Merrill Lynch's Rosenberg Says U.S. Economy Is on `Knife's Edge'

[EJ]

Rosenberg Says U.S. Economy Is on `Knife's Edge:' Chart of Day
November 1, 2006 (Thomas R. Keene and Brendan Moynihan - Bloomberg)

The U.S. economy is "on a knife's edge," and growth may slump to less than a 2 percent pace next year unless the Federal Reserve cuts interest rates, according to Merrill Lynch & Co. economists.

"Our recession-risk indicator is now at 51 percent odds for an actual economic downturn in the coming year," writes David A. Rosenberg, chief North American economist at Merrill Lynch in New York, in a note today. The last time the indicator registered that high was in the recession year 2001. product growth, adjusted for inflation, compared with Rosenberg's forecast of 2 percent growth in 2007 (the blue line). The 10-year trend in real GDP growth is shown in green.

Rosenberg says his forecast for next year is "predicated on the Fed cutting rates to 4 percent next year" from the current 5.25 percent.

Without that stimulus, growth could well be closer to a 1 percent to 1.5 percent range,'' he says. That's "weak enough to be considered in the 'hard-landing' zone," he says.

AntiSpin: That's more optimistic than my prediction: 90% chance of an "official" recession by Q2 2007, with several industries and regions of the US already in recession and others entering. An "official" recession is two quarters of negative GDP growth. Assuming you believe the GDP numbers, which lately appear to be flip-flopping faster than a politician's positions the week before an election.

Can there be any doubt that the housing industry has gone from seizing up to a "bust rate of decline" that is "significantly more rapid than the boom rate of growth"?

So far, so predictable. There will be plenty of surprises as our madcap, Frankenstein economy goes into recession, but the only surprise so far is that newly built unsold housing is hitting Step C a year ahead of schedule for sales of existing housing.

As transaction volumes continue to fall, demand for housing-related employment will decline too. The first signs of labor market distress will start to show up, as more and more of that 43% of the private sector who found jobs in the housing industry are no longer needed. Coincidentally, major employers—such as the U.S. auto industry—will be going through major restructuring, adding to pressures on housing prices in some areas. Some home owners will need to sell at a loss in order to move to regions of the country where the labor picture is better, and will do this if they have enough equity and are not paying cash out of pocket to cover their remaining mortgage obligations. These sales will further depress home prices.

As if on cue:

U.S. Factory Growth Slowest In 3 Years On Housing, Autos
November 1, 2006 (SCOTT STODDARD - INVESTOR'S BUSINESS DAILY)

It is the latest in a series of weak reports raising concerns that the economy may be slowing too fast. That spurred a sharp slide in stocks and bond yields.

Which leads us to Rosenberg's prediction of 4% interest rates. Yield curves are inverted globally. Gold prices are rising even as oil and gas prices plummet? What gives?

Stay tuned, as they say on the late night news.

[jk]

Re: Merrill Lynch's Rosenberg Says U.S. Economy Is on `Knife's Edge'

gold has finally decoupled from commodities- from oil and gas and base metals. i think copper was down 4% today, gold up 2%. commodities down => economic slowdown/recession. gold up => inflationary money pumping both current and expected.

[akrowne]

Re: Merrill Lynch's Rosenberg Says U.S. Economy Is on `Knife's Edge'

What is interesting is that it is pretty obvious that corporate earnings have little if anything to do with interest rates. The only legitimate reason to cut them would be to lower interest rates for consumer credit -- surely the Fed must know this.

But then there's that stubborn core inflation ... and another thing the Fed must realize is that the OER is now working to artificially make even core inflation look lower than it really is.

[Jim Nickerson]

Re: Merrill Lynch's Rosenberg Says U.S. Economy Is on `Knife's Edge'

http://www.marketwatch.com/News/Stor...o&dist=myyahoo

PETER BRIMELOW
Bond bears still lurking
Commentary: Bridgewater predicting bond-market sell-off

NEW YORK (MarketWatch) -- Bonds bounced Wednesday on news suggesting the economy and inflation might be slowing. But bond bears are still lurking.

"Another observer who has been betting against the consensus on bonds is the Connecticut-based money manager Bridgewater Associates in its institutionally oriented Daily Observations.
Despite its Wall Street credentials, which usually mean bland bullishness, Bridgewater has been boldly predicting a U.S. dollar-debt crisis. See May 18 column
But it has also consistently argued that, short-term, the economy will continue quite strong, with the result that interest rates will pick up and bond prices fall.
Bridgewater felt vindicated by the noises that the Federal Reserve made last week not to raise rates: "The Fed's assessment seems to be closer to reality than conditions as discounted by the bond market. It is now fairly clear that the weakening housing market so far has not been big enough to have a material impact on overall growth (as the change in tone in the Fed statement implies). And given lower rates, rising equity prices and strong demand, it is far more likely that housing will bottom soon than that a further decline in housing will destabilize the whole economy. And a healthier growth picture makes it much less likely that inflation pressures will dissipate (let alone lead to a drop in core inflation)."
Bridgewater felt the bond market was not anticipating this development: "The market action has clearly shifted in recent weeks towards rising growth and inflation ... But the magnitude of the change has been modest so far, and the level of pricing remains too pessimistic on growth and too optimistic on inflation. We think the bond market sell-off will start in earnest once it becomes clear that housing activity is no longer falling and that overall growth remains stable.
Bridgewater's patient conclusion on the long-awaited bond break: "We are not there yet, but are likely to see it within the next few months."
Bridgewater publishes in the morning, so we don't yet know what it thought about Wednesday's weak economic news. But it's unlikely that it's changed its mind.
In fact, Wednesday it extended its quirky analysis to stocks.
The U.S., it noted, had just seen "the greatest earnings boom in 70 years."
However, for various reasons, including the prospect of higher interest rates, the service thinks there is nowhere to go but down: "... Given where we are in the cycle, and given how stretched profit margins are, we think this caution is justified. Even if U.S. equity markets avoid a recession in the coming years, profit growth is likely to be mediocre at best."
Bridgewater currently rates itself as moderately bearish on U.S. bonds, neutral on U.S. equities." [Emphasis mine.]

So many differing opinions amongst the cognoscenti out there. It will be interesting to see who turns out to be correct. For me, I do not have the foggiest idea of how or when.

[jk]

Re: Merrill Lynch's Rosenberg Says U.S. Economy Is on `Knife's Edge'

What is interesting is that it is pretty obvious that corporate earnings have little if anything to do with interest rates. The only legitimate reason to cut them would be to lower interest rates for consumer credit -- surely the Fed must know this.

But then there's that stubborn core inflation ... and another thing the Fed must realize is that the OER is now working to artificially make even core inflation look lower than it really is.

financials represent the most heavily weighted sector in the s&p [?25% or so] and an even larger portion of the profits [?40% or so- does someone have these numbers at their fingertips?]. financials benefit substantially from lower rates.

for non-financials - has the commercial paper market shrunk so much that your statement is true for them?