One Recession Ends, Another Begins

by Addison Wiggin

  • Surprise! The 5 called the “end” of the Great Recession in real-time… so why now is a double dip is "already under way"?

  • One “no fail” indicator of a new recession six-nine months out… and how it turned nine months ago

  • Why “record cash on corporate balance sheets” is nothing to crow about… And how to invest accordingly

  • The giant factor that will propel gold past $1,300… sooner or later

  • More bank failures, and no refuge in credit unions… indignant over HSA accounts… "eat the rich" sentiments… and more!


  Today, we take a belated bow for calling the “official” end of the recession… by declaring a "double dip" to be unofficially under way.

Last week, the National Bureau of Economic Research (NBER) declared the Great Recession ended in June 2009. Turns out, looking back, we called it in real-time — relying on a single obscure indicator.

It’s called “capacity utilization” — that is, all the plant, equipment and other resources business have at their disposal, and what percentage of it businesses are actually putting to work.

On June 17, 2009, we pointed out that “over the last 40 years, a bottom in capacity utilization has marked the precise end of recessions.”

“Having no interest in real-time forecasting," we followed up on Aug. 14, 2009, "the NBER won’t officially call an end to this recession until it’s long past. It took until December 2008 to tell us that this whole mess started in December 2007.

“Heh," we concluded "by the time the NBER calls an end to this one, we might have begun another.

And so it goes. Today, we can hardly be precise about when it started. We can only say we believe the "double dip" is already under way.

One "tell" of the double dip: The horrible numbers reflecting private-sector investment. We brought you this last Tuesday, but it’s worth revisiting. The “growth” in GDP that’s come about since June 2009 owes almost entirely to growth in government spending — mostly in the form of transfer payments.

Meanwhile, gross domestic private investment has shrunk from 17.3% of GDP at the recession’s start to 11.3% last year. Worse still is that the majority of that figure is devoted to simply repairing and maintaining existing plant and equipment… and how it’s growing.

Investment in new plant and equipment made up an already low 40% of gross domestic private investment at the start of the recession. Last year, it was a paltry 3.5%.

Capital has gone on strike. What’s it doing instead?

  “Talking heads are gushing over the piles of cash on corporate balance sheets,” grouses Dan Amoss this morning. “But how is this good for shareholder value? Since when have big corporations done intelligent things with cash?

“Most of the time, they haven't. Instead, they overpay for their stock repurchases and overpay for acquisitions."

And overpay the same folks who are making those decisions.

  Right on cue, Standard & Poor’s reports that S&P 500 companies increased their stock buybacks during the second quarter by 221% compared to a year earlier — the fourth quarter in a row that buybacks have grown. 257 of the companies in the index — more than half — took part in buyback programs during Q2.

  “No CEO wants to take the career risk of aggressively deploying capital when acquisition targets are dirt-cheap,” Dan surmises. Again on cue, there were a flurry of acquisition announcements just today…

  • Wal-Mart is offering $4.3 billion for South Africa’s Massmart

  • Anglo-Dutch conglomerate Unilever is buying Alberto-Culver, the maker of beauty products, for $3.7 billion

  • Southwest Airlines will fork over $1.4 billion to buy AirTran.

“High corporate cash balances don't reflect a healthy economy,” Dan asserts. “Companies that hoard cash aren't expanding. If they're not expanding, they're not going to hire new employees.

"It doesn't help that Congress made hiring more expensive with the health care law and countless other layers of bureaucratic red tape. Weighed against a mountain of debt and other liabilities — both on- and off-balance sheet liabilities — corporate cash balances are much less impressive.”

  The second indication we've already begun another recession: M3 money supply.

M3 is the broadest possible measure of money in the system including cash, savings accounts, money market funds, etc. The Federal Reserve stopped tracking M3 in 2006 because they say they no longer find it useful.

John Williams of, however, has stayed on top of it, easily collecting the data needed to make this prognostication:

“M3 rising to the upside does not necessarily signal and economic upturn," says Williams, explaining the lines on the graph above. "Yet whenever annual growth in M3 has turned negative, a recession always has followed, usually within six-nine months."

Real M3 generated a signal in December 2009 for a downturn. How much time has elapsed? Oh, about nine months.

“The current weakness," says John, "will eventually gain official recognition as the second down leg of a double-dip recession."

  "We are now at a state where," Alan Greenspan said Friday, sounding almost lucid, "excluding World War II, we are in the worst shape of relationship between borrowing capacity and debt, I suspect, since 1791…

“We don’t know at this stage why or how the markets respond to this sort of — this type of event. And I think we’re taking a very high risk… In 1979, for example, everyone expected, yes, we have a little inflation, but there is not going to be a real problem.

“Within a very short time, the bond markets broke. Interest rates went up sharply. Mortgage rates went up sharply. The economy went into a real serious depression. And my basic — I said ‘depression.’ I meant recession.

