Weekly Review: A Hint of Sunshine

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Last week's dour overview (first article under author's photo) of the potential effect of the Eurozone crisis seems inconsistent with Econintersect's December 2011 economic forecast which suggests a weak but improving USA economy. See second article below author's photo.

There is no argument from the pundits that the USA economy seems stable, the disagreements begin when Europe (or even the BRICs) begins to be factored in. Economic forecasts cannot factor in the unknown. Both the course and effects of this Euro crisis have unlimited path options.

Some are arguing that the USA has decoupled from the Global economy. I would argue there is not a chance anyone on the globe has decoupled from anything. The other extreme is predicting a complete financial meltdown in the USA and Europe - the equivalent of a "financial" winter.

As usual, the arguments of what will happen next are based making assumptions about the uncertainty of the unknown. Many bloggers and journalists and economists spin the unknown toward worst case scenarios. Most readers are attracted to the dark side - predictions of doom - and writers find that Doomsday predictions attract readers.

Most knowledgeable analysts can postulate real doomsday scenarios evolving from the current global climate. Many of these scenarios are based on no or inadequate actions from the financial world, central bankers, and governments. Can the worst case scenario - a global financial winter - occur? Yes.

I am a believer that people, business or governments act in their own self interests - a survival instinct. Self interests dictate that damage is minimized / mitigated and gain is optimized. Would a Eurozone country just stand there, let the Euro collapse - and have no currency for their economy? Or allow its banking system to completely fail and allow its citizens to loose all their savings, and leaving businesses without a way to function?

Government treasuries and central banks around the world are "gaming" solutions to a myriad of situations. I suspect some Eurozone countries might even have new sovereign currency printing presses rolling. Some solutions will be terrible - but other bad solutions might work.

A few things I believe:

1) The timing of the beginning of a new financial crisis might be tomorrow or never (because of change of policy, regulation or direction before the crisis could begin). There is almost a zero chance that the status quo can remain for any extended period of time;

2) A breakdown of the Eurozone MIGHT actually be beneficial in the medium term to the global economy - as it allows the PIIGS to pick more paths than just austerity (for which there is almost universal agreement that it cannot work because debt levels are too high);

3) The world's financial system is based on fiat currency. The only rule for fiat currency is that there are no rules - except the ones a country chooses to impose on itself. Countries can decide to tax, not to tax, print, set exchange rates, or issue sovereign debt. A currency's relative value is based on what others do (and what you do relative to what they do);

4) Economics is not a science. No economist can provide irrefutable empirical proof of any theory as there are no means to control all experimental variables..

The number of ways this current economic and financial crisis plays out is limited only by the rules we impose. And unknown change has unknown consequences (both good and bad).

Economic News this Week:

The Econintersect economic forecast for December 2011 (third article beneath author's photo) predicts weak but improving economic growth.

ECRI has called a recession. Their data looks ahead 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown. Although Econintersect's data is not recessionary (one month look-ahead) - we take this recession call seriously. This week the actual level of ECRI's WLI index worsened slightly breaking its 4 week "less bad" trend - but it is still indicating the economy six months from today will be worse.

Initial unemployment claims rose 6,000 (from 396,000 which was revised up from a preliminary 393,000 last week) to 402,000. This broke a two week string that claims were under 400,000 - a potentially important economic point.

Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – fell slightly to 400,000. Because of the noise (week-to-week movements from abnormal events), the 4-week average remains the reliable gauge.

Overall the data this week continued to show a weakly improving economy. There were no recessionary flags. The global markets continue to react to developments in Europe - and this week the developments were positive.

Bankruptcies this Week: PMI Group (mortgage insurer), AMR Corporation (parent of American Airlines)

Click herefor interactive version of the following table with active hyperlinks.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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