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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1304.86 as this post is written

My overall analysis indicates a continuing elevated and growing level of danger which contains  many worldwide and U.S.-specific “stresses” of a very complex nature.

I have written numerous posts of some of what I consider both ongoing and recent “negative developments.”  These developments, as well as other highly problematic conditions, have presented a highly perilous economic environment that endangers the overall financial system.

My analysis continues to indicate that there are many reasons for tremendous concern, as seen in almost innumerable fundamental economic, financial-market, and proprietary measures.   Many prominent parties seem to be fixated on the European financial problems.  While I continue to believe that these European problems are gravely serious and disconcertingly intractable, and have broader implications (as explained in the November 17, 2011 post “Europe And Contagion – Broader Implications“), exceedingly problematical U.S. economic problems also exist.  While many would refute this view – as seen in a variety of recent economic and market forecasts that continue to indicate low probabilities of any type of serious adversity – my analyses indicate this optimism is misplaced, unfortunately.

Among the greatest threats to a quality, sustainable U.S. economic recovery (or expansion) is the existence – and future resolution of – a variety of asset bubbles.  While the collective belief appears to be that either such bubbles don’t exist – or if they do exist, they are not something to be unduly concerned about – I continue to find these asset bubbles alarming, and have written extensively about them.

Predicting the timing and extent of a stock market crash is always difficult, and the immense complexity of today’s economic situation makes such a prediction even more challenging. With that being said, my analyses indicate that the danger inherent in the financial system has reached a level at which a stock market crash – that would also involve (as seen in 2008) various other markets as well – has reached a level at which a near-term crash is of tremendous concern.

(note: the “next crash” has outsized significance and implications, as discussed in the post of January 6, “The Next Crash And Its Significance“)

As reference, below is a one-year daily chart of the S&P500, indicating both the 50dma and 200dma as well as price labels.  The current price is 1304.86:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1304.86 as this post is written

While my thoughts on the topic are complex, and I am not necessarily in agreement with it, I think highlighting some reference material on the the “Dual Mandate” is apropos as I expect there to be much more mention of this in the future.

One of the most thorough discussions of the “Dual Mandate” – especially in the context of our current economic situation – can be found in a February 13, 2012 speech by FRBSF President and CEO John C. Williams titled “The Federal Reserve’s Mandate and Best Practice Monetary Policy.”

An excerpt from the speech:

Let me start with the Fed’s mission. It’s often said that Congress assigned the Federal Reserve a dual mandate: maximum employment and stable prices. But, that’s not quite accurate. In fact, the Fed has a triple mandate. Section 2A of the Federal Reserve Act calls on the Fed to maintain growth of money and credit consistent—and I quote—“with the economy’s long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

The above paragraph contains a footnote referencing the following, as seen in the Federal Reserve Act, Section 2A (Monetary Policy Objectives):

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

[12 USC 225a. As added by act of November 16, 1977 (91 Stat. 1387) and amended by acts of October 27, 1978 (92 Stat. 1897); Aug. 23, 1988 (102 Stat. 1375); and Dec. 27, 2000 (114 Stat. 3028).]

The speech also contains a variety of other notable material, including some long-term charts illustrating various pertinent metrics concerning the “Dual Mandate,” as well as the first endnote, an excerpt of which is seen below:

It is interesting to note that the Federal Reserve’s legal mandate has evolved over time in response to economic events and advances in understanding of how monetary policy and the economy function. For example, in the original Federal Reserve Act of 1913, the Fed had no mandate for macroeconomic stabilization and was only charged with providing an “elastic currency” and to act as a lender of last resort for banks. The quote here originates in the Federal Reserve Reform Act of 1977 and remains in place today. See Judd and Rudebusch (1999) for some discussion and more details.

The Federal Reserve Bank of Chicago also maintains a page on the “Dual Mandate” with charts updated as of May 9, 2012.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1320.06 as this post is written

Although financial stocks have increased in price in 2012, I continue to believe that the longer-term “price action” of various financial stocks is disconcerting.  I view the poor performance of these financial and brokerage stocks to be one indicator among (very) many that serves as a “red flag” as to the financial markets and economy as a whole.

Here is an updated chart to that shown in the aforementioned June 29, 2011 post.  It shows the XLF (the financial ETF) on a daily basis since 2007.  As well, the S&P500 is plotted above it, with GS and JPM shown below it.  The blue line on each indicates the 200dma:

(click on chart image to enlarge)(chart courtesy of StockCharts.com; chart created by and annotated by author)

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1340.28 as this post is written

I think that the relatively poor “price action” of various financial stocks is notable.  It is one of many current indications that overall stock market health is not as strong as a casual glance at the major indices would indicate.

I continue to believe that the lagging / “sagging” price of various financial stocks is highly notable.  Here is a chart that I created a while ago that provides another view of the poor “price action” of the financial stocks vs. that of the entire stock market, as depicted by the S&P500:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart created by and annotated by author)

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The above chart is depicted on a daily basis, LOG scale, since 2007.   On each of the three plots, a blue line depicts the 50dma for perspective.

As one can see, there has been an interesting progression of the relative price of the XLF (Financial SPDR) vs. the S&P500, as seen in the top of the chart.  In the middle of the chart, the same can be seen in the $XBD (Broker/Dealer Index).  Generally, since mid-2009, the price of both the XLF and $XBD have been on a slow downward trajectory relative to the price of the S&P500.  The S&P500 is plotted on the bottom of the chart.

