Expect a U.S. Recession in 2012
As another two months have passed since then, I will review the macro trajectory again. The punch line is that I still expect recession in the U.S. this year. And the U.S. may already be in recession, although the markets are not exhibiting awareness of it.
My reiteration of recession expectations at the end of February and my advice since that QE3 was still coming was borne out of rising expectations of the opposite being expressed by many at the time and was causing stress for clients and some subscribers here.
A lot can change in two months.
Yesterday, both Pimco's Bill Gross and Jan Hatzius of Goldman Sachs joined the QE3-is-coming bandwagon with expectations of an announcement of such in June.
But there is a very serious problem this time that I also addressed a few days ago and that's the transmission mechanism for Fed monetary policy is broken.
There are two fundamental purposes for current Fed policy: keep the banks solvent and liquid and stimulate lending and borrowing. The more good loans are made out the front door the faster the banks can absorb losses on their existing bad loans.
About 80% of money center lending is for mortgages and most problem loans are there too. As such Fed stimulus is supposed to drive down mortgage rates to attract borrowers. It's not working and another round of QE3 isn't going to change that, regardless of what the Fed buys.
It will cause bank profits to increase affording for faster absorption of losses and an acceleration to the point where they can compete for mortgage borrowers again, driving down mortgage rates in the process. Until then Wells Fargo(WFC) , as the strongest money center, is for practical purposes setting the mortgage rates for the US, regardless of what the Fed does.
On economic activity, it is slowing.
And this is not just a U.S. phenomenon. Sovereign bond yields in the U.K. and Germany are at all-time record lows, while the US and Japan are approaching theirs.