Barron's Thinks Recession Won't Be Deep. Now I'm Really Scared.

We have had a lot of fun with Barron's over the course of this year.  This weekend Barron's published as their cover story, "Sorry, Chicken Little.  The Sky Over the U.S. is Dark Gray, But it isn't Falling.  Why a Deep Recession isn't in the Cards."  Barron's also wrote a self congratulatory piece, "Terrible Year, Some Great Calls."  That piece highlights their correct calls on Fannie Mae, The commodities boom and bust and the rise of the dollar.  Fair enough that they were right on these calls.  However, the piece left a few calls out were not so great. 

• In January, and then throughout the year Barron's consistently supported the bond insurer MBIA, consistently showing a lack of understanding of MBIA's real time exposure to the U.S. housing market through their Credit Default Swap positions.
• In February, just as it was becoming apparent that AIG was imploding, Barron's made the call that AIG was a screaming buy.  Again, Barron's showed little comprehension of AIG's real exposure to the U.S. housing market.  Through its analysis, Barron's put forth the incorrect opinion that AIG's problems were more of a mark to market accounting issue.  Real losses on the bonds underlying their gigantic CDS portfolio, as well as the mortgage bonds held in their GIC portfolios would lose less than $1 billion.  This was quite incorrect. 
• In March, one week after the fall of Bear Stearns, Barrons' wrote this;

  “At last, we may be there.  After months of turmoil capped by a run on a leading Wall Street house, banks and brokerage firms may finally have hit bottom.  You can thank the multi-pronged regulatory response to the near-collapse of bear Stearns.  Those measures may well prevent the deeply depressed stocks of many financial outfits from sinking further.  The shares may even start to recover; with encouraging implications for the entire market.  Yes, after being down on financial stocks for more than a year, we find ourselves unable to resist some real springtime optimism.”  Enough said.

• In April Barron's wrote that it was time to take another shot at the financials. “Feels Good. The water is looking calmer for stocks and America’s money managers are wading right in. Why they like financials and GE.” Granted that Barron's highlighted money managers opinions, but the tone of the article was clearly supportive of that opinion.

The point of this little review is, before you write self-congratulatory articles you should include the whole body of work, not just the select good calls.  Now we move on to Barron's call on the recession outlook.  Here is a list of what Barron's put out to show, "Why a major recession seems unlikely";

1. Starting in the current quarter, consumer spending, which accounts for 70% of gross domestic product, is likely to post gains, bolstered by lower energy prices.
2. Inventory-to-sales-ratios are already lean, holding out the chance of inventory rebuilding by early next year.
3. Capital spending was subdued during the recent expansion, leaving no need to work off excess industrial capacity.
4. Net exports are likely to continue to boost growth.

We only need to focus on the first and most important point, the U.S. consumer.  I think Barron's has missed the point of how the primary driver of not only the U.S. economy, but also the global economy, the U.S. consumer, drove his consumption.  The U.S. consumer was driven by the ability to use his house as a virutal ATM machine, constantly sucking out equity in a rapidly increasing residential real estate market.  The consumer also received five new credit cards in the mail every week, enjoyed very cheap funding for the purchase of large items like autos, and the high cost of college education.  All this was driven by Wall Street's magical securitization machine, or as we like to call it, "The Sausage Factory."  The Sausage Factory, fueled by super cheap money and insatiable demand, has completely blow up.  The consumer's access to cheap credit is gone and not coming back any time soon.  The drop in energy prices is a drop in the ocean compared to this.  It also doesn't stack up well against the loss of a job, which is going on right now.

Unfortunately, Barron's has severely under-estimated the devastating effect the broken credit markets will have on the U.S. consumer.  As Barron's correctly states, 70% of GDP growth comes from the consumer.  However, that 70% is flat on it's back.  You are kidding yourself if you think this recession won't be a long and deep one.  I think we have all had enough with kidding ourselves.