“Double Dip” is Here

Technically, we can’t have a double dip since the last recession ended almost an year back. But, humor me, will you? The meat is all the same; it’s just the label that’s in dispute.

Equities rallied by ~3.6% over the first 3 days of this week on basis of 3 pieces of backward looking data, plus hope and prayer. Market has moved up citing news about decent Consumer Spending, ADP Employment Report, Factory Orders. I believe that each of these reports hide problems within such as inflation, data volatility and easy comparisons. There has also been talk of QE3 after talks about further easing in FOMC meetings, which I think is rather wishful. QE2 was not sailed to fuel risk-appetite, but to defend against deflation, which central bankers simply can’t have. We don’t have deflation. CPI is picking up. How do people expect market to do another round of easing, when QE2 did nothing for the dual mandate of the Fed, is beyond me. This makes Rick Perry’s prayer rally look more sensible.

On the other hand, forward looking data has continued to come out negative. Consumer Confidence is down to 44.5, when consensus was 52.5. This is the lowest it has been since April 2009. The forward looking pieces, notably New Orders, of ISM signals a contraction. MBA Refinance and Purchase Applications are down by 10%.

Outside US, Canada GDP turned negative.In Italy, Berlusconi stepped back from the promised austerity programs, which was the condition for ECB bond buying program. The situation in EU is not going to improve easily as EU has become a dysfunctional family with Papa France and Mama Germany. This drama will continue because growth is nowhere to be found. Eurozone ISM recently dipped below 50. Korea ISM also dipped below 50. GDP growth in South Africa and India has slowed down. Brazil unexpectedly cut its interest rate as it expects lower growth. In China, inflation hit a peak and the government authorities are trying to control lending, which is happening from off-balance sheet, as required reserves in China is already 21.5%

None of this bodes well. I don’t expect another 2008, but it is becoming harder to deny a double-dip.

In company news, we saw a $3.2bn deal between Exxon and Rosneft. I think this bodes well for shale exploration is US, as this shows how desperate Big Oil is to invest anywhere that may lead to a sizable expansion of capacity. We also saw problems with the $39 bn deal between AT&T and T-Mobile. DoJ doesn’t usually file suits, so this bodes poorly for the acquisition without significant and speedier steps.

On the government front, White House is proposing a $50bn Infrastructure Bank. Given the partisan environment in DC, I doubt there will be any direct spending, but a compromise could be Federal government backstopping munis and state bond issuance.


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