Double-Dip Recession, Possible according to IMF

Tuesday, June 29, 2010

According to IMF's Strauss-Kahn: A double-dip recession isn't the baseline forecast, but possible. This announcement came after US stocks tumbled again on Tuesday 268 points on the DOW, as US data, and China reports its spur flight from risk. Gold futures have erased slight losses as a broad market swoon leads investors to the perceived safety of the metal.

Recovery faces a tough road, double dip or not. Now, especially after Tuesday's alarming 9.8-point drop in the Conference Board's index of U.S. consumer confidence,and additional pressures make that option viable.

While that's not a consensus forecast among economists, both the data and the gloom pervading financial markets suggest the current recovery will be a long, painful process.

As some observers pointed out during the recession of 2008-2009, this recovery would not match the fast rebound that followed the past two recessions. Whereas those involved a traditional business cycle reversal, this one was provoked by a financial crisis and so would be dogged by the spending restraint with which consumers, businesses and governments pared down debt.

It's why Steven Ricchiuto, chief economist for Mizhuo Securities U.S.A., believes the U.S. economy is destined for another contraction soon.

"Europe is going into a deflationary environment, Japan is in deflation, and we teeter with deflation," Ricchiuto said. "In this environment, are China and Brazil strong enough to counter that? I don't think so."

If there's a bright side to such predictions, it's that many in the double-dip camp don't see another contraction in the order of the 6.4% seen in the first quarter of 2009. Ricchiuto talks only of "a couple of quarters of down 0.5 to 1.0%."

Tuesday's most-actively traded gold contract, for August delivery, recently was up $6.30, or 0.5%, at $1,244.90 an ounce on the Comex division of the New York Mercantile Exchange. "Everything is getting hit today," said Bart Melek, global commodity strategist with BMO Capital Markets.

Gold prices lagged behind U.S. Treasurys and the yen--also viewed as refuge investments--but the yellow metal is now gaining momentum as investors seek to broaden their base of safe-haven holdings.

"Investors have kind of run out of room to run," said Dan Cook, a Chicago-based senior market analyst with London-based brokerage firm IG Markets. "You don't want to carry all your eggs in one basket."

U.S. stocks fell sharply Tuesday as intensifying concerns over a slowdown in global growth spurred investors to seek safer assets. Bank fees in the Financial Overhaul Bill are estimated at $18Billion US Dollars if the Banking Bill is approved, and that upset investors that are pursuing the banking sector as a safe haven.

Worries about the global economic outlook have been building for a while. Tuesday, signs that growth is slowing in China sent investors seeking safety in the government bond markets, with the 10-year Treasury yield falling overnight to its lowest level since April 2009, and the two-year yield hitting a record low. Bond yields fall when prices rise.

European stocks tumbled Tuesday, nearing their lows for the year as fears grew that the global recovery is fading. At the same time, investors braced for any fallout from the end of the European Central Bank's extraordinary bank lending program.

The euro fell against the dollar despite a sharp drop in U.S. consumer confidence, gold prices bounced back from the day's lows to end little changed and oil prices fell.

Asian trading set the tone for the European session after Shanghai stocks ended at a 14-month low. The market slumped after a Chinese growth indicator was revised downward and the domestic part of the Agricultural Bank of China's initial public offering was priced lower than expected.

Riskier stocks tumbled Tuesday and investors flooding Treasurys sent the yield on the 10-year note below 3 percent, to its lowest level in more than a year.

Markets are jittery too about euro-zone sovereign debt ahead of Thursday's expiration of a 442 billion ($542.53 billion) European Central Bank bank-lending program as well as the potential fallout from bank stress tests by European governments. Investors also were spooked by the prospect of a slowdown in China as a surprise revision to a leading indicator contributed to a sharp fall in Chinese equities.

The selloff accelerated as U.S. consumer confidence fell more than expected and concerns mounted over European banks, dimming prospects for growth. Hopes that demand from China could help offset weakness in the U.S. and Europe also were hurt, as the Conference Board revised its April leading economic indicator for the country sharply lower.

"There's some concern that China's not the growth engine we thought it was," said Len Blum, managing partner at Westwood Capital LLC. "A lot of investors have been hooking their dreams to China's growth engine to pull us out of our problems. There's certainly a fly in that ointment this morning."

The Dow Jones Industrial Average fell below 10000, sinking 243 points, or 2.4%, to 9896 in recent trading. All 30 of its components were in the red, led by a 5.1% drop in Boeing. Components with significant overseas exposure led the broad decline. Caterpillar tumbled 4.8%, while Alcoa fell 4.4% and General Electric shed 4%.

The Standard & Poor's 500-share index fell 2.7% to 1045, its lowest intraday level since May 25, when it hit its weakest intraday level of the year at 1040.78. The S&P 500 was on track recently to finish below its lowest close of 2010 of 1050.47 on June 7.

