Sadly I’ve been right. The US is plunging into recession. Not just idling in, plunging. Last night’s collapse in the Philly Fed leaves no room for doubt. Europe will follow.
Next up in the US will be a new round of job losses. Look at this chart from Zero Hedge which compares the Philly Fed Index with unemployment:
These job losses will suppress already diving demand illustrated by the collapse in consumer confidence:
The Phlly Fed is signaling that the next phase is under way. Inventories will rise and orders will be cancelled. Production will fall and the global supply chain will be dragged in.
Chinese and Asian trade will be hit in coming months. As in the last cycle, commodities will be the last to crack, as Chinese growth falters. But they will crack. It is starting now.
This is baked into the cake. And is no disaster. The US Federal Reserve can intervene when commodities crash and reflate the system with an open-ended commitment to QE3 – Operation Twist – as it has become known. But they must wait, resisting the panic that the Philly Fed Index could instill. Inflation is too high and if they move too soon their own credibility will get drawn into the tempest.
The Fed faces a rather simple problem in this. Before its interest rates reached the zero bound, it could cut in steady steps, to a degree managing economic and market declines. Now it possesses only one gigantic bazooka. Print money or don’t. Thus Fed policy has come to match current market conditions. It is all or nothing: volatile. Ben Bernanke will be under enormous pressure to announce new measures at the Jackson Hole Conference next week.
But behind it all, the real problem remains Europe. There are dark rumours swirling around European banks and their inability to find $US funding. And looming over that, of course, is the increasingly obvious fact that the Eurozone has no obvious solution to its sovereign debt woes. No solution, at least, that is not utterly disorderly.
The notion that Europe will have to recreate its market structures amidst an already advancing recession is not a happy prospect. Forecasting outcomes for Europe at this stage is a mug’s game. All we can do is watch, wait and hope that the centre holds.
Markets are setting up to “retest” last week’s stock market low just as Bernanke takes the podium at Jackson Hole. At this stage, I think they’re going to cash straight through it.
