Roubini Says Double-dip Recession

Charts: The S&P 500 closed at 1028, up .2%. The charts are saying that the bull market is entering its third leg up after a second short and unsatisfying consolidation period. The breakout point for the third leg up is 1018, which therefore is a key support level. Resistance is at 1037. Leadership is very poor for this leg. Fannie and Freddie are the big leaders. Fannie is up over 100% in the last five days. On Monday trading was dominated by the two government entities. Morning Star rates Fannie as insolvent and fair value at zero. But investors are looking at the government’s commitment to infinitely subsidize housing and since the US government supposedly has an infinite credit line they are piling into these stocks.

Fundamentals: The Consumer Confidence Index came in stronger than expected. It had been tanking for the past two months but it ticked up solidly in August. Future expectations were especially strong and surprisingly job expectations were robust. The Case Schiller home price index also came in better than expected. Professor Roubini wrote an article yesterday where he forecasts a double-dip recession; with the next down leg coming a few months from now because super high government deficits will cause tax increases which will crush the recovery as will the ever escalating price of oil and food. A few years ago Roubini forecast the credit crunch and the Great Recession with fantastic accuracy. Central to his past projection was a huge fall in the dollar. This was the only thing he got wrong; the dollar was strong during the recession. Roubini was wrong about the dollar because he doesn’t see American military strength as an economic factor. And Roubini still doesn’t (myopic). So there is at least a possibility that the world’s greatest forecaster is too pessimistic. Although if the geopolitical situation deteriorates we’ll really be in trouble.

Geopolitics: The new Paki Taliban super-chieftain, H. Mehsud, now admits that the old super-chieftain, B. Mehsud, was killed by a CIA drone. Paki soldiers killed 4 bad guys yesterday but they are picking up the bullet-riddled bodies of dead bad guys that somebody else is killing by the truck load. That somebody else is probably H. Mehsud. He needs to purge all the bad guys who are unwilling to accept him as super-chieftain. H. Mehsud is reported to have a leadership style very similar to Idi Amin or Joe Stalin. This style relies heavily on killing any subordinate that even whiffs of disloyalty and ruthlessly eliminating any rival for leadership. H. Mehsud is considered to be more violent and aggressive than his predecessor. He has already killed B. Mehsud’s father-in-law and several other relatives that might have tipped the CIA off and precipitated the drone strike. If he does consolidate power over the network that B. Mehsud built, he will be a formidable adversary for the Marines and all the other good guys. General McChrystal will soon be requesting more troops, probably 40,000 more. If Obama and/or Congress says, “No more troops, we need to get healthcare done first, then worry about the war,” the stock market will be very unhappy.