"The difficulties of life are intended to make us better, not bitter"
Author Unknown

I think after being in a relative silence for the last several weeks because of being consumed with the legal and administrative burden of starting my Pro career, it's time to catch up on the usual economic news and graphs.

The question on everybody's mind is whether the slump is likely to continue- unfortunately, I don't really have a concrete answer :) But there are some signs out there that it might not be quite over yet...

Let's start with another opinion- US Economy is quickly slipping into the "doom's day" scenario that could have been largely avoided if inflation was brought down under control last fall- quickly rising food and basic commodities prices, deteriorating credit situation because of additional write downs and massive simultaneous deleveraging around the world are starting to cause a chain reaction. Unfortunately, actual length of the recession/stagflation is now more important, in my opinion, than any absolute decline in any one sector. Think of it this way- any struggling business that thought that they had enough capital in reserves to weather a "usual" 3-4 quarter economic slowdown, now could be better off shutting down because things are not expected to get better in the short/medium term. Hence banks will have to write off more loans/ increase provisions for bad debt, because credit problems from housing related sectors (banks, mortgage lenders, home builders etc) are now rapidly spreading into sectors that would be your "usual" suspects when things out there get really nasty- autos, casinos, media, hospitality and/or anything that could be vaguely defined as consumer discretionary...

1. ABX indexes in pretty much all securities not rated as AAA have posted more declines and now are trading below the February lows. So much for the "write up" expectations that many have hoped for just two months ago...

Source: Markit

2. Situation with commercial mrtg backed securities is slightly better than it was back in February. It looks as if markets are becoming a bit more rational and instead of the "across the board" panic selling of March- you can actually clearly see the difference between securities of different "vintages", with AA and higher rated commercial mortgage backed securities issued in 2005 and early 2006 selling at relatively low spreads, but most of the lower grade and "younger" vintage paper is selling at spreads close to or higher than back in the early spring...

Source: Markit

3. Inflation expectations have been edging higher and higher and despite of all the "deflation" talk out there, represents pretty significant dilemma for the Fed. I am also starting to become really concerned that Fed's strategy of "monetary policy outsourcing" is going to significantly hurt the emerging markets and thus could possibly lead to a worldwide recession instead of the local North American one...

Source: ClevelandFed.org

4. What's more it now seems as if Fed Funds expectation have changed from the "virtually guaranteed immediate raise" in August predicted by futures several weeks ago, to an uncertain "maybe" in September...

5. So how close are we to the bottom? I've been growing more and more skeptical recently... According to a small research firm called TrimTabs Investment Research- BLS has been underreporting job losses by a pretty wide margin because of their survey deficiencies and thus things out there could be actually worth than headline numbers are suggesting. Below is the quote from their May macro release- while a bit late :) gives a pretty good summary why BLS's numbers aren't that good and are subject to some serious revisions- in contrast TrimTabs's numbers are based on daily treasury withholdings and thus are much better indicator of the real time health of the economy and they indicate things are getting worse not better...

"We believe the BLS is under reporting job losses for five reasons: The BLS survey period covered mid-April through mid-May, a period when the U.S. economy was just beginning to weaken. • The BLS applies flawed seasonal adjustments that typically mask subtle changes in the employment environment. • Only 40% to 60% of the BLS establishment survey is complete by the initial release date and is subject to large revisions in subsequent months. • Most of the initial respondents to the BLS survey come from government employment centers and large corporations so the survey does not adequately capture changes in employment in small and medium sized corporations. • The BLS applies a "birth/death" adjustment to their employment survey results which is nothing more than an educated guess."

To sum it up- may be my most recent shift towards defensive utilities/healthcare sectors hasn't been quite aggressive enough...

Stay safe out there, skepticalcapitalist@gmail.com