If the recession does wind down later this year, as many economists now expect, it will be nothing short of a miracle.

The natural forces that turn recessions into recoveries, such as the inventory cycle and a rising stock market, are being overwhelmed this time around by a number of negatives that have suddenly cropped up.

Take the lack of fiscal stimulus, for example.

As I wrote last week ( see May 26 column), only about $50 billion of the $787 billion stimulus package has hit the economy so far. Any additional funds will be equally slow in coming, since they are earmarked for states and local governments to upgrade their infrastructure, which can't be done overnight.

Even if this sum was tripled, it would clearly not be enough cash to turn the economy around from what in many respects is the worst recession since the 1930s....

Bank-run dark pools swelling in U.S. stock markets

TORONTO (Reuters) - Big banks are executing an increasing percentage of U.S. stock trades within their own walls, capitalizing on the credit crisis and enticing the most active traders away from the traditional exchanges.

"Dark pools," where orders are anonymously matched so that traders do not alert the wider market to their intentions, have triggered concerns that stock pricing may not be transparent.

But the growth of those run by broker-dealers such as Goldman Sachs and Credit Suisse are squeezing other "dark" electronic trading venues, as well as exchanges, resulting in lower fees.

The bank-run dark pools have only recently gained some traction in Europe, while other countries, such as Canada, are watching closely for signs of success or failure as U.S. equity markets fragment into some 40 venues.

Although executives and market watchers expect to see new U.S. rules to ensure public and accurate pricing of stocks, they also expect the private pools to grow beyond the relatively small niche they now occupy.

"The dark pools are definitely going to grow; the wild card is any new regulation," said Dmitri Galinov, director and head of liquidity strategy at Credit Suisse's advanced execution services, running the bank's CrossFinder dark pool.

http://www.reuters.com/article/domes...090604?sp=true

Before pricing in a rapid economic recovery, investors might consider the fundamentals of the economy's workhorse -- the U.S. consumer.

Despite recent frugality, consumers have barely dented their debt load. The Federal Reserve will offer a fresh peek at that mountain on Thursday, when it releases its "flow of funds" data for the first quarter.

By the end of 2008, households were on the hook for $13.8 trillion in debt -- nearly matching the $14.3 trillion output of the entire U.S. economy, not adjusted for inflation, that year.

Households are shedding debt; they're just not doing it very quickly. They owed roughly 130% of disposable income at the end of 2008, down only slightly from a record 133% in the first quarter of 2008.....

"U.S. Homebuilder Confidence Unexpectedly Fell in June" (Bloomberg):

Confidence among U.S. homebuilders fell unexpectedly in June, indicating that a recovery from the housing slump will be slow to develop.

The National Association of Home Builders/Wells Fargo index of builder confidence decreased to 15 this month from 16 in May, the Washington-based NAHB said today. A reading below 50 means most respondents view conditions as poor.

http://www.bloomberg.com/apps/news?p...d=aSGFRjuouGCU

"Treasury: Lending by Bailout Banks Fell in April" (Associated Press):

The Treasury Department says the value of loans held by the 21 largest institutions getting federal bailout support fell in April, the fifth decline in six months.

The department's monthly report of lending activity says that average loan balances at the 21 institutions totaled $4.34 trillion in April, down 0.8 percent from March.

Treasury has been issuing reports to track lending activity at banks that received capital from the $700 billion bailout fund. While activity has fallen in five of the past six months, the administration says the declines would have been even more severe without the government support.

http://www.forbes.com/feeds/ap/2009/...ap6545695.html

"Citigroup CEO: Accept New World of Tighter Credit" (Associated Press):

Citigroup Inc. Chief Executive Vikram Pandit says borrowers should accept a new world of tighter credit as financial institutions recover from months of bad loans, failed banks and foreclosed homes.

Pandit spoke Monday at the three-day National Summit, which is expected to draw about 3,000 attendees to Detroit over three days. The goal of the summit is to craft a plan to keep the U.S. competitive in manufacturing, energy, technology and the environment.

He anticipates less credit that is more expensive even as financial markets show signs of recovery. He also expects more corporate restructurings across different industries.

http://www.mercurynews.com/business/ci_12594623

"Is the Housing Bust About to Take Manhattan?" (Reuters):

New York City real estate prices are looking increasingly shaky as instability in two of the city's sexier submarkets -- second homes in the Hamptons, and new condos in Manhattan -- register the latest signs of a housing downturn.

http://www.reuters.com/article/newsO...55D1ON20090614

"U.S. Credit Card Defaults Rise to Record in May" (Reuters):

U.S. credit card defaults rose to record highs in May, with a steep deterioration of Bank of America Corp's lending portfolio, in another sign that consumers remain under severe stress.

http://www.reuters.com/article/ousiv...55E5GQ20090615

"US ECON: May Empire State Mfg Index Falls 5 Points to -9.41" (Reuters):

Washington, June 15 - The New York Federal Reserve Bank's Empire State Manufacturing Index unexpectedly dropped nearly five points in June to -9.41, a sign that manufacturing is still contracting in New York, although at a slower pace compared to Q4 2008 and Q1 2009. Economists were expecting a slight improvement to -4.50 from the -4.55 reported in May. The index has been in negative territory since May 2008.

http://www.forbes.com/feeds/afx/2009...fx6543487.html

"IMF Says Worst Not Over" (Reuters):

The head of the IMF questioned on Monday debate about when to roll back stimulus spending, saying the world economy had yet to weather the worst of a recession that claimed a record number of European jobs.

http://abcnews.go.com/Business/wireStory?id=7840093

"Idaho, US Rails Clogged With Cars Due to Recession" (Associated Press):

A growing number of idled boxcars and locomotives are filling the sidings in Nampa, reflecting the nationwide economic downturn and Union Pacific Railroad's decreased business.

