Recession Not Over

I agree with Shilling, the recession is far from over and the worst is yet to come. The robust earnings of the nation's largest banks are smokescreen based on changes in accounting rules and gains in trading revenue. Loan portfolios are continuing to deteriorate with credit card defaults rising to record levels and commercial real estate loans about to blow up. The stock market rally looks similar to the bear market rally during the Great Depression only to be followed by the worst of the decline. Use this rally to lighten up equity positions, the rally is a gift to those who failed to sell before last years crash.-Lou

False Bottoms

A. Gary Shilling, 07.15.09

The recession is not over. Investors will soon return to worrying about deflation and weak share earnings

Despite a 31% gain in the S&P 500 since Mar. 9 reports of the bear market's demise are greatly exaggerated. There have been statistics that suggest otherwise--that the economic decline is tapering off or that green shoots are sprouting on the economic landscape--but before you kick your shoes off and frolic in the foliage, take a hard look at the stock rally and our economy.

The stock market is exhausted, and I think investors are again worrying about the reality of a deepening worldwide recession. They're beginning to shun stocks, sell commodities and buy the buck. And they're grasping Treasurys to their bosoms as they again fear deflation.

False signs of a recovery are common in recessions. Since World War II there have been 11 recessions, and in 8 of them real GDP rose in at least one quarter well before the recession was over. Recessions don't start at the top and go straight to the bottom. I see the current downturn as following a sawtooth pattern along a declining trend. It's quite normal to have upticks in an otherwise bad-news economy. A rebound from last fall's financial and consumer spending nosedives was likely. If things continued straight down, this recession wouldn't just be the worst one since the Depression, it would rival those dark days when unemployment rose to 25%. It's not that bad today.

The government has been pouring hundreds of billions into the economy, but so far most of its programs are off to slow starts. The Public-Private Investment Program, for example, may be mortally wounded by the emasculation of mark-to-market rules. Banks no longer have to mark their toxic assets down to the market prices where hedge funds and others will buy them. So they can sit on dead assets and pretend that nothing is wrong. The consequence is that our banks are at risk of becoming zombies like Japanese banks in the 1990s.

The folks in Washington are big fans of modifying mortgages to make them more affordable. Alas, this doesn't cure what ails homeowners. More than 50% are behind in payments only 60 days after modification.

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