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Posts Tagged ‘economy’

Why hasn’t the economy recovered? Why are there still issues? This week I want to give you an economics lesson. If you can get an understanding of economic cycles, you can get a sense of where we are today.

We can get some insight by taking a look at how a normal economic cycle works. A normal economic cycle goes through 5 stages. The economic cycle starts at the bottom with a recession. Then you start a recovery that leads to a period of prosperity. When the period of prosperity hits a peak, a period of contraction occurs. During contraction, the prosperity period (economic growth) starts to slow down. If the contraction is severe then the slow down becomes economic loss. Economic loss leads to the next stage – recession. The recession acts as a detoxification period. The Government intervenes and then the recovery starts again which leads to a period of prosperity. The economy has been doing it that way for decades.

During a normal economic cycle, the government is effective in providing solutions. The government can intervene, fix things, and shorten the time it takes to get back to economic growth. In order words, the problems that created the recession can be easily fixed.

If we are not in a normal cycle, the cycle has grown much larger, meaning that it takes longer to move from stage to stage. This type of economic cycle is full of structural problems. For instance, the debt feuled prosperity period for this economic cycle was much larger and because of that the downturn is much larger. If that circle gets pushed far enough out, then the economic cycle could result in a much worse scenario like a depression or hyper inflation. It is an economic cycle that has gotten out of balance.

When you get into an abnormal economic cycle, you find the economy has structural problems. Said another way, it is the structural problems that create the abnormal economic cycle. With our current scenario, an irony exists. The very thing that created the growth in our country is the very thing that is creating the problem – DEBT. We were fueled and are being destroyed by the same thing. That creates more and more structural problems. A debt fueled recession or worse is the toughest thing to fix because in an abnormal economic cycle the Government cannot just fix things. They are ineffective as we have witnessed over the past few years.

The problem is only fixed through the destruction of debt. Either the debt is paid back or someone takes a loss. Since the government refuses to allow this to happen, the circle gets bigger and bigger pushing real recovery off into the future.

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Are we heading towards a double dip recession?  Take a look at the numbers:

May new home sales plunged -32%.

Mortgage delinquencies are up 36% since last year

The Baltic Dry Index has dropped -40% since May 26, 2010.  This index is considered a leading indicator of the future growth of the economy.

Manufacturing index plunged in May
May housing starts fell -10%
May retail sales post biggest decline since September 2009
May existing home sales fell unexpectedly?

Pile on top of those statistics the fact we have a major landscape change occurring in the Gulf of Mexico that will negatively affect the economy and that region as well as continued climbing unemployment and a decline in consumer spending, I just don’t think that a double dip recession is avoidable.

John Mauldin pointed out in his excellent weekly writing Frontline Thoughts that the index of weekly leading economic numbers has turned negative.  There was a -23% decline.  Then he showed this chart of what this type of drop has signaled in the past.

   

For all of those in the financial services community wanting you to drink “the everything is OK” Kool-aid, they are going to have a tough time spinning out from underneath these deteriorating numbers.

In addition these numbers are showing a renewed decline in real estate.  As I have stated before, it will be tough to turn the Titanic around without a recovering real estate market. 

This is Evidence that Economic Numbers could be Rigged

Either these numbers are rigged or their methodology is flawed or they were able to actually hand pick and find a few thousand happy people.  Now with all of the above bad news that is coming up along with high unemployment and a stock market that has been in the tank since April…The University of Michigan Consumer Sentiment Index jumped to its highest level in 2 years.  Are you kidding me?  If you believe that you might also believe that British Petroleum has the problem in the Gulf under control.  Really, there is no way that could be accurate.   

On Friday the ever so important unemployment numbers are coming out.  That should give us an interesting piece of the puzzle.  I just wonder how many jobs the Government will create out of thin air this time?   

