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Tags: economic | recovery

U.S. Recession Faces a Slow Recovery

By    |   Tuesday, 14 July 2009 02:44 PM EDT

So, U.S. Treasury Secretary Geithner is visiting the Gulf Arab states again. Here are some quotes of what he said today at the Jeddah Chamber of Commerce when aiming to reassure Gulf Arab states that the United States wants their investments and that their U.S. dollar assets are safe.

He told the audience he saw signs of confidence returning to the U.S. financial sector and pledged the United States would pursue policies that preserve the dollar's value: "The policies of the United States are designed to lay the conditions for a strong dollar for more stability in the international monetary system and among the major economies. … Given the dollar's role in the international financial system and the significant impact of the U.S. economy on global economic conditions, we fully recognize that the United States has a special responsibility to play … The force of the global recession is receding … but, no recovery is possible without repairing the institutions and markets that are critical to the supply of credit.”

Geithner also cautioned that it would take “considerably more time” to get the global economy back onto a path of sustained growth: “We are very committed to make sure that as we get through this crisis to bring down our fiscal deficits and to reverse these extraordinary interventions that we have taken."

Five of the six Arab states that comprise the Gulf Cooperation Council still peg their currencies to the dollar. In May 2007, the sixth member — Kuwait —pegged its Kuwaiti dinar to a basket of international currencies after more than four years of linking the local currency to the dollar. Since that date, Kuwait has not disclosed the composition of its currency basket, but it is believed to be 70 percent dollar-based with the rest in euro, yen, and sterling pound.

While Mr. Geithner is doing his job over there in Saudi Arabia, yesterday Federal Reserve Chairman Ben Bernanke in a conversation with key Republican Senator Richard Shelby said he sees the possibility of continued high unemployment even after the recession loosens its grip.

"I (Sen. Shelby) said... could this be a jobless recovery?' ... and he (Chairman Bernanke) said it could be…"

Also yesterday, analyst Meredith Whitney told CNBC that unemployment is likely to rise to 13 percent or higher and will weigh on the economy for several years, countering government efforts to stabilize the banking industry.

Notwithstanding, while Whitney said the long-term outlook for the economy remains murky she raised her short-term outlook for banks.

But, even as Geithner confirmed today in Jeddah that credit indicators have improved, according to Standard & Poor’s, there are plenty of U.S. companies in deep trouble.

In June, 15 companies lost their investment-grade ratings, which makes it the third-highest monthly tally since 1987, with rankings for two additional issuers cut to junk status.

The number of U.S. “fallen angels” climbed to 60 this year with a combined debt of $209.2 billion.

The largest fallen angel this year is CIT Group Inc., which is a small business lender.

To spice up this confusing mix a little bit more, Fitch Ratings has warned that CIT may default as soon as April 2010 when a $2.1 billion credit line matures. CIT applied to access the FDIC's bond guarantee program in order to access debt markets but as of late yesterday, July 13, the FDIC hadn't given their consent due to credit risk concerns.

Geithner has already said that Treasury has the authority and the ability to intervene if it chooses to do so.

David Hendler, an analyst at debt research firm CreditSights Inc. in New York said: “They’re on life support right now. … The financial system is in a ‘once in a lifetime meltdown’ and CIT went into it in a weakened position. …”

By the way, a failure of CIT would be the biggest bank collapse since regulators seized Washington Mutual in September 2008. CIT reported $75.7 billion in assets and $68.2 billion in liabilities, including $3 billion in deposits, at the end of the first quarter of 2009. Fitch says that CIT’s demise would be disruptive for the real economy.

In the meantime, Robert Shiller told us that housing markets are very inefficient and that is why it takes several years for prices to fall to a market clearing price.

"My more probable scenario is languishing of the housing market for years."

Even if the rate of price decline has slowed, there will probably be a long tail of real price declines in many areas.

Besides all that, remember, Japan had a real estate bubble and a credit bubble, but it never had a consumption bubble as has been, and still is the case in the United States. Indeed, what makes this downturn different and more troublesome than what happened in the past is the downside potential for consumer discretionary spending.

A considerable amount of people appear to be ignoring that “getting small” is going to be the trend in U.S. consumer spending. I would advise investors to focus on the forest, not on the trees. Whatever the Treasury Secretary may say, we will have to live with reality and see the lingering collapse in credit as a secular event. Correctly assessing that reality is what I’m always trying to achieve.

There is also a big majority that says the secular decline in government bond yields, in the United States and globally, will quickly come to an end because of the very low yields and the massive reflation efforts from governments. As a consequence that inflation is going to show up very soon.

I have my doubts about their timing, and their expectations may well be true somewhere in the future, but looking back into history, despite huge policy initiatives, long-term bond yields did not hit their bottom in the United States until late 1941, at below 2 percent after the 1930s super-recession.

Much more recently, nobody has built more bridges and roads than Japan did in the 1990s, and despite a doubling in the government debt-to-GDP ratio and multiple credit downgrades, the yield on the 10-year Japanese government bonds did not hit its lows at less than 1 percent until 2003, which was also more than a decade after their super-recession of the 1990s took hold.

On U.S. Treasuries, the actual secular bull market will not be over until the 10-year breaks above 5.26 percent because then and only then will the 28-year secular bull-phase prior interim high be taken out.

Looking at the time series we see that ever since bond yields peaked during the inflation bubble of 1981 they kept on hitting lower and lower highs during the eight cyclical selloffs, and they continuously made lower lows during the intermittent eight cyclical rallies.

Investors should keep in mind that, as I said before, the U.S. recession won’t end until production, employment, ‘real’ sales and organic personal income bottom within two months from each other.

In the meantime for those who want to play and are bullish on the economy, they could consider Goldman on dips. There are some who see Goldman Sachs back in the $250 zone in 2010. Don’t forget that Goldman Sachs’ strong and weak points are at work at the same time, which means they are betting on the markets. But the markets are betting also on Goldman. The stock is still well off its record high of $250.70 in 2007.

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So, U.S. Treasury Secretary Geithner is visiting the Gulf Arab states again. Here are some quotes of what he said today at the Jeddah Chamber of Commerce when aiming to reassure Gulf Arab states that the United States wants their investments and that their U.S. dollar...
Tuesday, 14 July 2009 02:44 PM
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