Eyeing a double dip

According to the author of this article, whoever wins the next presidential election is likely to face another recession. For some time it looked like the economy was on its way to a recovery, but lately data has shown that we might face another recession before seeing any sort of recovery.

Charles Gasparino
Posted: 10:59 PM, June 25, 2012
NY Post

As President Obama and Republican challenger Mitt Romney get set for what’s likely to be among the most negative presidential campaigns in recent history, each man should ask himself if he really wants to win — because he’ll almost certainly face the grim prospect of another recession.

Sure, it’s always difficult predicting the economic future; that just a couple months ago we all thought (including me on these pages) that we were heading for a sustained recovery, as job growth seemed to have picked up steam and most financial gurus predicted that it was just a matter of time before the strong data translated into meaningful wages and a more vibrant economy.

But now we see just the opposite, at least according to the latest data, and the prediction a slew of market strategists and investors made to me even before last week’s round of bank “downgrades” by the raters at Moody’s Investors Service.

Our low growth and jobs woes can be traced to a number of factors, of course — from Europe’s mess and China’s slowdown to the ongoing assault of higher taxes and increased regulations at the heart of Obama’s economic agenda.

Bottom line: We only limped out of recession, and the limp’s been getting worse the last few months. Now the Moody’s actions might just be the final straw that pushes a barely growing economy into negative territory.

First, a little background: A bond rating is a measure of a company’s ability to repay its debt, given what’s known about the company, the economy and the business environment. Moody’s assigns letter grades as part of this assessment, with “Triple-A” being the highest, and a “C” for firms that look ready to default on their debt.

Last week’s actions against a slew of big banks, including some of the nation’s largest — JP Morgan, Citigroup, Morgan Stanley, Goldman Sachs and Bank of America — doesn’t mean that Moody’s is predicting Armageddon, or anything close to the conditions that led to the banking collapse of 2008.

What the rating agency is saying in lowering these institutions’ ratings is that business conditions are weak — and weakening, something investors should be taking into account when making choices as to where to put their money.

Lots of people saw the downgrades coming. In the runup to the announcement, bank shares plummeted. But then they recovered, as many investors brushed off Moody’s warnings. Many had feared worse — Morgan Stanley shares, for example, spiked on the news of its two-notch downgrade, because investors had expected a three-notch cut.

Others discounted the source: The raters at Moody’s didn’t see the 2008 financial crisis coming, or other smaller ones before it. So why believe they’ve got some crystal ball on the banking business now?

But major stock investors didn’t do much better at picking winners and losers in the banking biz. In the runup to the 2008 meltdown, the shares of increasingly insolvent banks were bid higher on any whiff of good news.

More important, the substance of what Moody’s said largely rings true. By any measure, as Moody’s pointed out, banks do have “significant exposure to the volatility and risk of outsized losses inherent to capital markets activities” given the deteriorating situation in Europe, which goes beyond Greece to include basket cases like Italy and Spain.

US banks have been dealing with these countries for years; lent them money and insured their debt — actions that rightly worry Moody’s.

Again, that doesn’t mean we’re heading for another banking calamity, not according to Moody’s or just about any market strategist I speak to. Our banks are much better capitalized and better equipped to deal with the vicissitudes of their inherently erratic business than they were four years ago.

But the future of the US economy is still increasingly bleak. The downgrades are an indication of how bad things are now, but could also be the final straw in pushing us back into recession.

We all know that banks aren’t lending anywhere near as much as they’ve done in the past. Among the many reasons for that is that banks believe that the economy could turn south at any moment, thus making it more difficult for businesses to repay those loans.

And the lower bond ratings just made lending much more difficult. Banks will have to pay more to borrow and finance their own balance sheets. They may also have to hold more capital, all of which means they will lend even less to cash-strapped small businesses.

In short, the cost of business just went up for everyone.

Does this mean that the country is sure to head into recession? No, those predictions are difficult. But none of this is good for the economy, the country or whoever is in the White House come Inauguration Day.

To see original article CLICK HERE

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