y-front design offering men a greater sense of security in these troubled times.

 

In a separate article, leading Y-front brand Jockey reported that sales of coloured Y-fronts have risen by an average 60% over the last six months and baby pink pants in particular have risen by 62%.

 

A classic case of a substitution effect in a consumer market. The fallout from the recession has driven men to reasses their underwear needs. And all of a sudden, my entire underwear collection has come back into fashion

 

/see: http://tutor2u.net/blog/index.php/economic...aped-recession/

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(Here's someone who was using Y in relation to the movements in the economy, and got it right)

 

...from June 2008...

 

Edwards: “We see a y-shaped global recession. We are going down before looping backwards”

Posted by Paul Murphy on Jun 26 15:30.

We had promised more on the latest missive from Societe Generale’s Albert Edwards - so here it is.

 

This is evidence, we think, that only Edwards can out-Edwards when it comes to alarmist market strategy report. It’s just marvellous.

. . .

 

The UK, Euro and Japan will follow the US down, Edwards says.

 

And he gives us one hard forecast number that he says we can hold him to:

 

At its worst, I expect non-farm payrolls to be contracting at a monthly rate of 500,000.

 

So the SocGen man is talking about a recession at least as deep as the early 1980s, albeit not quite as bad as 1974.

 

What does that mean?

 

Oil - $60

CPI - zero in the US, UK and Eurozone

US 10yr bonds - yield bottoms out below 2 per cent

 

As for equities:

 

A deep recession will result in a profits slump. Coupled with an Ice Age P/E contraction, we see global equity markets falling some 70% from their Oct 07 peak. I expect the S&P to bottom around 500 (verses the 1,575 peak) and FTSE around 3,000 (imagine where consumer confidence will be if equity prices do collapse).

/see: http://ftalphaville.ft.com/blog/2008/06/26...ping-backwards/

 

 

And in his own words:

Two clear behavioural biases in this industry mean that 99% of the forecasts produced by sell-side economists, strategists and analysts are totally and utterly useless. First, a human desire to be liked reinforces a deep industry bias towards bullishness. Recession (for example) is seldom forecast. A deep recession is unthinkable. Second, forecasts typically revert to some mean, or seldom stray too far from the current spot rate. What a waste of time. We see a y-shaped global recession. We are going down before looping backwards.

 

 

/see: http://ftalphaville.ft.com/blog/2008/06/26...very-long-tale/

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More about Edwards, who seems to have made some amazing calls

- another real economist like Roubini and Schiller ?

(unlike those entertaining "circus clowns" hired as economists by many big banks)

 

Albert Edwards: Expect new equity lows in H2, China is global Achilles’ heel

 

Prieur du Plessis | Jun 19, 2009

 

Albert Edwards, global strategist of Société Générale, has always been a firm favourite among readers of Investment Postcards. His latest “Global Strategy Weekly” offers thought-provoking reading at a critical juncture in financial markets. The paragraphs below come courtesy of Tyler Durden of Zero Hedge.

 

Not only does Edwards, who was previously vilified then praised for calling the 1997 Asian Bubble, see a significant drop in equities before the end of the year, but his main concern is also every optimist’s greatest green shoot: China.

 

“Most areas in the markets have now discounted a V-shaped recovery. Any doubt will trigger a rapid reversal in prices. I continue to be extremely sceptical and see recent events as part of a 1930s-like, long march to revulsion. Talking about long marches, nowhere in the world fills me with more scepticism than the Chinese economic recovery. The continued enthusiasm for all things China reminds me so much of the way investors were almost totally blind to the fact the US growth miracle was built on sand. China could be the biggest disappointment yet.

 

Edwards follows up with some very amusing observations on mass delusions:

 

“It is amazing how easily group-think takes a vice-like hold in the financial markets. As the BRIC economies meet for their debut summit, few dare to speak out against the new, ‘New Paradigm’. We also saw this same investor mania 13 years ago with the Asian Bubble, which the consensus thought was a growth miracle. But to go that far against the consensus invites a deluge of hate mail. That is why I keep a copy of a World Bank book entitled Thailand’s Macroeconomic Miracle: Stable Adjustment and Sustained Growth. It was published in October 1996, less than a year before Thailand’s (and Asia’s) economic collapse.

