Headed For A Double Dip Recession?

[Gone4Good]

The policies to date are only a re-flation of existing issues. We are following in the footsteps of Japan from what I can tell at this point.

Except Japan's bubble was much bigger (it was said at the peak that the value of the Imperial Palace was greater than all of the real estate in California), the policy response was much slower (Japan didn't start easing monetary policy aggressively for 5 years after the bubble burst), it's banks never recognized loan losses, its economy is far more rigid (Japan's unemployment never went above 6% in the past 20 years and was below 3% for several years after the bubble burst), its population is much older (22% of Japanese are 65 or older vs. 13% in the US), is aging faster, and is shrinking while ours is growing.

We're in much better shape than Japan was, or is.

Be of good cheer.

 

[LARS]

... Yrs to Go,

I hope you are right, but I fear you are wrong.

The only thing weighing in the US's favor at this point is that Japan and China (despite complaining to the contrary) are committed to maintaining exports (to maintain employment) and so will continue, it appears, to fund our outsize deficits.

Still, the points you raise about Japan are valid (though I am not certain you are correct on the relative size of the "credit" bubbles), but you neglected to mention the most important difference as regards this situation vis a vis the US and Japan, IMHO: the Japanese are savers and the nation runs current account surpluses. Both of these are major positive differences for Japan as relates to the US and its current predicament.

Finally, I again disagree with you that our policy responses have been substantially different than Japans (other than we have tried the re-flation card quicker). And in particular, we have taken a similar approach to recognizing loan losses throughout the system.

 

[Gone4Good]

And in particular, we have taken a similar approach to recognizing loan losses throughout the system.

I don't see how that is possible considering that so much of the large bank's exposure was in the Mark to Market books. These things were getting written down way before the securities even defaulted. Japan had nothing like that. Sure we still have a bunch of commercial loans in the accrual books, but according to the IMF earlier this month . . .

As in past estimates, the IMF said that banks in the U.S. are further ahead in dealing with potential losses than those in Europe. Banks in the U.S. have recognized about 60% of anticipated write-downs, the IMF calculated. Banks in the Britain and continental Europe have recognized only about 40% of their potential losses.

So we've recognized 60% of the anticipated write downs already. I wonder how long it took Japan to hit that mark. Meanwhile the capital ratios of our large banks are better than they were before, in many instances. Basket-case Citigroup, for example, reported a Tangible Common Equity ratio of 10.3% in the latest quarter, up from 2.8% in 2007. So we've taken more than half the hit, and our largest banks have more capital than when we started.

True, a lot of the rest of the exposure is at smaller banks. But they're getting closed down on an ongoing basis. I don't see us sweeping this under the rug to the extent the pessimists claim.

 

[charlie]

I don't know about a double dip, but I do think it is time to rebalance
and shorten up on your bond duration, if possible.

Short rates are going up, IMHO, but how soon? Nobody knows. If long
rates don't follow suit, then the probability of a double dip is higher.

Cheers,

charlie

 

[FIREd]

For those interested in the similarities between the US and Japanese crises:

U.S. Risks Japan-Like ‘Lost Decade’ on Stimulus Exit, Koo Says - Bloomberg.com

Whether we have a double bottom or not depends, IMO, on whether the government can continue to prop up the economy despite popular opposition. If government spending slows down (because of concerns over the deficit) or if the Feds raise interest rates (to support de US $) before the consumers and companies can pick up the slack, we will probably have a double dip. Raising long term rates would be a disaster for the housing market at this point.

 

[LARS]

Charlie wrote: "If long rates don't follow suit, then the probability of a double dip is higher."

There is no question that the bond market is screaming on-going recession (and not even suggesting the end of the first dip let alone a second one).

The stock market, on the other hand, is screaming recovery.

One is right and one is wrong: my money is on the bond market being correct.

 

[LARS]

Yrs to Go,

Another guy who agrees with me about US and Japan similarities as well as bank write downs. Quotes from David Rosenberg's (former Merrill Lynch economist now with a Canadian firm) most recent piece:

On Japan and US:

“The story in Japan is that the country kept zombie banks alive for fear of unleashing financial Armageddon — much like the U.S.A. today. As a result of the private financial system’s incapacity to create credit in Japan, the tradeoff for not shuttering insolvent banks has been two decades of economic stagnation, lower bond yields and a pervasive bear market in risky assets. Instead of following the Swedish system, or following the painful financial and economic restructuring that allowed emerging Asia to rise from the ashes after its debacle of the late 1990s, the U.S. is following the Japanese model of keeping failed banks in the system and sanctioning an accounting system that allows these institutions to disguise their true net worth and hide losses embedded in their asset base.”

On bank write downs:

“There have been more bank failures this year than in the past 15 years combined, and the only reason why the big boys never followed suit was because the government guaranteed all their debt and then allowed them to hide their losses by switching to mark-to-model accounting from mark-to-market. Believe us when we tell you that even the most renowned experts could not tell you what is really sitting on the balance sheets of these large U.S. banks…”

 

[ziggy29]

The stock market, on the other hand, is screaming recovery.

One is right and one is wrong: my money is on the bond market being correct.

I think the bond market's predictive record is better than the stock market's record. I think one of the main reasons the stock market is so much higher in the last few months is that people are looking for places to put their money and seeing pathetic yields everywhere else. Having said that, while my crystal ball is broken I saw "Dow 10000" as a convenient excuse to rebalance and lighten my equity load a bit. It seems like silly psychology, but the Dow has always had a lot of trouble taking and keeping another digit -- often for well over a decade. It had trouble holding 100, 1000 and now 10000.

Much higher stocks from these levels, considering economic realities and even factoring in a modest recovery, feels like irrational exuberance.