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Unemployment numbers came out last Friday and they paint a very concerning situation.   The unemployment rate is 9.8% and the economy lost another 263,000 jobs.  That is 22 months in a row of job losses.  I looked back at historical data that I have that goes back to 1939 and cannot find a string of job losses this bad.  You would have to go back to the Great Depression. Fortunately, unemployment is not as bad thus far.  Here is what it looked like in the 30’s.

 

Now take a look at the latest from Shadowstats.  It shows a comparison between what the Government reports, the Department of Labor (which is higher and more accurate), and then their data which includes everyone effected by unemployment.  As you can see, Shadowstats is close to 22% unemployed.  That is a far cry from what the Government is reporting. 

Now we also always like to see how many jobs the Government “estimated.”  Every month, the Government estimates jobs created or lost that they feel that the Department of Labor misses.  Yes, this is purely a bogus number.  This last month it was actually on the low side. They added 34,000 jobs into the total.   In 9 months, they have created 1,063,000 jobs out of thin air.  Now do you know why you can’t trust Government reporting?

In 2008, they created 904,000 jobs out of thin air.

In 2007, they created 883,000 jobs out of thin air.

Dating back to early 2000, I cannot find a year where they have been so aggressive.  The problem is that we continue to lose 250,000 jobs a month with no job creation in sight.  We aren’t even stopping the bleeding much less creating jobs.  They have let this problem get way out of control and now the problem is going to be tough to eliminate.  Let’s all hope that the graphs don’t end up looking like the one in the 1930’s.

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Wall Street (which drives me crazy) calls even the smallest bit of good news “green shoots.”  The analogy is that grass starts to grow in the form of a “green shoot.”  Well, I have many “green shoots” in my yard right now.  Unfortunately, these green shoots are weeds more than anything.  John Mauldin made a very good observation in his latest writing.  He said:

“My premise for uttering the heresy “This Time It’s Different*” is that the fundamental nature of the economic landscape has so changed that comparisons with post-WWII recoveries is at best problematical and at worst misleading.”

His point is that Wall Street is looking at this recession through the lens of past recessions since WWII.  It is like comparing apples to oranges when you think of what makes up the problems that we face today.  Last week, the S&P cut their investment ratings on 22 banks.  Banks depend on strong investment ratings so that they can attract investor money.  The Consumer Price Index saw its largest drop since 1950.  Once again, it looks a lot like deflation more than inflation.  The reality is that there is a higher probability that we are in the throws of a deflationary problem which is something that only time can solve.  The problem with the weeds in my yard is that I cannot do anything about them unless I want brown spots all over my yard.  I will have to wait until next year and make sure that they don’t come back.  This is unlike any recession since the 1930’s. 

This week will have some interesting events.  The Federal Reserve Board meeting, that always makes for an interesting day.  The Treasury is set to sell billions of dollars of Government Bonds on the open market.  It will be interesting to see how interest rates hold up.  Once again, a rising interest rate environment is the last thing that a debt laden economy can handle.

As I write, the S&P 500 is below a critical price level of 900.  If the market were to close below that level, we would want to watch the next couple of days very carefully.  Once again, we want to evaluate whether this stock market rally is the beginning of a new bull market or nothing more than a bear market rally.  It is my view that this is nothing more than a bear market rally.  Thus, you want to be monitoring your risk very closely right now.  I will update more frequently this week as it warrants.

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Forget about what the Government, Wall Street, or the economists say about the probabilities for the stock market and the economy.  Instead, look at what the people in the day to day trenches are doing with their money.  A key indicator is the actions of the corporate insiders and whether they are buying or selling their company stock.  Think about it for a moment.  If the corporate insiders, the individuals who are seeing the actual numbers and projections for the future, are selling their company stock, then there is obviously something that concerns them. 

According to Wall Street, this is intended to be the buying opportunity of a lifetime.  If so, then why would you sell?  Let’s take a look at the latest statistics that show whether corporate insiders are positive or negative about the future.

