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The current economic rebound is not a healthy and sustainable one. That’s because it is the result of the largest monetary and fiscal stimulus program ever!
For proof, just look at disposable income: A record 20 percent is derived from federal transfers. And these transfers are coming from a government that is already up to its eyeballs in red ink!
The deficit could hit a record $1.6 trillion this year, or 10.7 percent of GDP. And as shown in the chart below, it’s been heading skyward since 2002.
And that has put the …
Housing and Labor Markets
in Dire Straits
According to the Case-Shiller Home Price Index home prices are again in a freefall. December marked the fifth consecutive monthly drop. And the declines were not insignificant: 11 percent in December alone.
As far as the labor market is concerned, a disturbing weak picture emerges …
Nearly two years after the official end of the Great Recession, there are 7.5 million fewer jobs than in 2007. Plus, the employment-to-population ratio just dropped to a new low for the cycle — lower than at the depths of the recession.
The chart below shows the percentage changes in that ratio so you can compare today’s labor market with what occurred during and after previous recessions. As you can see, the current period is indeed bleak.
Housing and employment are two very important segments of the economy. Neither is participating in the current rebound. Meanwhile, budget deficits and transfer payments are at record highs!
This paints a crystal clear picture of a dangerously unbalanced and vulnerable economy that is exposed to two major risks …
Risk Number One:
Soaring Oil Prices
With parts of the Middle East in turmoil, crude oil prices have risen considerably. The potential impact: A $10 a barrel price increase translates into gasoline prices sucking an additional $30 billion out of consumers’ pockets.
As shown in the following chart, the most recent price increase — some $20 per barrel since November — comes on top of an uptrend that started March 2009.
During this surge prices have increased to a degree that has historically triggered — or at least coincided with — recessions. And since the economy is now so unbalanced and fragile, risks are high that the recent oil price shock could set off another recession.
But in the unlikely event the economy as a whole can escape unscathed, profit margins cannot …
They are already at the high levels not seen since 2007. So even without rising energy prices, profits are due to turn lower. And higher oil prices will accelerate and aggravate this process.
Analysts’ earnings estimates for 2011 are also very ambitious. They leave absolutely no room for either of these two events without major earnings disappointments taking place.
Risk Number Two:
Lower Money Supply Growth
I have written in past Money and Markets columns how China, India, Brazil and many more emerging markets have started to implement restrictive monetary policy measures like interest rate hikes and higher reserve requirements. These steps are showing some effect in that most emerging stock markets have not joined the S&P 500 in making new cyclical highs during the past weeks.
Neither the Fed nor the ECB have followed this return to a more restrictive policy. Especially in the U.S.; QE2 has dominated the monetary policy discussion — and worked its way into the stock market.
But now it seems as if an important change has taken place behind the scene. At least that’s what money supply growth figures are telling me …
In July 2010 the 3-month annualized growth rate of MZM declined 1.5 percent. Then in August Fed chairman Ben Bernanke stepped up and announced QE2. Money supply growth quickly responded …
The 3-month annualized growth rate of MZM jumped to:
- 9.2 percent in October,
- More than 11 percent in November, and
- More than 11 percent in December.
In January it was back to 6.8 percent, and now it’s down to 1.9 percent.
Only a few weeks ago Bernanke bragged how QE2 had caused the recent stock market rally. Never mind that lowering interest rates and supporting the housing markets — not a stock market rally — were his original goals.
Well, since QE2 failed miserably as far as the original goals are concerned, he probably felt it necessary to at least have a stock market rally back to bubble territory as his big achievement.
I have no doubts that QE2 did indeed play a major role in rescuing the economy from double-dipping and the stock market from another severe slump. If so, the above described considerable slow down in money supply growth should be seen as another major risk for the economy and the stock market.
To protect your wealth from a potential economic setback and market decline, you might consider an inverse ETF, like the ProShares Short QQQ (PSQ). This fund’s return is designed to correspond to the inverse of the daily performance of the NASDAQ-100 Index. So when the Index drops 1 percent, PSQ should rise 1 percent.
