What a week…

NBER says the US left recession last summer. Great…but with a recovery like this who needs a recession? Thanks to budget-breaking-stimulus-spending we have managed to goose US Industrial Production back to its 2005 level (now 5 years later), Retail Sales back to 2006 levels, and employment to its lowest level in decades.
Ireland too was happy to officially exit its recession in the first quarter of this year, but apparently their recovery was short-lived. Today we learn the Irish economy double-dipped back into negative growth in the second quarter. See Ireland woes hit European markets.
If you have not yet read Michael Lewis's article in Vanity Fair this month: Beware of Greek’s bearing bonds, here is the link and I suggest that you do. But you better pour a cold one. The credit debacle is so prevalent on planet earth today that it is both humorous and deeply disturbing. Bottom line is that we should expect shoe after shoe to keep dropping over coming weeks, months and years. Why accountants Arthur Anderson went down advising Enron on how to commit Fraud and yet Goldman Sachs is still an apparently revered and esteemed investment bank after advising Greece and many others on the same ‘strategies’, is an indictment on all of us. Investment banks have no moral obligation or duty of care to their clients or our society. Apparently we are all fine with that. I expect we won’t hit the end of this particular secular bear, deleveraging, cycle until our complacency toward the money-changers has been turned upside down.
Meanwhile we hear that Larry Summers is retiring from Obama’s economic advisory team, and that Tim Giethner may not be far behind. Could Obama actually be thinking of breaking his allegiance to the financial sector in favour of actual reform? He must be very worried about losses in the November race. We will have to watch and wait some more.
US Treasuries are back in bid this week, with yields resuming their downward trend. The November-December '08 lows, around 2% on the 10-year note, are still on our radar ahead. Traditionally leading indicators for the stock market, US financials and Chinese stocks, so far still in negative trends down -15% and -25% from their near-term respective peaks. Buying volume across all equity markets continues to be missing in action. And Mut-fund managers are already in: now sitting with record low cash levels just over 3%.
After a decade of flat to negative returns in the stock market and fixed income yields that have been pushed below 3%, it is disheartening to be reminded that most pension funds in the world are still plugging in lunatic assumptions of 8% as their median expected return number despite the fact that their median annualized return has been less than half of that since 1999. See WSJ: Pension Gaps loom larger:

“From 2005-2009, S&P 500 companies with pension plans expected to generate about $475 billion in returns. The actual returns were only about $239 billion, a 50% undershoot…”

Admitting the administrators, consultants and managers, have all screwed up will be something they continue to resist. The truth does hurt. Downsizing the expected return rate to a more likely 4-5% target over the next 5-10 years reveals that funding shortfalls today are trillions not just the billions presently acknowledged. The only way to fix these holes are miracles, magic or large contribution hikes, later retirement dates and reduced benefits. I think realists should bank on the later…
The gig is up, we are “poorer than we think”. Nothing for it but to work and save our way back to prosperity. So be it. Not the end of the world.