"It's just a big visual manifestation of what's going on in our economy right now," Union Pacific spokeswoman Zoe Richmond told the Idaho Press-Tribune. "With consumer spending going down, our shipments have gone down."

http://www.forbes.com/feeds/ap/2009/...ap6544889.html

"Even Amish Getting Laid Off In Recession" (Chicago Sun-Times):

“Nowhere in U.S. Amish history has a down economy affected the Amish so much,” said Steven Nolt, a professor at Goshen College who has studied the Northern Indiana Amish and written books about them. “It’s a pivotal time for them.”

http://www.suntimes.com/news/nation/...061509.article

The U.S. economy will not recover until the end of this year, and even then growth will remain meek and vulnerable to higher interest rates and commodity prices, economist Nouriel Roubini said on Tuesday.

Roubini, who rose to prominence for predicting the global credit crisis, tore down the "green shoots" theory that a rebound is imminent, saying there was a significant risk of a "double-dip" recession where the economy expands slightly only to begin contracting again.

"In addition to green shoots there are also yellow weeds," he told the Reuters Investment Outlook Summit in New York.

He pointed to the growing divergence between business sentiment surveys, which have been improving in recent months, and industrial production, which is down sharply and receded another 1.1 percent in May.

Roubini, the head of economics research firm RGE Global Monitor, said the U.S. jobless rate, already at a 26-year high of 9.4 percent, would reach 11 percent before it begins to ease. He added that he saw few engines for growth given that U.S. consumers are tapped out

As a result, Federal Reserve policy-makers, whom Roubini says completely missed the magnitude of the crisis at its inception, face an unenviable set of policy choices.....

The global economy may fall back into a recession by late 2010 or 2011 because of rising government debt, higher oil prices and a lack of job growth, said Nouriel Roubini, the New York University economist who predicted the credit crisis.

A “perfect storm” of fiscal deficits, rising bond yields, “soaring” oil prices, weak profits and a stagnant labor market could “blow the recovering world economy back into a double-dip recession,” he wrote in a research note today. “It is getting more likely unless a clear exit strategy from the massive monetary and fiscal stimulus is outlined even before it is implemented.”

Some of this might trace to the nature of the recession, itself. Its onset caught most forecasters off guard, its causes were unique, and its severity fooled just about everyone.

That being the case, few pundits are willing to go out on a limb and use a precise number when discussing the months ahead.

You can't blame them. Some think that a sharp recovery usually follows a sharp decline. Others postulate the exact opposite, saying the causes of this recession were so unusual that it will take some time before the economy can shake them off.....

God the pumping is getting disgusting.

I want to put forward something objective and impossible to argue with: MATH.

Let's go back to this chart:



$2.5 trillion in consumer credit outstanding.

Now let's focus on the underlying fundamental reality of consumer-generated GDP and economic activity in general, and the impact of what I call the rate spread on that activity.

Back in 2007 before the mess got out of hand you could get a 5% 1 year CD. That's the savings rate, or what you were paid to save money.

In addition prime credit on revolving accounts was typically handed out (like candy) at 9.9% or less. I had credit cards with offered rates under 10% and so did a lot of other people. "Higher risk" but still "standard" rates were in the mid-teens (13-14%), with only penalty rates exceeding 20%. Nearly everyone could avoid a penalty rate by refinancing their house and paying off their credit card with the HELOC if required.

Ok.

Now we have this "crisis" but due to the lack of will in Congress, regulators and The Fed they fail to force the bad assets out into the open where they are marked to the market and the people who have those bad assets go under. Doing so would result in a lot of bank bankruptcies. This is thought of as "bad", but in fact it is only bad for the banks that have lied - the good banks (and there are some) and credit unions would win huge from such an event, as they'd not only get your deposits but also your loan business.

Nonetheless most if not all of the "big banks" are the ones who have Congress in their pocket and they're on the bad list.

So in response to this fees and interest rates have gone to the moon. I run no balance on my plastic and have a near-perfect FICO (being "dinged" only because I don't carry balances), charging and paying off every month, generating a very nice "discount" income for any card issuer that gives me credit. Nonetheless I have seen interest rates repriced "for market reasons" up to 13, 14 and in one case to 17.9%.

In addition the interest rate available on a 1 year CD has gone down from 5% to 1%.

What this does to the "spread" and thus private consumer activity is tremendous. Revolving credit is instantly repriced on the outstanding balance at the new interest rate, as are the CDs when they roll over, typically after a year.