 

“It is all too easy for investors to buy into beguiling ‘growth’ stories that are in fact utter nonsense. If the bubble of belief in China’s medium-term growth prospects finally bursts, it will have huge investment implications. I will be writing far more about this subject over this summer. But one thought, if China is doing so well, how come C

 

...more: http://www.rgemonitor.com/emergingmarkets-...l_achilles_heel

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IMF calls fiscal cost of credit crunch at $10 trillion

 

Friday, July 31, 2009 .. by Geoff Riley

 

This is a shed load of noughts!

The BBC has a report here on the latest estimates from the IMF of the cost to governments arising from the credit crunch:

 

Governments are likely to recover most of these sums when the world economy recovers, but big deficits will stay.

 

The financial bail-out costs include:

 

* Capital injections: $1.1tn

* Purchase of assets: $1.9tn

* Guarantees: $4.6tn

* Liquidity provision: $2.5tn

 

/see: http://www.tutor2u.net/blog/index.php/econ...at-10-trillion/

 

 

HOW LONG to recover from that?

And with so much being spent to prop up the economy,

do we really know what the true underlying state of the economy is now?

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People say the US isn’t like Japan 10 years ago. I agree. Actually it’s WORSE!

 

Albert Edwards / (44) 20 7762 5890 / albert.edwards@sgcib.com / www.sgresearch.socgen.com

 

We have long believed that when the US bubble finally burst, there would be key lessons that

could be learnt from Japan’s experience a decade ago. Until recently most have dismissed our

comparisons. But despite having a more pro-active central bank, with the US now entering its

second recession since the stock-market bubble burst and with a pronounced credit crunch

unfolding (just like Japan had), clients are more willing to listen to our gloomy story.

 

? With one of the biggest credit bubbles in history now bursting, many of the big beasts in

the investment world have stated we are heading for the deepest economic downturn since

the War (i.e. also since the Great Depression). In these troubled times it is very difficult to

look back in US history and find adequate route maps for similar sized bubbles bursting.

 

? We have always believed that when the multiple bubbles the US enjoyed over the last

decade (e.g. stock-market, economic and credit bubbles) finally burst, the Japanese

experience would provide a useful template for investors. The vast majority of clients have

always vigorously rejected this comparison. However, though the comparisons are not

exact, there are essential similarities in the de-bubbling process.

 

? Many seek comfort that the Fed is well aware of the mistakes Japan made a decade ago

and they have at the helm an expert on the Great Depression. But that does not mean they

can muffle the huge sucking sound as debt excesses unwind.

 

/more: http://www.sgresearch.socgen.com/publicati...080403)_cc0.pdf

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SPLITTING THE TEAM

 

Top analyst Montier quits SocGen for Grantham's GMO (Reuters) - Jun 25, 2009

 

Grantham, Mayo, van Otterloo LLC - James Montier at Societe Generale

* Behavioural investor Montier to join GMO .

* Quits SocGen after winning Thomson Reuters Extel vote LONDON, (Reuters) ,

 

One of London's top analysts, James Montier, has resigned from French bank Societe Generale ( (SOGN.PA) ) to join Jeremy Grantham's GMO LLC as a member of the asset allocation team, the investment firm said on Thursday. Montier, who has written a number of books on behavioural finance, hit the headlines in June when he criticised the efficient market hypothesis, the theory that a price encapsulates all known information. The hypothesis has inflicted "massive amounts of damage" on the money management industry, Montier wrote.

 

Montier was recently voted best strategist in the Thomson Reuters Extel survey alongside colleague Albert Edwards

 

== ==

 

The sort of work they were doing...

 

us_profits_and_equities.png

 

As to the fundamentals of Edwards argument, he is spot on. Note our prior mention of the SocGen team was back in June (“Appalling” Market Fundamentals, Not Inflation, Is The Problem).

