I hear that the stimulus package just started in May and its effect will be felt over the next three months.

To this I will say c’mon guys, that stimulus package is already in the full force for the two full months. In early March we all knew how much it will be and when it will come (and if we qualify, unlike me, for example). Most people have credit cards and can pre-spend the check in advance.

That’s what they did, the just released data show that consumer credit in March rose $15 bln, well above expected and above $5 bln in January. I assume that most people are making the best efforts to manage their finances and if they increase debt in the face of obvious economic difficulties I assume they do it within the margin set by this check in the mail. So those who planned to spend the check are already doing so.

The second category of people are those who don’t have any credit lines left and can’t pre-spend the check. I assume that those people have horrible debt situation and whe they get the check it will go straight to pay the pile of bills. Those people will not spend much when they get this check.

And the third category of people are those who don’t plan to spend it at all. It will go to savings, to reduce debt, to pay for the college for the Fall and stuff like that.

Looking at all this I think I can estimate that about $60 bln of the $110 bln stimulus package will be spent and the rate of spending is set in March, i.e. about $15 bln/months. So the last dime will be spent during the 4th of July fireworks. The recession, which is interrupted by now, will resume in July. Plan accordingly.


The trouble in BOA-CW deal came at interesting moment. As I’ve noted here, the T-bonds are at the most critical juncture in 10 months. Too much complacency (VIX sub 20 for a while) and too much T borrowings are about to produce a major T-bond “sell” signal.

There are three major buyers of T-bonds: domestic investors looking for safe heaven, FCBs and speculators. If the chart bends the third group will be out, the first group will shrink. The T-bonds will fall until they find a firm support, but that could be a disaster for the economy.

I’ve demonstrated my concern. Now Bernanke needs to show his concern. The very good and sure way to save the treasury market will be to let Countrywide to fail. They are not so important for the economy and it would be a fair price to save the rest of us. Think of it as of timely sacrifice 🙂

Please read this nice post from sudden debt about rotten Friday job report. I’ll just add few comments.

As you know after the crash of Communism a lot of manufacturing jobs in US were outsourced to China and replaced with service jobs. The difference between manufacturing and service sector feels during downturns.

Suppose you have a manufacturer who lost 10% of sales. What he will do? He will just fire 9% of factory workers, as simple as that.

Now suppose you have an auto dealer who lost 10% of sales. Suppose he employs 10 people. Will he fire one them? No, he will switch three of them to work part-time (and cut health insurance to all three). This way he has more flexibility to cover Saturdays and evenings. Sometimes the car manufacturer has a promotion and he will give those 3 guys more hours for a week or two. If he loses another 10% of sales he will switch another three of them into part-time. As you see the payroll statistics will show no lay-offs from this firm.

Look at the chart of long-term T-bonds:

The last 3 minimums made a very clear neckline for a potential head-and-shoulders, but the chart happily bounced again to start the next run up. Until yesterday. The chart fell back to the neckline. If it bounces it’s all fine. If it falls through down we’ll have a nasty downfall of treasury bonds in the face of deteriorating economy. The consequences could be pretty nasty.

What’s the reason? Please read here.

Just after I’ve made two posts here and here saying that in the case the stock market does not flop back to bull mode the current level already looks like an exhaustion point after which the bear programming should continue. I also copied two messages from other board here where Charmin says that the current point is very similar to June of 2001. Everything that happened in the last two months is very, very typical for the bear market.

Well, apparently Bernanke is reading the charts as well, and I suspect that he’s reading the charts much better than I do. He made the announcement to expand TAF by another $50 bln. Remember this post? Where Bernanke says he’s now accepting catshit as TSLF collateral? Well, today he announced that even miceshit is accepted. The Fed coffers must be quite smelly now 🙂

The time of this announcement was incredibly damaging for bears. Surely the stocks rally with a danger that the technical parameters of the bear market will be broken. As millions of people are trading by those charts you can expect an extended rally that will fly away from any fundamentals. Bernanke does read the charts, this is why Bernanke put is so real.

Before you trade check this nice site. Trade safely.

A little bit of chartism. Look at the Nasdaq:

  • Look how all my moving averages crossed each other in early January at 2500. We are just 20 points below that magical crossover
  • Look how today close is exactly at the trendline that connects November and December peaks
  • We are one shot below 200 DMA
  • Slow stochastic is where it was back in October

Now the weekly chart:

  • The slow stochastic is at October maximum

Conclusion: if we are in the bear market than it’s a perfect point to turn down. If it turns up from here than we are not in the bear market anymore. Very interesting, critical moment

1. The expectations are running high

The week of April 28 Barron’s ran a cover story “The Bulls are Back”.

bull in the water

AND NOW, FOR SOME GOOD NEWS: THE OTHER SHOE isn’t going to drop. After a winter of discontent marked by massive write-offs on Wall Street and a wilting economy on Main, America’s portfolio managers have declared that the worst is over. More than half of the institutional investors participating in our latest Big Money poll say they’re bullish or very bullish about the prospects for stocks through the end of 2008. Their forecasts suggest they’re even more upbeat about the first half of 2009.

The market expectations run high:

Market sentiment

This Barron’s declaration prompts me to write several posts that I want to unify by the title “Where is my recession?”. The goal is to carefully run through the bulls and bears arguments and collect the readers opinions that will help to proceed to the next step.

Are the bulls correct and the economy (what they really care of are the profits of listed corporations) is on the way to bottom soon and recover going into later this year? Or what we see is a classic front page indicator marking the foolish euphoria right before the real meltdown starts?

2. The economy as a dynamic equilibrium

First of all, what are we talking about? What is a downturn or a recovery? If we think about the economy is like a big barge that almost always exists in a state of some kind of dynamic equilibrium. Dynamic equilibrium means that there is a multitude of forces that are constantly pulling and pushing this barge in different directions and those forces sums up into one force that is making this barge to slowly drift in one direction. Most of the time this barge is slowly drifting in one direction with GDP growing close to 2.5% trend growth. Sometimes it slows below 0% or above 5% – way out of the trend.

What it this trend move at all? The civilization exists by consuming natural resources and converting them into goods. The western market economy proves itself to be the most efficient in processing the natural resources, which makes the developing world to ship their natural resources to us rather then trying to process them themselves. The whole process of working out natural resources and consuming the final goods is quite profitable and the western world is booking the profits according to this advantage.

Sometimes the inefficiencies develop. They can be different. Sometimes the natural resources are overconsumed and that moves the profit from the processing to extraction, i.e from the West to the developing world. That makes the West profits to fall and the chain of overproduction unfolds backwards until it hits the initial resource extractors. Sometimes one of the West countries tries to book future profits and that makes it fat and lazy and then the creditors come and bankruptcies follow.

To sum it I can say that when GDP grows too fast it it inefficient, when it grows too slow it is unprofitable. The economy is bouncing between the efficiency and profits but makes it very slow, in 4 and 8 years cycles. This process is slow and the economy spends significant amount of time at the both ends of each swing. When a trend develops it takes a lot of time before it can be reversed.


So the purpose of this exercise is to find out if the forces that are pulling the economy out of this recession are on the rise while the negative forces that are pushing are deeper are contained.

3. The bull argument

Let me try to collect the essential bull arguments.

  1. The interest rates are extremely accommodative. Compare current rates with 8% rates at the beginning of the 1991 recession
  2. The Feds are extremely cooperative with all other measures. For example, they are lending to non-regulated institutions, which never happened since 1930s
  3. The stimulus package will help the consumer to overcome all the temporary problems ad restore confidence and consumption
  4. The subprime incident is almost over

The following posts will address those questions

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