And with a price/earnings ratio of 24 and a dividend yield of a miniscule 0.4 percent, this index looks massively overvalued.
Best wishes,
Claus
P.S. Would you like additional practical solutions to help you have financial security in times of crisis? Then you should check out my colleague Mike Larson’s Safe Money Report.
{ 15 comments }
What a nice market opening this morning. Just look at some of the headlines: Unemployment Claims fall to 3-yr low, Retailers did well in February, Productivity up in the 4th Qtr.
The Weiss pundits just don’t get it. I believe in America. Go Dow 15K.
As long as the dollar is going down, the Dow and Gold will go Up. Soaring oil prices are a definite help, because 1, much of that 30 billion are taxes for the government.
2, help advance the alternate energies, particulate the nuklear.
3, make gold go much higher.
The freighter already turned 180 degries by the ent of last year. Now we are full steam ahead.
I have an uncomfortable feeling about the “Jobless Claims Head Back Down” headline I just read. It simply doesn’t jibe with what I’m seeing in our state which has been one of those LEAST affected by the downturn.
Reading the rest of the article, I see that A. this is based on the figures for just one week; and B. unemployment application figures for the short term can be affected by external factors such as the weather; and C. “This doesn’t include millions of people enrolled in emergency unemployment benefit programs funded by the federal government.” This certainly doesn’t justify trumpeting a big turn-around the way headlines are doing.
I do think that the US is moving toward a recovery; however an economy turns like a freighter, not like a jet-ski. And there are inevitable dips along the way. Does anyone else smell rotten fish in these headlines?
You are right to be uncomfortable with the jobless claims reported. The real numbers are very close to 20% unemployment. And the recovery you think we are moving towards is only a recovery for multi-national corporations and Wall Street insiders. Main street is not part of any recovery I can assure you.
I will jump in since you asked.
Peggy, the smell has remained at such a high level for so many quarters now that I don’t even notice it. I just were rubber boots every day.
Manuel, I congratulate you for believing in America. Unfortunately, this is not my America; this is a third world, banana republic version of America with no respect for the rule of law and economic policy read of the back of a box of Japanese breakfast cereal box.
It did not work for the Japanese and it will not work for America. Eventually the debt curve of this ‘economic recovery’ will collapse on it’s self and we will have been no further along than we would have using alternate approach. BUT we will have 5-7 trillion of additional debt which will be paid for by the American public.
Right now we are spending $6 for every new $1 of new GDP. Does that sound like anything except a 3rd world banana republic?
The U.S. economy will plug along as long as someone keeps buying our debt (the Fed not included), as long as world/ oil transactions are denominated in U.S. dollars, as long as the U.S. has access to oil at not much more than $100/barrel (gasoline < $4.00/gal), generally speaking as long as the world thinks the U.S. and it's currency is the safest bet, but when that changes and it will, we will have the life styles of Greece, Portugal, Spain, et. al. Many world leaders have been talking about ending the U.S. dollar ending as the reserve currency and are trying to make that happen. When that happens it will make the average U.S. taxpayer's head spin.
It seems that govt is trading unemployment for inflation.You can’t get “something for nothing” no matter what Bernanke and Obama are telling you.The govt’s massive deficits,financed mostly by the Fed buying the debt have probably kept unemployment slightly lower than otherwise, but at the expense of higher inflation.So,we end up back in stagflation.Just like the Jimmy Carter days.Should be bullish for commodities and bearish for Dollars.
In view of the extreme uncertainty eminating from the middleeast = let’s put pressure
on the Obama Administration to immediately open up drilling in the Gulf of Mexico ( 13 other
countries are already doing it ) What are we afraid of…? offending the environmentalists
“The defenders of the spotted owl ? ” Pnone calls to your Representative in DC – plus
e-mails and letters may get them off their butts….before we know it – gas will be $ 5 a Gal.
I’ m writing letters and e-mailing “the idiots in Wash. DC ” almost daily…Gotta do it – unless you
don’t give a crap how much you pay for Gas and heating oil !