All of the S&P 500's sectors were negative, led by declines in the riskier industrials, technology and financial sectors. Safer consumer staples and health-care stocks posted the smallest losses. The Nasdaq Composite slid 3% to 2154, stung by a 4.3% drop in Apple, a 3.7% slide in Microsoft and a 5.2% decline in Amazon.com.

Selloffs in Europe and Asia fed the U.S. market's decline. Investors sought the safety of gold futures and Treasurys, and the yield of the benchmark 10-year Treasury dropped below 3%.

Concerns surrounding the end of the European Central Bank's 12-month liquidity facility on Thursday also weighed on European markets and the euro.

The euro was recently trading at $1.2195, down from $1.2274 late Monday in New York. The U.S. Dollar Index, which tracks the U.S. currency against a basket of six others, jumped 0.5%.

Worries about global growth mounted after the Conference Board sharply revised lower its April leading economic indicator for China, raising fears that a key driver of the global economy could slow. The Shanghai Composite lost 4.3%, with the move by Agricultural Bank of China to cut the price range for the local portion of its estimated $23 billion initial public offering also weighing on Chinese equities.

Investors said renewed concerns that China's demand for materials and commodities could sink if its economy cools. Crude-oil prices tumbled more than 3% on Tuesday, falling below $76 a barrel.

New data on the U.S. housing market did little to encourage investors, despite the S&P/Case-Shiller Home Price Indices' slight improvement in April over the previous month, mostly thanks to the demand for homes ahead of the expiration of the federal tax credit.

The latest readings come on the heels of disappointing data last week on home-sales activity, including both new and existing units. Traders are particularly interested in the housing market as a harbinger of possible recovery or struggle in the U.S. economy, since the sector's meltdown was a key catalyst in causing the recent recession.

Investors' optimism dimmed Tuesday, with many looking ahead to Friday's key jobs report.

"The things that pulled us into the recession haven't been fully solved," Blum said, noting the continuing weakness in the jobs report. "There's a very good chance we could have a double dip or very slow economic growth, which will feel recessionary," he said.

Then add the U.N.s call to demote the US Dollar as the World currency Tuesday. It seemed like all the economic forces were taking their turn. According to a report released Tuesday, the Dollar should be replaced as the main Reserve Currency.

"The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency," said the World Economic and Social Survey 2010.

The report said a new system should be developed, which "must not be based on a single currency or even multiple national currencies." Instead, the report advocates the increased use of International Monetary Fund accounting units called Special Drawing Rights as a reserve asset.

SDRs are based on a basket of four currencies: the dollar, the euro, the yen and the U.K. pound. The weight of each currency in the basket stems from the value of exports and the amount of reserves denominated in the respective currencies held by other members of the IMF.

The U.N.'s suggestion is the latest in a series of proposals that have gained prominence since the financial crisis. Last year, Nobel laureate economist Joseph Stiglitz led a U.N.-appointed panel that also urged the replacement of the dollar as the world's reserve currency. Developing nations with high currency reserves, led by China, have also been vocal about the need to create a new global reserve currency.

The recommendation is only a small part of the 200-page U.N. report, which is mainly focused on sustainable economic growth. The U.N. cannot directly act upon the report's recommendation to replace the dollar as the main global reserve currency since increased use of SDRs falls under the purview of the IMF and World Bank.

The panel chaired by Stiglitz published a report in March 2009 that also proposed a SDR-based reserve system, arguing this "could contribute to global stability, economic strength, and global equity."

Earlier this year, Dominique Strauss-Kahn, managing director of the IMF, also envisioned the prospect that the fund could one day be the global provider of reserves. In a broad-ranging speech on the future mandate of the IMF, Strauss-Kahn stopped short of calling for a fund-created reserve asset, but said it is a longer-term issue worth considering.

A truly global reserve currency, he said, "would limit the extent to which the international monetary system as a whole depends on the policies and conditions of a single, albeit dominant, country."

And then there were rumors of changes to the U.S. financial overhaul bill are flying fast and furious on Capitol Hill, sowing confusion among lobbyists, lawmakers, and the press, according to the Dow Jones News sources. An alleged 2 p.m. EDT meeting of lawmakers on the "conference" committee working on the bill turned out to be a false alarm, but that didn't stop television cameras, top bank lobbyists, and even Rep. Darrell Issa (R., Calif.) from arriving at a locked House committee room.

BANK BILL: Current Senate Vote Tally
The current U.S. Senate vote tally on the "Dodd-Frank Wall Street Reform and Consumer Protection Act," which would overhaul Wall Street regulation.

