Market analyst David Rosenberg of Gluskin-Sheff sees another recession storm appearing on the horizon. The dark clouds forming are rising food and energy costs. He doesn’t believe consumers will be able to weather their fury.
Using a little historical analysis Rosenberg finds an interesting metric…the ratio of crude oil to core CPI. This ratio recently crossed the 40x threshold for just the third time in history. The other two times this has happened – November 1979 and October 2007 – severe recessions began just two months later. Even breaches of the 20x level preceded the recessions of 1973-75, 1990-91, and 2001.
Here at the Economic Prism we consider the potential for another recession to commence several months from now to be highly likely. For in addition to a high oil to core CPI ratio, another historic milestone will soon be passed. What is it we’re talking about?
Only the conclusion of QE2, which is set to expire at the end of June.
“When you stop QE2 a major source of stimulus disappears,” says Robert Arnott, chairman of Research Affiliates. “The end of QE2 – if it’s not renewed with QE3 – may trigger a recession and a pull back in risk markets.”
Unconventional Debt Default
Quantitative easing – printing money and lending it to the Treasury – is insane. With oil over $100 per barrel and skyrocketing food prices, more quantitative easing is suicidal. But that doesn’t mean the madmen at the Fed won’t try it anyway.
Besides, what choice do they have? If the Federal Reserve doesn’t fund the Treasury’s deficits, then who will?
Not the world’s largest bond fund manager. PIMCO’s Bill Gross wrote in his April Investment Outlook, that he “has been selling Treasuries because they have little value within the context of a $75 trillion debt burden.
“Unless entitlements are substantially reformed,” he added, “I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates.”
When it comes down to it, the unconventional debt default by the U.S. Government via inflation, currency devaluation, and low to negative real interest rates, is already underway…
…Inflation, when you account for food and energy, is running at 6-percent annually.
…The dollar index is currently at 75.82…down 36 percent over the last 9-years.
…And the Federal Funds rate is at essentially zero…well below the rate of inflation.
Washington’s Budget Cut Farce
Yet even in the midst of debt default, be it unconventional, the U.S. Government can’t cut the budget. In fact, the 2011 fiscal year is half over and, still, there is no budget. So now Congress must pass an emergency spending bill to keep the government operating.
If you’ve been following the story you know the spending cuts being debated aren’t much of doodly-squat. They’re a farce.
The House Democrats will only agree to cut $32 billion…less than 2-percent of the projected $1.645 trillion deficit and less than 1-percent of total spending.
House Republicans want to cut $61 billion to bring total spending reductions to $100 billion. Yet, even cutting $100 billion amounts to just over 6-percent of the projected deficit and 2.6 percent of total spending.
This year the U.S. Government will spend $205 billion paying interest on existing debt. Based on the Obama administration’s own forecast, interest payments will grow to $928 billion in 2021. What this means is that, even if Congress is successful in cutting $100 billion in spending, this amounts to just 10.7-percent of what will be needed to cover interest payments alone within just 10-years.
Moreover, what this means is Washington isn’t serious about getting their spending under control. They pretend to be serious. But they really aren’t. They know that if they were serious they wouldn’t get reelected.
The populace wants something for nothing. The politicians promise to give it to them. For years and years they work their magic borrowing from the future. But alas tomorrow becomes today…eventually it ends in delusion and ruin.
for Economic Prism