For the "typical Grandmother" who was making 5% on her CD and paying 9.9% on her plastic, the spread was 4.9%. That is, 4.9% was the "real cost of credit" to her annualized.

Reasonable.

Now the credit card is 18.9% and her CD earns 1%. The spread is now 17.9%, or nearly 18%, an increase of 12.8%.

For the "subprime" borrower its awful as well. He has no savings, so the CD rate means nothing. But his credit card went from 20% to 36% due to missing one payment. He's seen a spread increase of sixteen percent.

Why does this matter?

It matters tremendously!

Remember, from the above there is $2.5 trillion outstanding in consumer credit. An increase of just ten percent in the spread cost for money means that $250 billion dollars each and every year does not get spent on consumption (and employment of those who make what was consumed), it instead goes to the banks to paper over their fraudulently-marked paper!

How big of a deal is this?

Our economy (at present) is around $13 trillion dollars (was closer to $14, but heh, 'tis a recession, right?)

This is thus a real and permanent 1.92% decrease in private-activity GDP each and every year and it will NEVER GO AWAY so long as "The Bezzle" mandates that the spread be used to cover up the fraudulent accounting at the banks and other financial institutions!

Nor does it stop with consumers. Corporations are also paying outrageous spreads over comparable Treasuries to borrow money compared to just a couple of years ago, and that interest once again is going to the banks and other institutions that buy their paper and use the excess spread to paper over THEIR losses on mismarked paper.

As such the $250 billion number is almost certainly greatly understating the true amount of the damage.

Folks, if you think that this sort of game-playing is somehow "beneficial" to the economy or it is "no big deal" this ought to disabuse you of that notion RIGHT NOW.

There is no possible way to generate a durable trend-growth economic recovery ever in the future until this game-playing stops. This is the fundamental reason that Japan never turned the corner and had a durable recovery and it is why we won't either.

It simply can't happen. The mathematics make it impossible, as that excess spread comes off GDP each and every year until the bad paper is either removed from the system or amortized and the excess spread disappears. Since most of this paper (especially that related to houses!) has amortization schedules measured in decades and an underwater homeowner cannot refinance, this drain on our economy is going to remain for years, not months.

There is only one way to stop it: FORCE all of the bad paper into the open immediately, close all the defunct institutions that this uncovers, and remove the excess liquidity so that the rate spread contracts back to a reasonable level. This means that I will once again be able to get a 5% CD and I will once again see "good credit risks" offered revolving credit at under 10%.

While this would trash a bunch of banks (and it should) it would free upwards of $250 billion dollars a year in consumer spending!

Our regulators and government officials are both protecting crooked dealing and destroying our economic recovery prospects.

Wake up America.

Paul Tudor Jones, the billionaire hedge-fund manager who outperformed peers last year, is wagering that Goldman Sachs Group Inc. and Morgan Stanley got it wrong in declaring the start of an economic recovery.

Jones’s Tudor Investment Corp., Clarium Capital Management LLC and Horseman Capital Management Ltd. are taking a bearish stand as U.S. stock and bond prices rise, saying that record government spending may be forestalling another slowdown and market selloff. The firms oversee a combined $15 billion in so- called macro funds, which seek to profit from economic trends by trading stocks, bonds, currencies and commodities.

“If we have a recovery at all, it isn’t sustainable,” Kevin Harrington, managing director at Clarium, said in an interview at the firm’s New York offices. “This is more likely a ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later.....”

The U.S. economic recovery will be “anemic” and prone to a relapse because it lacks momentum, Morgan Stanley economist Stephen Roach said.

“The economy is growing very close to what people refer to as a stall speed,” Roach, chairman of Morgan Stanley Asia, said in a Bloomberg Television interview today. “It lacks a cushion should there be something unexpected. When those shocks come, you don’t have the cushion and you’re vulnerable, you could have a relapse. Any recovery from a relapse will also be anemic. This is not the environment for a V-shaped recovery.”

The economy has lost about 6.9 million jobs since the recession started in December 2007, the worst of any downturn since World War II.....

U.S. officials contemplating an exit from record fiscal stimulus are in danger of repeating mistakes that plunged Japan into its lost decade of stagnant growth, according to Richard Koo of Nomura Research Institute Ltd.

“This isn’t a cold, its more like pneumonia,” said Koo, author of “Balance Sheet Recession,” a 2003 book about the malaise that hit Japan after its stock and real-estate markets crashed in 1990. “We still need more government spending,” he said, adding it could take “three to five years to get out of this mess, even under the best of circumstances.”

Koo’s comments echo the view of economists including Nobel laureate Paul Krugman, who warn that the U.S.’s likely return to growth in the second half of 2009 doesn’t mean a sustained recovery is assured. The Obama administration aims to rein in a record $1.4 trillion budget deficit as growth returns, seeking to safeguard the value of a declining dollar.

“If you learn your lesson from the Japanese experience, you don’t remove your fiscal stimulus until private sector de- leveraging is over,” Koo, 55, chief economist at the research arm of Japan’s biggest brokerage, said in an interview at his Tokyo office last week.....