Friday, September 07, 2007
recession is here
today's non-farm payrolls contracted 4,000 jobs -- against an expectation of creating 110,000 -- crushing some illusions of continuing economic expansion in the face of a burgeoning credit crunch. recent incidents of strong data were emphasized by some, but -- as calculated risk well dissects -- a handful of strong reports are not what they seem. conflicting data are common at turning points. as was previously noted, labor is the last to go -- and one has to see the surprisingly significant weakness here, compounded by a credit crunch that is probably still far from abating, as deep confirmation that all those non-confirms in the equities of consumer and construction sectors were valid indicators of a recession that may well already be here.
the setup for stocks is interesting. financials are being eviscerated, as is the dollar -- but both are set to test lows.
in the financials, the low to watch is 101.50 in the bkx. a fail of that low would probably mean a collapse to the 94 area -- another 8% down. and a fail to hold 94 in the near-term would be unthinkable.
but more important may be the dollar index low of 80 -- it is monumentally important on a multiyear scale. it is being tested on this news. if it breaks against the current credit backdrop, the possibility of a 1987-style cascading failure is distinct -- and will certainly put the fed between a rock and a hard place, as interest rate cuts intended to alleviate leveraged market pain will only weaken the dollar further, sparking inflation. at some point, more debt creation is not the answer to a debt problem.
alan greenspan commented this morning on the identicality of this situation and both 1987 and 1998. but i have to agree more with this comment from minyanville.
Both episodes were liquidity events for sure, but the solution Mr. Greenspan came up with was to create “artificial” liquidity through credit creation. The infusion of debt-stabilized asset prices (more “money” chasing the same volume of assets). But in both cases Mr. Greenspan never had the gumption to mop up that debt and allowed it to grow and grow and grow. Today we have the culmination of that debt. This “liquidity event” is much larger than either of these two previous episodes.
The same solution is being used, but this time it is only slowing down a much bigger problem.
this is an insolvency problem at core, and defaults will ultimately mean serious credit contraction and quite possibly a deflation that the fed simply can not manage even if bernanke dumps money from helicopters.
UPDATE: there is an excellent chart here showing the employment ratio. conclusion: a recession is very probably already underway, and the equities market is -- not for the first time, but probably not for much longer as it has already been doing so for nine months -- lagging the economic reality.