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Sunday, September 05, 2010

Double Dipping

For those of you with whom I speak on a fairly regular basis, you know that I believe we are headed toward the second dip in a double dip recession. For those of you who I do not speak with as often, I believe we are headed toward the second dip of a double dip recession.

The specific, technical definition of a Double Dip Recession: When gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth. A more basic definition would simply be to say that a DDR is a recession that is followed by somewhat of a recovery, and that recovery is then followed by another recession. I believe we are now in that recovery period before the second dip. Further, I believe that the second dip will be worse than the first one. I sincerely hope I'm wrong here, but I'm not the only person that is thinking this way.

Nouriel Roubini is a Professor of Economics at New York University's Stern School of Business and chairman of Roubini Global Economics, an economic consultancy firm. A recent column for the UK Telegraph quotes him from this year's annual Ambrosetti conference on Lake Como:

The US has run out of bullets [to defend against a DDR]. More quantitative easing (bond purchases) by the Federal Reserve is not going to make any difference. Treasury yields are already down to 2.5% yet credit spreads are widening again. Monetary policy can boost liquidity but it can’t deal with solvency problems.

He's basically saying that the Fed can't fix this. And he's dead right. We're in a mess people.

He goes on to hypothesize that the US growth rate is likely to fall below 1% in the second half of this year, “despite the biggest stimulus in history: a cut in interest rates from 5% to zero, a budget deficit of 10pc of GDP, and $3 trillion to shore up the financial system.” To put things in perspective, at this stage in a normal post-war recovery, the growth rate is generally between 4% and 6%.

Here's what I see happening. In the next 30-50 days, I'm looking for a 2-6% correction (that is, a drop) in the US markets. I'm also expecting DEflation. This deflation will be overcompensated for, which will bring about INflation. I expect the unemployment rate to remain stagnant for a few months, but I expect it to start slowly increasing again. I believe that the second dip will be worse than the first. Will it be a depression? I don't know, part of that depends on how you want to define depression. But I really don't know.

I'm not trying to be pessimistic, I'm just trying to be realistic. But, again, I will be very happy to be wrong.

Have a great Labor Day weekend, my friends. Much love to all.


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