Senators:
Daniel Akaka (D., Hawaii) No Answer

Lamar Alexander (R., Tenn.) No Answer
John Barrasso (R., Wyo.) No
Max Baucus (D., Mont.) No Answer
Evan Bayh (D., Ind.) Undecided
Mark Begich (D., Ark.) No Answer
Michael Bennet (D., Colo.) No Answer
Robert Bennett (R. Utah.) No Answer
Jeff Bingaman (D., N.M.) No Answer
Christopher Bond (R., Mo.) No Answer
Barbara Boxer (D., Calif.) No Answer
Sherrod Brown (D., Ohio) Yes
Scott Brown (R., Mass.) No
Sam Brownback (R., Kan.) No Answer
Jim Bunning (R., Ky.) No Answer
Richard Burr (R., N.C.) No Answer
Roland Burris (D., Ill.) No Answer
Maria Cantwell (D., Wash.) No Answer
Benjamin Cardin (D., Md.) Yes
Thomas Carper (D., Del.) Yes

Robert Casey, Jr. (D., Pa.) No Answer
Saxby Chambliss (R., Ga.) No Answer
Tom Coburn (R., Okla.) No Answer
Thad Cochran (R., Miss.) No
Susan Collins (R., Maine) Undecided
Kent Conrad (D., N.D.) Undecided
Bob Corker (R., Tenn.) Undecided
John Cornyn (R., Texas) No Answer
Mike Crapo (R., Idaho) No
Jim DeMint (R., S.C.) No

Christopher Dodd (D., Conn.) Yes
Byron Dorgan (D., N.D.) No Answer
Richard Durbin (D., Ill.) Yes
John Ensign (R., Nev.) No Answer
Michael Enzi (R., Wyo.) No Answer

Russell Feinfold (D., Wis.) No

Dianne Feinstein (D., Calif.)Yes
Al Franken (D., Minn.) No Answer

Kirsten Gillibrand (D., N.Y.)No Answer
Lindsey Graham (R., S.C.) No Answer

Charles Grassley (R., Iowa) No Answer
Judd Gregg (R., N.H.) No
Kay Hagan (D., N.C.) No Answer
Tom Harkin (D., Iowa) Yes
Orrin Hatch (R., Utah) No

Kay Bailey Hutchison
(R., Texas) No
James Inhofe (R., Okla.) No Answer
Daniel Inouye (D., Hawaii) No Answer
Johnny Isakson (R., Ga.) No Answer
Mike Johanns (R., Neb.) No
Tim Johnson (D., S.D.) Yes
Edward Kaufman (D., Del) Yes
John Kerry (D., Mass.) Yes
Amy Klobuchar (D., Minn.) No Answer
Herb Kohl (D., Wis.) Undecided
John Kyl (R., Ariz) No
Mary Landrieu (D., La.) Yes

Frank Lautenberg (D., N.J.) Yes
Patrick Leahy (D., Vt.) Yes
George LeMieux (R., Fla.) No Answer
Carl Levin (D., Mich.) No Answer

Joseph Lieberman (I., Conn.) No Answer
Blanche Lincoln (D., Ark.) Yes
Richard Lugar (R., Ind.) No Answer
John McCain (R., Ariz.) No
Claire McCaskill (D., Mo.) Yes
Mitch McConnell (R., Ky.) No Answer
Robert Menendez (D., N.J.) No Answer
Jeff Merkley (D., Ore.) Yes
Barbara Mikulski (D., Md.) Yes

Lisa Murkowski (R., Alaska) No Answer
Patty Murray (D., Wash.) Yes
Ben Nelson (D., Neb.) No Answer
Bill Nelson (D., Fla.) No Answer
Mark Pryor (D., Ark.) No Answer
Jack Reed (D., R.I.) Yes
Harry Reid (D., Nev.) Yes
James Risch (R., Idaho) No Answer
Pat Roberts (R., Kan.) No

John Rockefeller (D., W.Va.) No Answer
Bernard Sanders (I., Vt.) Yes
Charles Schumer (D., N.Y.) No Answer
Jeff Sessions (R., Ala.) No Answer
Jeanne Shaheen (D., N.H.) Yes
Richard Shelby (R., Ala.) No
Olympia Snowe (R., Maine) Undecided
Arlen Specter (D., Pa.) No Answer

Debbie Stabenow (D., Mich.) No Answer
Jon Tester (D., Mont.) No Answer
John Thune (R., S.D.) No Answer
Mark Udall (D., Colo.) Yes
Tom Udall (D., N.M.) No Answer
David Vitter (R., La.) No Answer

George Voinovich (R., Ohio) No Answer
Mark Warner (D., Va.) No Answer
Jim Webb (D., Va.) No Answer

Sheldon Whitehouse (D., R.I.)No Answer
Roger Wicker (R., Miss.) No Answer
Ron Wyden (D., Ore.) No Answer

The seat of the late Sen. Robert Byrd (D., W.Va.) remains vacant.

(The tabulation is based on interviews by Dow Jones Newswires reporters with 44 senators or their offices. Senators marked undecided are those who say they are undecided.)

Don't be surprised if the final bill has no Bank fees, and that the World stock markets make a recovery over night.

Good Evening.