 

Here’s a brief excerpt:

 

US Q2 whole economy profits were shockingly poor. The headline data (post-tax) were down 6% yoy - bad but not a disaster. But our preferred measure of underlying profits (domestic non-financial economic profits — full explanation later) is down a surprisingly sharp 17½% yoy. The last 4 quarter’s average is down 12% yoy (see chart below). Typically we have now reached the point in the cycle where companies reach the end of the road on earnings manipulation and have to admit to their shareholders how bad things really are, sending reported profits diving. James Montier’s recent piece “Cooking the Books” suggests that some companies may indeed be doing what the title implies. But analysts currently see no prospect of a non-financial profits slowdown, let alone recession (see table below). Why? Because companies have not yet owned up to the mess they are in and told the analysts to downgrade their numbers!

 

We are at a very similar point to the end of 2000, just before corporate capitulation sent reported profits and the economy diving and the equity market collapsed.

 

Economists typically model corporate profits as a residual, with it dropping out of their economic models as a function of what is happening to the economy overall. We have always believed though that corporate profits are a key driver of the economic cycle, rather than just the result of it. Historically, recessions are ’caused’ (in an accounting sense) by the corporate sector. As profits decline, after a point companies finally bite the bullet and business investment slumps (see chart below). Historically, the evolution of pre-tax domestic nonfinancial profits proves to be the best explanation for company’s domestic spending activity.

 

/see: http://www.dailymarkets.com/stocks/2008/09...tdown-imminent/

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Why settle for one letter?

V L J -shaped!

Very Large Job losses? I'd buy that !

 

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Wise words from the 'Y shaped' article.

 

''

 

Those who agree with my scenario can protect themselves from further wealth erosion by getting their retirement funds out of the stock market, and selling their properties and renting. The rallies of 2009 have delivered a welcome "window of opportunity" to make these adjustments to family wealth holdings.

 

The question that remains, if you get out of stocks and property, how do you hold your wealth? I favor a risk-averse approach. I would not hold debt instruments, and I would steer clear of most stocks, and be very suspicious of high dividend stocks, which may find it tough to maintain cash flow for dividend payments, if their cash flows wane in a shrinking economy. We are coming into a time when "cash will be king" once again. But cash must be held in sensible currencies, and in safe institutions. I would avoid stashing money in currencies of debtor countries which may be headed towards default. And bonds of those countries are even worse, since capital values will fall, if they indulge in aggressive money printing. This leaves the savings nations, like China and some other countries in Asia (like Singapore), and some special cases, like Norway, which have little or no debt, and big oil savings.

 

I have some money held in US dollars for the time being, since that currency is benefiting from an unwind of dollar-carry trades as stocks and other assets are sold. We saw a similar upthrust in the dollar, when de-leveraging hit in 2008. When the dollar begins to falter, and commodities begin to bottom out, I may consider moving more deeply into the currencies of commodity exporting countries, like Canada and Australia. Even now, I continue to hold a decent part of my cash in C$.

 

There is certainly a role for Gold in a low risk portfolio, since it can be regarded as the only "currency" which is not someone's else's liability. As long as it is held safely in physical form, there is zero risk of a credit default. You are not relying on someone's willingness to pay, or their vagaries of cash flows from tax collections or volatile business activities.

 

I will take some risk, but it will be in a measured way involving a minor part of my portfolio in leveraged instruments like puts on the general indices and volatile junior mining shares. This way, I aim to protect the bulk of my portfolio, by leaving it invested in save haven instruments, but I may still be able to grow the size of my portfolio, by investing a minor part of the total portfolio in high-geared "bets" when opportunities appear.

 

The next few years will be full of challenges for investors, and for anyone who is seeking to maintain their present living standard. The good news is that a more frugal approach, which most of us will be forced to adopt, does not necessarily mean a major decline in the quality of our lives. When we have less money to spend, we will discover that the best things in life cannot be measured with money. Perhaps golfers will find pleasure in gardening, or luxury yacht owners will become keen fishermen. We will all have a great chance for remaking our lives in creative ways. We are likely to have more time on our hands, and many of us will rediscover some forgotten aspects of living that really matter, and bring a rich texture to life.''

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Bubb, anything to add or change at this stage?

Not much.

It will be a bumpy road.

 

Interestingly, I had a lunch meeting with two guys here in HK, that run a gold-oriented Hedge Fund.

They made 100% from 2008-2009, and are around breakeven this year.

 

They were also talking about a "bumpy road."