In the last few weeks, corporate insiders sold over $335 million in stock versus the buying of only $12 million  (www.financialarmageddon.com).  This begs another question. Is it more concerning that insiders are selling or that insiders are just not buying?

The reality is that the economy is not in good shape and the fundamentals do not suggest that we are remotely close to being out of the woods.  Let’s take a look at a few other variables.

Unemployment

I wrote last Friday about the huge discrepancy in the unemployment report that the Government gives and the unemployment problem that is really facing America.  However, the numbers get even more distorted when you consider other variables.  The temporary workers distort those numbers.  This is the classification of workers who are jumping from temp job to temp job just to make ends meet.  They will count as employed.  The latest shadowstats.com repoprt shows the unemployment number around 20.5%.  That is a far cry from the reported 9.4% unemployment and suggests that a huge headwind faces this economy.

Interest rates

The Government is going to have a tough time getting this economy jump-started if interest rates continue to increase.  This is going to be a key risk factor for the stock market.  This week the Government will be holding another significant bond auction in order to raise money to fund our enormous spending appetite and deficits.  Buyers are demanding higher rates of interest for the bonds thus increasing the interest rates of the government bond markets.  Interest rates were up again last week.  Of course, this affects the interest rates of the consumer markets.  The last thing that a debt crisis needs is rising interest rates.

Price Levels

Let’s not forget the price levels that we watch to determine if the market is making headway and still a good investment or if the risk level has become too high.  The price level of 943 is a huge price level that the S&P 500 has had a tough time getting over.  The longer that the S&P 500 stays below that price level, the larger the chance that the bear market declines will return.  Thus far, this has been a real challenge for the market.

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My boys have a book called the Bear Snores On.  It is a story about a bear that sleeps through a party that his animal friends had in the bear’s cave while he was sleeping.  The bear continued to sleep despite all of the noise going on around him.

Each page of the story would tell the activities of the party occurring while the bear slept.  The page would then end with “the bear snores on.”  Then all of the sudden the mouse sneezes and the bear wakes up.  Obviously, the bear wasn’t too happy. 

The last few weeks have reminded me of that story.  As the stock market continues to go up, the bear market seems as if it is going to continue to stay asleep in the cave.  The data that has come out lately has been anything but encouraging when it comes to a sustainable recovering economy and stock market.

Before I go further, most people would argue that the news is always worse when we are the bottom.  I don’t disagree.  The problem is that I don’t think that we are at the bottom.

The latest foreclosure information shows home foreclosures are still occurring at a rapid pace.  According to data, a record 12 percent of homeowners with a mortgage were behind on their payments in the first quarter.  A concern that I discussed weeks ago was the type of borrowers that were going into foreclosure.  Borrowers with good credit make up a larger percentage of these foreclosures…and the bear snores on.

Last week we also saw something very concerning occur.  In order to get out of this mess, one key ingredient will be lower interest rates.  Rising interest rates in an economy mixed with debt is not a good sign.  Rising interest rates would also indicate that the Federal Reserve manipulations with the credit markets are not working.  This would leave the economy very vulnerable. 

So, how do you know that this is occurring?  You watch the government bond markets.  The consumer interest rates fluctuate based on what is happening in the government bond markets.  Probably the best interest rate is the 10 year government bond rate.  As interest rates go up, bond prices go down.  In order for the Government to borrow enough money to get out of this mess, we need lower interest rates.

However, the opposite is occurring.  Foreign countries are stating that interest rates must be higher.  They want to higher interest rates on their money that is being loaned to the US Government.  Thus, you are seeing a rise in interest rates.  We saw this occur last week when interest rates really spiked upwards in one day’s time.  Following that one day, interest rates began to fall again.  However, this morning we are seeing a repeat of last week and watching as the stock market continues to go up at the same time.

And the bear snores on…

I suspect that we are looking at a situation where this bear market is not going to be asleep much longer.  My indicators are still showing that tremendous risk is being ignored.  This was no different than in October 2007 when the market was hitting new highs.

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