...from Dr John

"...Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) was also well ahead of this apparent "surprise," noting last month that "You're not going to see the quarter of a million jobs on average anytime soon." Unlike the emergent weakness we saw in 2010, the recent weakening in leading measures of economic growth have been more in line with what he calls the "Three P's." Achuthan argues that the oncoming global economic slowdown is likely to be pronounced, persistent, and pervasive - "not a one or two month affair" - though the data is not sufficiently discouraging to warn of an outright recession at this point (and we would agree). ECRI suggests that "the broad economy is going to slow alongside the industrial sector... it's all going to be synchronized."

"...Unlike 2010, there appears to be little latitude for a robust fiscal or monetary response to the weakening in leading economic measures. Not that we would view any of those responses - aside from facilitating debt restructuring - as promising in any event. Before contemplating a round of QE3, the hawks on the Fed are likely to ask what benefit QE2 provided to the real economy, aside from Fed sponsored speculation, market distortions, and commodity price inflation.

Moreover, as of Wednesday July 7, the Fed's consolidated balance sheet shows $2.87 trillion in assets, versus $51.7 billion in capital, for a leverage ratio that is now up to 55.6-to-1. This isn't getting any better, and is far beyond where Bear Stearns, Lehman, Fannie Mae or Freddie Mac were at just prior to their respective insolvencies. Of course, nobody is going to shut down the Fed just because it is approaching technical insolvency, but we ought to recognize that anytime interest rates rise, the interest being paid on Treasury debt is quietly being used to cover the Fed's capital losses."

"...From a fiscal standpoint, there is little political latitude for further attempts at "stimulus," aside from a possible expansion of the payroll tax holiday. From a broad fiscal perspective, we have just passed the edge of the well-anticipated "cliff" where the bulk of prior Federal stimulus now rolls off. Analysts who regularly criticize Meredith Whitney for her concerns over state and municipal balance sheets don't seem to take account of the fact that nobody expected (or should have expected) much strain until we passed June 2011.

Globally, even with the approval of further austerity measures in Greece, yield spreads on government debt there continue to price in a 100% probability of Greek default (assuming 60% recovery) within about two years. The only material change with respect to peripheral European debt is that last week, yield spreads in Portugal and Ireland also shot to levels that imply 100% probability of default (again assuming 60% recovery), but within about four years rather than two."