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The United States emerged from a grueling 18-month recession just two short years ago, according to the business cycle arbiters at the National Bureau of Economic Research. Yet for many Americans, the “recovery” felt like anything but a rebound. And now, it looks like it’s already coming to an end.
Just consider what we’ve learned in the past few days …
* Personal spending went nowhere in May! That missed the forecast for a gain of 0.1 percent, and it was the worst reading in 10 months. Moreover, the gains stemmed from higher prices not strong underlying demand. Inflation-adjusted spending shrank 0.1 percent, the second monthly decline in a row!
* The Dallas Fed’s latest manufacturing gauge imploded! It fell to -17.5 from -7.4. That was the worst reading in 11 months. It’s not an isolated disappointment, either. The New York and Philadelphia indices also tanked, and the overall plunge we’ve seen in these up-to-date manufacturing surveys over the past couple of months is one of the worst on record!
* Housing keeps sinking like a stone! New home sales fell another 2.1 percent in May, while existing home sales dropped 3.8 percent. Home prices, according to S&P/Case-Shiller, dropped 4 percent from a year ago in April. That was the biggest annual drop in 17 months, and it leaves prices at their lowest level since eight summers ago.
* Consumer confidence is tanking! The Conference Board’s consumer confidence index slumped again to 58.5 in June from 61.7 in May. Not only did that miss economist forecasts, it was also the worst reading in seven months.
What might we see next? What are the ramifications for stocks? Bonds? Currencies? Let’s take a look …
Why the Second Recession in as
Many Years May Be Looming
How could we possibly be in this dismal situation? Weren’t we told several times over the past couple of years that brighter times were ahead?
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| Neither Bernanke nor Geithner have offered any practical solutions to ease the pain Americans are feeling. |
Sure, we were. By politicians in Washington. And you probably know the old joke: “How can you tell a politician is lying? His lips are moving!”
The fact is, we didn’t lay the groundwork for a healthy recovery. We didn’t allow the debt destruction that had to take place, proceed. Instead, we tried to bail out and backstop everybody and his sister in order to make things less painful. That means that even now, we’re still too buried in debt to fund a healthy, long-lasting rebound.
As The Wall Street Journal reported on Monday …
“The Federal Reserve is just days away from ending one of the major steps to aid the U.S. economy — but the effort has done little to solve the original problem: The government and individuals alike are still heavily in debt.”
The Journal goes on to make the same argument I’ve laid out for you:
“The fundamental problem is that reversing the trend of piling on the debt requires some combination of cutting spending, growing income or the economy, and inflation. But wage growth is stagnant and home prices, which underpin much of the debt problem, are still falling.
“Meanwhile, in a vicious circle, businesses aren’t hiring or investing because they know consumers are tapped out. Banks, for their part, are hoarding cash, being stingy with new loans.”
The amazing thing is that policymakers at the Fed and Treasury don’t seem to understand this fact — even as it’s been obvious to me for the past couple of years! Ben Bernanke himself admitted in his most recent press conference that …
“We don’t have a precise read on why this slower pace of growth is persisting … Some of the headwinds that have been concerning us, like the weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, may be stronger and more persistent than we thought.”
That sure is encouraging, eh? It just goes to show you that if you’re counting on the Fed to get things right, good luck! They got the dot-com bubble wrong. They got the housing bubble wrong. And their plan to underwrite an economy recovery has proven to be the wrong medicine for what ails us.
Practical, Real-World Ways
to Protect Your Wealth!
My simple advice: Stop listening to the happy talk coming out of Washington. Take steps immediately to protect your wealth from a looming recession!
One of my favorite vehicles is inverse ETFs — exchange traded funds that rise in value as sectors of the stock market fall. In the first phase of the recession, sectors like real estate and financials got crushed … driving the value of select inverse ETFs through the roof.
If I’m right and sectors like REITs are going to tank again, then the actions I recommended in my June 17 Money and Markets column will pay off handsomely.
You could also consider something like the ProShares UltraShort MSCI Europe (EPV) to hedge yourself against the risk of a meltdown in the PIIGS nations. The only problems with this leveraged ETF, and the many others you can choose from, is timing and pricing.
You need to know when to get in, and when to get back out, because tracking errors between these ETFs and their underlying benchmarks increase with time. You also have to control your risk with tools like profit targets and stop losses.
That’s precisely what I’m helping my subscribers do in Safe Money’s Crisis Trader, and if you’d like my help navigating this potential recession, I’d love to welcome you aboard. Just click here or give us a call at 800-393-1706.
Until next time,
Mike
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 8 comments }
A lot of folks speak about another dip coming and I do not think we ever pulled out of the first one yet. I personally think we are on the brink of a depression, rather than a recession
Well put Mike! When the cost of servicing debt eats up the productivity of a society, that society goes into a recession or depression until a sufficient amount of debt is liquidated to restore productivity. And like Dorothy in the Wizard of Oz, the public is beginning to realize the Fed has no more power than the wizard behind the curtain. Society as a whole determines the direction of the economy and financial markets, not the wizards in DC. And when society determines that its own future productivity does not justify current stock valuations, the stock market falls, regardless of what the political wizards say or do.
The problem with your conclusion,that stocks will fall due to a poor economy,may not come true.It would be a correct conclusion if stocks were priced in something real,of constant value.Instead,stocks are priced in Dollars.The Dollar is not a solid rock,store of value.It is backed only by the full faith and credit of a bankrupt govt.I believe that the Dollar is the common stock of the U.S. Govt.It will continue declining if the country is in decline.Therefore stocks may not decline,when priced in Dollars.The Dow was about 850 in 1982 and now is over 12,000.Do you really think that the Dow went up 15 times due,only, to the prosperity of the companies in that index?More likely is due to the Dollar devaluing.Just like,when I was a kid,on TV,you heard about millionaires,like Jed Clampett of the Beverly Hillbillies or Thurston Howell of Gilligan’s Island.Now,to be considered very rich, the rich have to be 1000 times richer,or billionaires.Check out what happened to stock prices in banana republics of the past several decades.They had disaster economies that resulted in their currencies crashing and stocks being a good inflation hedge.
The W pundits just don’t get it. Look at the Dow today, only 12% away from its alltime high. The chairman must be livid.
Hi Mike
A lot of the Q.E. money has not yet been spent. It is held in deposits by the larger banks and it is my humble thought that the banks have used these funds betting against the U.S.Dollar in the global cash markets. The banks are trying to improve their positions in the unregulated derivatives markets. The German chancellor who visited the States recently knows that in case of a bond default that the C.D.S. insurance will never be paid out and is trying to protect temporary market confidence. That is why we have this ongoing circus in the Greek financial markets. Timing of course is everything and anyone one step away from the decision making process is out of the loop. Meanwhile many governments have socialized the debts having watched the profits being capitalized. Everyone who created this crap in the first place has got away with it. Great isn’t it.
Hello again Mike
Consumers are being played here and they know it. Even at consumer level they know that as citizens their governments can’t be trusted anymore. Any casual investigation into the finances of countries like Ireland and Greece among others will show that. Consumers are preparing for a long road ahead and some stock market investors can’t see that yet. Regards Howard Dimond
Mike says: “we tried to bail out and backstop everybody and his sister in order to make things less painful.”
Not so, Mike. Tell that to Main Street. We just tossed Billions down the drain, or should I say, down the banksters deep pockets.
obama said he would save the jobs and he did, vgood, trashed the dollar all good. Bought all the property back at a less price.sort of. not bad. Cut bankers pay , thats good for shareholders. pretty good.
with travel to america being limiteed to ships soon as peak oil really rears up…