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Expecting a V-Shaped Recovery? Consider Yourself Warned


Bad news is on the horizon -- and it's taking the form of a different letter.


Yesterday, Dallas Federal Reserve President Richard Fisher threw a little cold water on the V-shaped recovery madness everyone seems to be buying into these days.

Please consider Fed's Fisher: GDP Growth In Third Quarter Likely Lower Than Reported.

Speaking at a conference in Tyler, Texas, Fisher said he was willing to venture that the increase would not be "as robust as originally reported."

He did say, however, that the growth rate would still be positive -- though it would be closer to a rate of 2.5 percent -- and that growth would also be positive for the fourth quarter.

Even though he said economic growth would be positive, Fisher cautioned that the high unemployment rates would cause recovery from last year's financial crisis to be slow.

Managing Expectations

Get the idea the Fed is attempting to manage expectations? That's precisely what the Fed is doing.

When asked about the dollar at a question-and-answer session following his speech, Fisher said that lower interest rates haven't increased the risk of the dollar declining in value. Rather, he said, the weakening of the dollar was due to other major currencies entering the world's economic system.

"You'd expect with more participants that there might be some kind of rebalancing," but such evolution would be orderly and gradual, he said.

Let me get this straight: The dollar is falling because "other major currencies [are] entering the world's economic system."

Is he serious? What this proves is that these guys absolutely cannot think beyond their prepared remarks.

The Effect of Stimulus

A trillion dollars in stimulus (not counting bank bailouts) and other stimulus measures not labeled "stimulus" because everyone is getting tired of the word, only got us 2.5%-3.0% of GDP growth.

Dave Rosenberg was talking about GDP in today's Breakfast with Dave.

Heightened appetite for risk does not mean that credit problems have gone away as we see the global speculative-grade corporate default rate rise 12 basis points in October, to 9.71%. And Fitch just published a report indicating that the US banks can expect to see 10% of their $1.1 trillion of direct commercial real estate loans default and that the regional banks can expect to see "significant" cuts in their credit ratings.


Dallas Federal Reserve Bank President Fisher suggested yesterday that the Q3 real GDP print will be taken down from 3.5% at an annual rate to 2.5% -- despite massive government stimulus. (Is that all you get for your money?) And the Philadelphia Fed survey of professional forecasters shows that this collection of 41 economists just took down their 2010 Q1 GDP call to 2.3% from 2.5% and for next year's Q2 to 2.4% from 2.8%.

Meanwhile, the S&P 500 is currently trading as if the economy is going to expand at nearly a 5.0% rate in the coming year. If the consensus is right, then fair-value in the S&P 500 is closer to 900 than it is to 1,100. This by no means suggests that the speculative run is over; it only means that the folks allocating their capital to the stock market today do not adhere to the adage of "buying low and selling high" and are very likely the same folks who were buying at the top back in 2007 when "excess liquidity" themes were all the rage.

The Stall Rate

I'm of the belief that the first 2.0-2.5% of GDP is fluff hedonics, imputations, distortions, and unproductive spending that does nothing nor produces anything.

Heck, it's likely much higher than that. But Bernanke has stated that the economy needs to grow faster than 2.5% to gain any jobs. Now bear in mind, the name of the game isn't just to gain jobs, but to gain 100,000 jobs or more because that's his estimate as to how fast the labor market is expanding. Please see Bernanke's Outlook for Recovery and What It Means for Jobs for details.

At 2.5% GDP or even higher, unemployment will keep rising even as the effect of the stimulus is starting to drop off. Meanwhile the much-touted ECRI leading indicators dropped 1.4 points and hit an eight-week low. Those green shoots (which was, in reality, nothing more than government throwing money around), are starting to die on the vine, even as Obama is concerned about rising deficits and inflation hawks on the Fed are rattling cages about removing stimulus.

Those touting a "V-shaped recovery" are forewarned: Shockingly bad news is on the horizon and it's the shape of an "L" or "WWW."

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