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What Denotes A Dip Doubled Or Deep?

Today’s breaking news: last night, Bernanke said the Fed might not wait until full employment is reached before increasing rates.

Wow, that’s really a bulletin – certainly worthy of the key spot on Bloomberg’s Top News scroll that it maintained for much of the day. Full employment…whether that’s 4%, like the Fed thought in the late 1990s, or 5%, like they thought in the 2000s, or 6%, like they think now…is years away, 2012 at the earliest. Yes, it seems a fair bet that if unemployment drops 3% or so from the highs then the economy is booming enough that the central bank can move rates from zero. Thanks for that post, Dr. Obvious.

But that doesn’t mean, of course, that the FOMC will be tightening any time soon. With the Unemployment Rate at 9.7%, and likely to rise once Census workers start being pitched back into the labor pool, there is no credible reason that the Committee will be hiking rates very soon.

The Chairman also says that there will be “no double dip” recession. To be fair, though, he never saw the first one coming. Remember that in August 2007, only days before the quant fund melt-down that precipitated a 100bp cut in the Fed Funds rate over the following month, the Fed saw “no moderation in inflation pressure, and in June 2008 they adopted a balanced directive with “upside risk to inflation.” They maintained that view through the September meeting, which occurred after the seizure of Fannie Mae and Freddie Mac, the bankruptcy of Lehman, and on the same day as the Fed extended an $85bln lifeline to AIG. Inflation subsequently ebbed from 5.6% to -2.0% over the next year, and rates went to zero rapidly (beginning with an emergency cut, finally, on October 8th).

Moreover, his answer may be right but for the wrong reason. I think it’s incorrect even to think of the coming second dip as a double dip; it is, after all, eminently arguable whether we would have been out of the first dip without the machinations of fiscal and monetary policy. As I mentioned yesterday, those bounces look played out and it seems they may not have produced the organic growth that represents a true end to the recession. (Since GDP is C+I+G+(X-M), any government that relies on the “two consecutive quarters” definition of recession can create an “expansion” by goosing G sufficiently, but of course this just moves around growth from one quarter to another). Heck, there’s even a chance, if we slip “back” into recession, that the economic cycle dating committee will consider it a single recession anyway…they haven’t yet declared the last one over, since most of the normal signs of growth are tepid at best.

None of that affected trade today, which was all about the struggle to avoid a critical break below support levels. The S&P flirted with the lows around 1040 a couple of times, but ultimately managed to close near the highs of the day +1.1%. A sinister note, however, is that the trading occurred on volume that was quite heavy. In fact, volume was heavier today than during the 3.4% slide on Friday, and the highest (therefore) of the month. Selling activity is not being exhausted at lower levels, that is: it is increasing. This does not augur well.

September TNotes managed a 5/32nds gain, with the 10y note yield down to 3.17%, but fixed-income is not the main event at the moment.

On Wednesday, the only important quasi-important economic release is the Beige Book, but there are two key speakers to be aware of. Bernanke speaks to the House Budget Committee beginning at 10:00; also, the head of the NY Fed’s Open Market Desk, Brian Sack, speaks to the NABE around noon. In prior speeches, Mr. Sack has discussed the mechanics of withdrawing stimulus, and so it is worth listening to whether he has anything new to add.

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