“My problem, basically, is that economists can’t make these forecasts.”

Good thing we're not economists, eh?

  “More people are coming to realize,” sums up Dan Amoss, “that the Federal Reserve's zero interest rate policy imposes painful costs on the economy, in addition to the alleged 'benefits.'”

If you want to prepare yourself in case all of a sudden it becomes 1979 again, so far this year, Dan has delivered his readers gains of 40%, 90%… even 92%. They’re also sitting on a 62% gain after just two months, betting on another downturn in housing. To learn how to apply Dan’s strategy, take a look at his most recent presentation.

  Before the opening bell today, all the buzz was about that merger activity driving up the market. No dice. The major indexes are both down a bit, traders jittery about Moody’s downgrading the debt of Anglo Irish Bank.

Strangely, the currency markets are taking it in stride. The euro is down only slightly, to $1.347.

  Gold is holding firm today at $1,298.

But maybe not for long. After 10 years, the Financial Times reports, central banks in Europe are done selling off their gold reserves.

In the last 12 months, member banks of the Central Bank Gold Agreement — the eurozone, Sweden and Switzerland — sold off 6.2 tons of gold. That’s well below the quota allowed under the agreement, and it compares to a peak of 497 tons in 2004-5.

An informal survey by the FT shows that CBGA member states have few plans to sell in the coming year.

Couple this with buying in the past year by central banks in China, Russia, India, Sri Lanka, Mauritius, Bangladesh, Thailand — even Hugo Chavez’s Venezuela — and the days of central banks unloading their gold into the market appear to be over.

Likewise, the unintended (we're sure) consequence of downward pressure on the Midas metal's price.

  The FDIC shuttered two banks after the close of business on Friday, one in Florida, the other in Washington state. That brings the year’s total to 127 after nine months of 2010.

The total in 2009 was 140.

  If you think a credit union is a safer alternative to a bank, take note: Regulators moved in on Friday to take over three “wholesale” credit unions — the backstop for over 7,500 credit unions that provide retail banking services.

Over the last 18 months, the feds have seized five of these 27 wholesale credit unions. Turns out they got suckered into subprime mortgage bonds and other dodgy derivatives like everyone else.

And who will pay for their sins? The little credit union on the corner, of course. Like the FDIC, the National Credit Union Administration will likely jack up insurance premiums on its member institutions to replenish the fund that “insures” deposits.

Makes the First Bank of Serta look better and better by the day.

  “I can't let yet another fool pass by emailing you,” a reader writes, “about the supposedly 'astronomical' health care costs in the U.S. — it's just not true [the reader who wrote in Friday about health insurance costing $1,000 per month]. I live in California, of all places, and insure myself, wife and three children for approximately $5,500 per year in the individual market.

"By any measure, this is a very reasonable cost to pay for the potentially $15-20 million in insurance coverage for a given year.

“This is through Health Savings Account (HAS) policies, and also includes a separate 'emergency room only' policy that covers the HSA deductible amount after the first $100 in cost. Much of my kid's basic appointments are covered, even thought their deductible rate is something like 4,000, and to top it all off, I'm a cancer survivor — talk about pre-existing conditions.

“Our biggest problem is having to periodically rejigger our policies because the insurance companies are having to do the same to meet b——t provisions and mandates from the fools in elected office.

"I was actually interviewed by The New York Times during the health care putsch last year. They had called my insurance agent, who referred them to me. But I didn't get into print — guess they didn't like to hear a dose of reality on the subject."

The 5: Indeed, HSAs are a good idea. They do exactly what months and months of debate over "health care reform" failed to achieve. They put the onus and responsibility of health care on, gasp, the patient. They also introduce, heaven forbid, real price competition in the health care market.

  “Woe is the small-business owner making $500,000 a year,” writes another, “who would have to pay an extra $17,000 in taxes. Surely, this will keep him from hiring more people to expand his business so he can extract even more.

“But then he could recover that amount by increasing the amount his employees have to pay for health insurance coverage. After all, he who has the gold makes the rules.

The 5: You're kidding, right?

Oh… maybe not.

Let's make this really simple for you: A small-business owner has to provide a service or product that people want to buy. If he fails to do that, he goes out of business. If, on the other hand, he provides a good service or a product people do want… he can hire more people to help get the job done.

Just 'cuz you own a business doesn’t mean you make the rules. In fact, it's increasingly the other way around… largely because of dumbass notions like yours.


Addison Wiggin

The 5 Min. Forecast

P.S. Even when the broad stock market drifts sideways, there are diamonds in the rough. And you can see the best-of-the-best come Wednesday when we release our special report 8 Stocks for RIGHT NOW. It includes contributions from all of our editors. And it’s yours free when you sign up for access to every stock-picking service we offer.

You can get it right now for a shockingly low price — but only through 5 p.m. EDT on Wednesday, when we issue the special report.



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