This is No Cyclical Recession… It is a Secular DE-pression - TheNewTopical.com - current events, politics, culture, ethics, economics discussion forum

FredFredson · #1 (**permalink**) 10-11-11, 01:42 AM

This is No Cyclical Recession… It is a Secular DE-pression

Submitted by Phoenix Capital Research on 11/09/2011 10:56 -0500

Few if any commentators understand what is happening in the US today. The reason for this is that the vast majority of investment professionals believe that what they’ve experienced in their lifetimes is the norm.

Put another way, an entire generation of investment professionals has:

1) Never witnessed a secular economic change
2) Never witnessed or invested during a bear market in bonds
3) Hasn’t studied enough history to know about either of these items

I firmly believe that what’s happening in the US today is not a cyclical recession, but a one in 100 year, secular economic shift.

See for yourself. Here’s duration of unemployment. Official recessions are marked with gray columns. While the chart only goes back to 1967 I want to note that we are in fact at an all-time high with your average unemployed person needing more than 20 weeks to find work (or simply falling off the statistics).

Here’s the labor participation rate with recessions again market by gray columns:

Another way to look at this chart is to say that since the Tech Crash, a smaller and smaller percentage of the US population has been working. Today, the same percentage of the US population is working as in 1980.

Here’s industrial production. I want to point out that during EVERY recovery since 1919 industrial production has quickly topped its former peak. Not this time. Despite spending TRILLIONS in stimulus industrial production is well below the pre-Crisis highs.

Again, what’s happening in the US is NOT a garden-variety cyclical recession. It is a STRUCTURAL SECULAR DEPRESSION. And the reason is that we are currently witnessing the collapse of the greatest debt bubble of all time.

Going into this recession, total US credit market debt was at its highest level of all time: over 350% of GDP. In comparison, during Roosevelt’s New Deal during the Great Depression we hit only of 300% total GDP.

Debt is absolutely endemic in our financial system. The average non-financial corporation in the US is sitting on a debt to equity ratio of 105%. Bank leverage, while relatively low compared to Europe (13 to 1 vs. 26 to 1), is still high enough that an 8% drop in asset prices wipes out ALL capital.

Debt is absolutely endemic in our financial system. The average non-financial corporation in the US is sitting on a debt to equity ratio of 105%. Bank leverage while relatively low compared to Europe (13 vs. 25) is still high enough that an 8% drop in asset prices wipes out ALL capital.

The situation is even worse for the US consumer. During the housing boom, consumer leverage rose at nearly twice the rate of corporate and banking leverage. Indeed, even after all the foreclosures and bankruptcies, US household debt is equal to nearly 100% of US total GDP.

To put US household debt levels into a historical perspective, in order for US households to return to their long-term average for leverage ratios and their historic relationship to GDP growth we’d need to write off between $4-4.5 TRILLION in household debt (an amount equal to about 30% of total household debt outstanding).

Again, this is not a garden-variety recession. This is a structural secular DEPRESSION. And we’re nowhere near the end of it. Indeed, if anything, we’re about to enter the second and worst round of the Great Crisis: the sovereign debt round.

Folks, we’re not out of the woods yet… not by a long shot. The same problems plaguing Europe today are coming to the US’s shores. And when they do, everyone will realize what I’ve been saying since 2009: that 2008 was the warm up… the REAL Crisis is when the US defaults and we face systemic collapse.

FredFredson · #2 (**permalink**) 10-11-11, 01:43 AM

Italy Sparks Market Bloodbath: Financial Stocks Collapse

Submitted by Tyler Durden on 11/09/2011 16:03 -0500

So much for the US decoupling. Following 5 days of persistent refusals to deal with reality, the real world finally came back with a bang, and while the overall market tumbled the most in two months, it is really financial stocks that took the brunt of today's beating. As the chart below shows, the XLF has literally collapsed with most major banks on the ropes, and the broker dealer index down 6.45% the most since August 10. The reason? Italy of course, and the fear that once the country is forced to write down its debt, the bank failures will proceed in waves: first Italian banks, then French, and then everyone else, especially those that have already been in the market's crosshairs for their exposure. And if today was ugly, tomorrow promises to be an absolute bloodbath with Italy deciding to proceed with the issuance of €3 billion in 1 year Bills into what may well be a bidless market.

Unable to scramble back to VWAP, the buy-the-dippers faced some uncomfortable reality today in equities as we closed near the lows of the day in ES (on heavy volume). Financials dropped over 5.5% with some of the majors (MS, GS, BAC) and Minors (JEF) stumbling very hard. The biggest drop in financials in over two months (and ES also!) was the worst performing sector as equity markets retraced more of that richness relative to credit that has been hanging over this rally's head. Wherever you looked there was pain with Copper smashed lower (along with silver and less so Gold) as the dollar tore higher after EURUSD fell over 330pips from its morning highs.

ES managed a small pull off the lows into the close but remained well south of both VWAP (light blue) and CONTEXT (dark blue) as volume was 15% above average.

A one-day drop in the Financials ETF of over 5.5% is the most since the early August chaos.
And as usual, this is what happens when too much faith in central planning meets reality:

But it will get worse: unless the ECB steps in early and forcefully tomorrow, this is coming:

Charts: Bloomberg

FredFredson · #3 (**permalink**) 10-11-11, 01:45 AM

Asian stocks open sharply lower on new eurozone fears

BBC News - Asian stocks open sharply lower on new eurozone fears

Asian stock markets opened sharply lower on Thursday after Italy's record-high cost of borrowing renewed fears over the eurozone crisis.

Japan's Nikkei index fell 2.3%, Australia's ASX was down 2.8% while South Korea's Kospi opened 2.6% lower.

The falls in Asian markets follow losses in US markets.

The cost of borrowing on Italian government bonds jumped to 7% on Wednesday, a level considered unsustainable by economists.

The high interest rate means that if Italy were to borrow money today, with the aim of paying it back in 10 years, it would have to pay an interest of 7%.

Italy has a low growth rate, which means it would struggle to repay its debt at these rates.

Analysts say some actions need to be taken in Italy in order to calm markets.

"Europe has moved from a manageable crisis in Greece to a much bigger challenge in Italy," said Frederic Neumann from HSBC in Hong Kong.

"We need radical solutions at this point to backstop the markets."