 

They expect gold to get to $5,000-6,000 within 3-5 years.

But before then...? They think we might see $700 later this year.

If we see that, Gold will be "the buy of a lifetime."

 

With such volatility possible, how does one take a one-decision bet on inflation or deflation?

It is far better to recognize reality, and bet on Manic Swings, 'cuz that's what we are seeing or far, isn't it?

 

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There's only 4 official letters.

U

denoting a depression where recovery is hampered by continuing problems.

V

denoting a short sharp recession and a quick recovery, ussually caused by a single random event (e.g. a flood)

L

denoting a "correction", - e.g. a bubble popping

I

denoting the end of an empire

 

The western world has been in an I shaped recession since the late 80s, most everything else is just numberwang.

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DEFLATION vs. HYPERINFLATION - It is Silly to argue.

Just ride the Big Swings

 

Politics always impinges on economics, it's a politcal economy afterall. But the politics can cut both ways and you have to ask not what's politically possible, but what is most plausible or probable... and then also keep some time hoizon in mind. There could be years of "tea party austerity" before some backlash. Then again, sanity could eventually prevail in a new Bretton Woods.

 

Anyway, the status quo is all looking very deflationary..

Indeed.

As I have said before: No deep crash, no panic QE leading to hyperinflation.

 

As you may know, I am now playing the current Deflationary Swing:

Plenty of cash, big positions in short-side-options (recently acquired), and some longs in Gold and mining shares.

 

If we get a big drop here, I am well-prepared for it,

and understanding that Swings are what we would be seeing, have helped me to get here, and make money

while getting set up for it. (Example: I rode Gold up from $1088 to $1200-50, and then sold of it.)

 

I think those people who are taking "one way bets" on Deflation or Inflation, are going to get frightened out

at the wrong time.

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Yelnick Blog : August 10, 2010

 

Double Dip Countdown: T-5 After Fed Punts

 

The countdown is getting closer to the double dip: 10 - 9 - 8 - 7 - 6 - 5, restarted after we put the countdown on hold last week. The Fed concedes that after an unprecedented stimulus worldwide, the US economy has never recovered and is beginning to slow again. This does not mean it will go negative, but when the economic cheerleaders face reality, it means things are worse than reported.

 

Already GDP, which was reported at 2.4%, was downgraded (by JP Morgan) a couple of days later due to a poor durables report, and now has been downgraded by them again to 1.3% due to a poor wholesale inventory report. Tomorrow international trade comes out, and JP will be at it again. They note that the GDP gets reported at the end of the month, with estimates for items that come in a week or two after. They think the estimate of international trade was "extreme", setting up another downwards revision tomorrow.

 

001yz.jpg

 

The other disturbing news is more leading indicators heading south. The US LEI is heading down, although not yet signaling a second recession. The Global OECD indicators are turning over and in some cases in negative territory. David Rosenberg's Euro bearish counterpart, Albert Edwards, reports that the Conference Board indicator (excluding a yield curve input) is now in negative territory (see next chart). He pulls out the yield curve since the short-end is artificially low due to ZIRP (zero interest rate policy). He concludes that market participants will soon realize that the US is Japan of ten years ago, and will follow a similar path of deflation and zero growth.

 

/more: http://yelnick.typepad.com/yelnick/2010/08...s.html#comments

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Not much.

It will be a bumpy road.

 

Interestingly, I had a lunch meeting with two guys here in HK, that run a gold-oriented Hedge Fund.

They made 100% from 2008-2009, and are around breakeven this year.

 

They were also talking about a "bumpy road."

 

They expect gold to get to $5,000-6,000 within 3-5 years.

But before then...? They think we might see $700 later this year.

If we see that, Gold will be "the buy of a lifetime."

 

With such volatility possible, how does one take a one-decision bet on inflation or deflation?

It is far better to recognize reality, and bet on Manic Swings, 'cuz that's what we are seeing or far, isn't it?

Sorry, I missed this till now. Not that I have a lot to say, except I agree with your Manic Swings. Regarding gold to 700 and it being the buy of a lifetime, well I would agree, it would be a buy of a lifetime, if we see that again. Prechter certainly seems to think so. I won't be panicked into selling as I also go along with the 5-6000 prediction.