If smoke and mirrors convince you that we are climbing out of this recession Hve another pale ale and dream on. Even if you have a job it doesn’t go as far as it used too. The Pubs are at Union Busting again.
A thought: How many members of Congress, both houses are not millionaires? Don’t be startled or feiint, as it was our votes that put them their to take more money from us for their use such as the $5,00 raise last year, full pension after 6 years and a health cARE BENIFIT THAT WOULD MAKE YOU hoarse screaming??!~! America, the home of fools and idiots?
What can you expect ? The majority of the people voted for this government . They also
voted for a President who had no experience in leading us out of this financial morase.
The irony is that so many with PhD’s voted for this inexperienced falsetto.
This old man has lived through the depression of ’29, and all that followed. You don’t need a PHD to recognize the dangers of throwing good money after bad. And there is no viable remedy to incurring debt in excess of your ability to repay. It applies to us as individuals, and it applies to governments. This is too simple to escape logic, and yet it is ignored at terrible consequences to follow.
I don’t understand why so many economists cite slow new housing construction as one of the big problems in economic recovery. Just where in Econ. 101 (which I used to teach) does it say that the way to stimulate the economy is to produce more of what you already have too much of. New housing starts are likely to slow the liquidation of empty lender owned housing and probably result in more foreclosures by reducing pre-foreclosure sales of properties in process of foreclosure.
There are many areas more important efforts that would benefit long-term economic well being – increasing the incidence of honest “Made in America” labels.
Claus, Thanks for the good article but is all this supported by the technical evidence from your other economic indicators, notably the Conference board’s Leading Economic Index (LEI), Moving Averages, etc.?
Emanuel
Again, there is no product or service that cannot be successfully produced in this country by Americans and there was a time when everything you bought was US made. Remember when you could always get a laugh when you read Made in Japan, a synonym for junk?
Our outsourced jobs need to return en masse and we need to begin thinking again about what is good for our country and its citizens, not what is good for Wall Street, Big Government, Big Banking and the megacorporate aristocracy.
Our infra stucture has been neglected for too long. Bring our money back home, cut government expense. stop the political bickering.
After all that is happening, have we learned our lesson, or have we learned . . . nothing?
Thank you Claus for your insights and analysis. I agree with your assessment but disagree with your conclusion that we are probably bound to get a severe downturn or another recession. Its possible but unlikely because there are so many other variables at work, including USA’s instrinsic productive and creative capacity. YES our politicians and government bureaucrats are making poor decisions and taking wrong actions. And our public, voters, are noticing and reacting, and acting to effect changes, notice the “new crop” of much more conservative “new blood” elected to congress.
Our Financial and Investment “Professionals” have behaved horribly with excess greed and irresponsible risk taking, and when they screwed up they applied political “clout” to take public tax dollars to make themselves “whole again”. Woe to them and their political pals, we know it and are taking action. The consequence over time will be new legislation and regulation to prevent future repeats. I only wish we ALSO took appropriate punitive action, but its doubtful that will happen.
Our public is also taking drastic action to increase productivity, SAVINGS, reduce borrowing, and strengthen family & individual balance sheets. And THAT reduces probability of yet another recession.
Even more impactful, but longer outlook, is the innovative entrepeneurial action by our population. In many indutries & services, biomed, pharmaceuticals, electronics, machinery, food production & processing, etc; USA is Increasing investments and developing technology & products of the future. For all humans worldwide. And we are upgrading our infrastructure, long overdue; and slowly but surely moving away from energy dependency toward energy self sufficiency. With relaxation of nuclear powerplant restrictions, expansion of solar and natural gas, and development of electric/hybrid vehicles suitable for OUR marketplace and environment. And all this transformation is reflected in our practical education system where workers and entrepeneurs are acquiring and enhancing knowledge and skills essential for future success. All this is NOT “Headline News” but it is happening and in a growing crescendo. I will continue to invest in USA, its potential far outweighs its risks. Thank you.