In my experience, any time the financials lag the general stock market for a considerable period, it is generally a “red flag” that should be closely monitored.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1336.93 as this post is written

I found various the following excerpts to be notable:

The economy is expected to add about 185,000 jobs a month over the next year. That rate of growth hasn’t been seen since 2006, but it remains too slow to bring down the unemployment rate quickly.

also:

Meanwhile, the prospect of another recession over the next 12 months remains remote. On average, economists put just a 16% chance of another downturn.

also:

But contagion from Europe was the biggest potential pitfall cited by more than half the respondents.

Also, as seen in the Q&A section (in the spreadsheet), the percentage of  economists who see the Federal Reserve starting “another round of large-scale bond buying in 2012″ is at 24%.  Also, as to whether the risk to their 2012 economic forecasts are to the upside or downside, 70% said to the downside.

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The current average forecasts among economists polled include the following:

GDP:

full-year 2012:  2.5%

full-year 2013:  2.6%

full-year 2014:  3.0%

Unemployment Rate:

December 2012: 7.9%

December 2013: 7.4%

December 2014:  6.8%

10-Year Treasury Yield:

December 2012: 2.47%

December 2013: 3.10%

December 2014:  3.67%

CPI:

December 2012:  2.3%

December 2013:  2.3%

December 2014:  2.6%

Crude Oil  ($ per bbl):

for 12/31/2012: $100.76

(note: I highlight this WSJ Economic Forecast survey each month; commentary on past surveys can be found under the “Economic Forecasts” category)

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with many of the consensus estimates and much of the commentary in these forecast surveys.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1338.35 as this post is written

Each of these interviews and articles is in some way a reaffirmation of ECRI’s recession call of September 30, 2011 that the U.S. was “tipping into recession,” and ECRI has reaffirmed that view since, including a notable statement on March 15 (“Why Our Recession Call Stands.”)

While I don’t necessarily agree with ECRI’s analyses and conclusions -my overall thoughts on ECRI’s measures and methodologies are complex and lengthy – below are various of last week’s comments that I find notable:

Bloomberg video, May 9:  ”Lakshman Achuthan on Renewed U.S. Recession Call: Video”

ECRI, May 9:  ”Revoking Recession:  48th Time’s The Charm?”

Here, ECRI discusses a variety of issues – including whether recessions can be avoided – and highlights the YoY Growth in Real Personal Income, especially for the last 3 months.  An excerpt:

For the last three months, year-over-year growth in real personal income has stayed lower than it was at the beginning of each of the last ten recessions. In other words, this is what personal income growth typically looks like early in a recession.

ECRI, May 11: “Rising GDP Doesn’t Rule Out Recession.”

What most people don’t understand is that recessions often begin when gross domestic product is still showing positive growth.

Four of the past six recessions started during a quarter when GDP was growing, as did 72% of all recessions in the past 94 years[1].

also:

One reason we believe the economy is heading for recession now is weak job growth. Since February, job growth has turned down, as have other key indicators.

also:

In fact, our research shows a new recession is likely to start by mid-2012. Under the circumstances, complacency about U.S. recession risk is likely to prove badly misplaced.

For a variety of reasons, I am not as enamored with ECRI’s WLI and WLI Growth measures as many are.

However, I do think the measures are important and deserve close monitoring and scrutiny.

The movement of the ECRI WLI and WLI, Gr. is particularly notable at this time, as ECRI publicly announced on September 30, 2011 that the U.S. was “tipping into recession,” and ECRI has reaffirmed that view since, including a notable statement on March 15 (“Why Our Recession Call Stands”) as well as various interviews and statements this week, including:

Bloomberg video, May 9:  ”Lakshman Achuthan on Renewed U.S. Recession Call: Video”

ECRI, May 9:  ”Revoking Recession:  48th Time’s The Charm?”

Wall Street Journal video, May 9: “Free Market Economies Have Business Cycles”

ECRI, May 11, “Rising GDP Doesn’t Rule Out Recession.”

Below are three long-term charts, from Doug Short’s blog post of May 11 titled “ECRI Update:  Reaffirming the Recession Call…Again.”  These charts are on a weekly basis through the May 11 release, indicating data through May 4.

Here is the ECRI WLI (defined at ECRI’s glossary):

(click on charts to enlarge images)

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This next chart depicts, on a long-term basis, the Year-over-Year change in the 4-week moving average of the WLI:

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This last chart depicts, on a long-term basis, the WLI, Gr.:

_________

I post various economic indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1353.39 as this post is written

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1357.99 as this post is written

These charts raise a lot of questions.  As well, they highlight the “atypical” nature of our economic situation from a long-term historical perspective.  I regularly discuss many troubling characteristics of our economy in this EconomicGreenfield.com blog.

All of these charts (except one, as noted) are from The Federal Reserve, and represent the most recently updated data.

The following 8 charts are from the St. Louis Federal Reserve:

(click on charts to enlarge images)

Housing starts (last updated 4-17-12):

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The Federal Deficit (last updated 2-13-12):

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Federal Net Outlays (last updated 2-13-12):

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State & Local Personal Income Tax Receipts  (% Change from Year Ago)(last updated 3-29-12):

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Total Loans and Leases of Commercial Banks (% Change from Year Ago)(last updated 5-7-12):

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Bank Credit – All Commercial Banks (% Change from Year Ago)(last updated 5-7-12):

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M1 Money Multiplier (last updated 5-3-12):

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Median Duration of Unemployment (last updated 5-4-12):

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This next chart is from the CalculatedRisk.com blog post of 5-4-12, titled “April Unemployment Report:  115,000 Jobs, 8.1% Unemployment Rate“ and it shows (in red) the relative length and depth of this downturn and subsequent recovery from an employment perspective:

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This last chart is of the Chicago Fed National Activity Index (CFNAI) and it depicts broad-based economic activity (last updated 4-26-12):

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I will continue to update these charts on an intermittent basis as they deserve close monitoring…

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1359.57 as this post is written