I'm not good enough to trade the swings but I will be buying the dips because I am not confident of the falls to 700 either. I am also looking into some property here but still think I am a bit early to be honest, so no rush. UK, I have all but given up on, which I feel philosophical about.

But, hey ho, manic swings...you never know. I might change my mind and go live in Kuala Lampur. Or somewhere.

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Not much.

It will be a bumpy road.

 

Interestingly, I had a lunch meeting with two guys here in HK, that run a gold-oriented Hedge Fund.

They made 100% from 2008-2009, and are around breakeven this year.

 

They were also talking about a "bumpy road."

 

They expect gold to get to $5,000-6,000 within 3-5 years.

But before then...? They think we might see $700 later this year.

If we see that, Gold will be "the buy of a lifetime."

 

With such volatility possible, how does one take a one-decision bet on inflation or deflation?

It is far better to recognize reality, and bet on Manic Swings, 'cuz that's what we are seeing or far, isn't it?

This idea of gold going to $700 is starting to look a bit silly don't you think? Deflation is now writ large in the headlines, yet gold is staying pretty solidly around $1200.

 

Are you sure that your own subjective wishes are not getting the better of you here?

 

And then, if the investor doesn't decide on the big picture of inflation or deflation, they could be left in a much worse position by just "betting on swings". The risk that most will face here is taking the wrong position at the wrong time, second guessing themselves, getting cut up by the markets, and not to mention how and where profits are to be taken.

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This idea of gold going to $700 is starting to look a bit silly don't you think?

Deflation is now writ large in the headlines, yet gold is staying pretty solidly around $1200.

 

Are you sure that your own subjective wishes are not getting the better of you here?

 

And then, if the investor doesn't decide on the big picture of inflation or deflation, they could be left in a much worse position by just "betting on swings". The risk that most will face here is taking the wrong position at the wrong time, second guessing themselves, getting cut up by the markets, and not to mention how and where profits are to be taken.

"Subjective"?

I wouldn't say that. I think you must admit that my calls on Gold this year have been near flawless.

I bought below $1100, and sold between $1225-1250. That last "sell" was still the right decision, and I don't see anything that makes me want to change my moderately Bearsih view.

 

I'm not expecting $700. That's the level mentioned by two Hedge Fund guys. I actually met one of them last night, and he still thinks that is possible.

 

My own expectation is that Gold and Gold shares will selloff if and when stocks slide. And a bigger slide may be imminent. Stay tuned.

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"Subjective"?

I wouldn't say that. I think you must admit that my calls on Gold this year have been near flawless.

I bought below $1100, and sold between $1225-1250. That last "sell" was still the right decision, and I don't see anything that makes me want to change my moderately Bearsih view.

The next few months will be telling. The risk you run in selling at $1200 is taking profits in a weakening currency while losing your position in the strengthening one. Given the action in gold these past few years, I'm surprised you haven't built a core position in gold yet.

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The next few months will be telling. The risk you run in selling at $1200 is taking profits in a weakening currency while losing your position in the strengthening one. Given the action in gold these past few years, I'm surprised you haven't built a core position in gold yet.

I am not the only one looking for a dip in Gold.

 

So does TFNN's Tom Obrien (the top Gold forecaster, I believe), and Pierre Lasonde:

 

http://kingworldnews.com/kingworldnews/Bro..._Lassonde_.html

 

Lassonde sees Gold falling back to $1050-1100.

 

BTW, I still have a long exposure to Gold and some Gold stocks.

I have made money in recent weeks, given the strength in GLW.t, and the way the GLD position is hedged:

My favorite Gold stock, and my largest single holding - about 10% of my Main portfolio

 

Gold Wheaton / GLW.t ... update

xxxb.gif

 

...enjoying a breakout of sorts, on high volume.

 

This is one of the reasons that I haven't worried too much about "downsizing" my Gold holdings.

Another is: I continue to have a LARGE position in Bull Spreads on GLD. So if Gold runs, I will make some nice money.

 

Having said that, I continue to expect Gold and Gold stocks to selloff, if Stock indices slide. But we are at the beginning of the usual BUY window for Gold.

 

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