Pentonomics – A Double Dip Recession

May 9, 2011 at 11:25 PM

The evidence of a double-dipping housing market and economy are becoming undeniable, even to those who still perilously cling to the notion that government intervention has been a salve instead of a poison.

The main evidence presented on the part of the perma-bulls of a healing economy is that corporate earnings have been good. However, S&P 500 earnings from multi-national corporations have been significantly boosted by a U.S. dollar that has lost nearly 15% of its value in the past 12 months. So earnings look great but they don’t buy you very much, while small-cap domestic businesses suffer under the scourges of inflation and slow growth.

But markets have the final say as to where the economy is headed and investors would do well to listen. The 10 year note yield has traded down to 3.19% from 3.72% three months ago and the 1 year T-bill is now yielding just .17%. In confirmation of the slowing economy, oil prices have dropped $8 dollars a barrel in a week, while copper prices have plummeted from $4.47 to $4.01 a pound in one month!

Recent economic data confirm the move lower in industrial commodities. Yesterday, we saw the ISM-Service Sector Index drop to 52.8 from 57.3 in March. New orders plunged to 52.7, which was the lowest reading since December 2009, from 64.1 in the prior month. And the employment index dropped to 51.9 from 53.7 a month earlier. First-time jobless claims surged by 43k to 474k in the week ending April 30th , which was the highest reading since August. And the four-week moving average rose to 431,250 from 409,000.

But perhaps most importantly, more evidence of an official double-dip in home prices was found in a report from Clear Capital. The report stated that its monthly index is now 0.7% below the all-time low set in March 2009. Two highlights (or lowlights) from the report:

Year over year national home prices are down 5%
Home prices have dropped 11.5% in the last nine months, a rate of decline not seen since 2008

The saddest news of all is the fact that over 25% of all homes with a mortgage are underwater on the loan. Home prices that continue to fall will bring that number higher and create the vicious cycle of a greater percentage of mortgage holders with negative equity, which causes more inventories, which leads to falling prices.

What’s a Fed Head to Do

The truth is that a double-dip recession was temporarily held in abeyance through a massive government effort to boost consumption. But that intervention in free markets was destined to fail from the beginning. , Quantitative counterfeiting part 2 hasn’t even ended yet and this ersatz economy that is based on borrowing and printing is already starting to falter. What does all this mean for the Fed? A slowing economy with rising unemployment and falling home prices will, unfortunately, keep the Fed in the ship building business (think QEIII) for quite some time. That means when the Fed, Treasury and Administration finally acquiesce to allowing market forces to reconcile the imbalances, i.e., allow the deleveraging process and asset price declines to consummate, the pain will be much worse.