5/2/2012 5:24 PM ET|
How a bad economy helps stocks
Doubts about the rebound are rising yet again, but don't let that scare you away from investing. Those doubts will be good for stocks and gold -- for a while.
You don't have to look very far to find things to worry about.
Yet, after largely going quiet since February, stocks and other risky assets -- including junk bonds, copper and precious metals -- have started perking up like wildflowers. This is despite sour investment sentiment and building evidence of a new slowdown in the global economy.
What gives? And can this new strength continue in the face of such dire threats?
It all depends on what the Federal Reserve announces at its June policy meeting. Wall Street is betting that in less than two months, Fed Chairman Ben Bernanke will unveil a third round of quantitative easing or "QE3" -- essentially pumping cheap, newly printed cash into the financial system -- to follow up on the "QE1" effort started in late 2008 and the "QE2" effort teased in the summer of 2010.
You can see this in the way the U.S. dollar is being eviscerated, dropping below its multimonth trading range. That's pushing traders into assets helped by a weak dollar, like gold and silver and the related mining stocks -- areas that have largely been ignored since early 2011, when the dollar stabilized. The catalyst for that was renewed confidence in America's vigor after Osama bin Laden's date with destiny. Nothing like a righteous kill to boost confidence.
In the twisted reasoning that passes for logic in the markets these days, as long as the dollar stays weak -- ostensibly through additional Fed stimulus -- stocks and metals should march higher. And as long as that happens, you shouldn't be scared out of the market despite the storm clouds on the horizon.
Once that changes -- say, due to a Greek exit from the eurozone, a deepening of the problems Spain faces or a nasty new debt-ceiling debate here at home -- there'll be hell to pay as the dollar strengthens.
But right now, despite the economic mess, we're due for a brief upswing. Here's why.
Liquidity or nothing
As all this is happening, some serious, scary fundamental problems are being shrugged off -- problems that will be obvious once the short-term sugar rush the Fed's stimulus fades. Each iteration of QE only strengthens the nasty side effects of those efforts -- rising inflationary pressures, weaker real wages and higher prices at the pump -- while the benefit diminishes.
Europe is a mess, as the likes of Spain and Britain have fallen back into recession while its fragile banking system edges toward the precipice. The Spanish sovereign credit rating was recently cut to "junk" by analysts at Egan Jones. Food and fuel prices remain troublingly high. Social unrest is heating up again as winter's chill fades -- in Europe, in Asia and here at home.
China is suffering from a drop in exports, to Europe and elsewhere, as it tries to manage the end of a housing and debt bubble.
In the United States, various leading indicators of growth -- from industrial production activity to recent labor market data to the drawdown in the personal savings rate -- suggest trouble. And we have to contend with the "fiscal cliff" Washington is speeding toward like a drunken driver toward a Jersey barrier. (See "U.S. barrels toward a fiscal cliff.")
This week, both the Chicago and Dallas Fed manufacturing reports came in under expectations. The Chicago PMI fell to its weakest level since November 2009 on a drop in orders and production. The Dallas report fell to its weakest level since last September on a drop in factory utilization, orders, employment and production.
With the economy puttering along at just 2.2% growth, tax hikes and spending cuts worth nearly 4% of the gross domestic product await in early 2013. That could tip us back into recession.
There are other, deeper problems, too. Such as the drop-off in the labor participation rate to early 1980s levels as people give up looking for work. Or how Washington has failed to address the looming demographic problem facing Social Security and Medicare as more and more seniors are supported by fewer and fewer young taxpayers. Or how the corporate sector is hoarding cash and withholding investment -- causing labor productivity to stall and threatening future economic growth, according to JPMorgan economists. This will have long-term consequences.
These are serious problems with no easy answers. The root of the problem, as I've said before, is too much debt in the West combined with aggressive trade mercantilism and fierce competition for new jobs from the East.
Until these issues are resolved, the "recovery" will continue to disappoint, with lots of corporate profits but languid job growth and salary gains. Earnings multiples will likely contract, according to Morgan Stanley strategists -- which means lower stock prices as earnings volatility and subdued growth take a toll on investor confidence. While the market is trading near its long-term average price-to-earnings ratio, history shows it doesn't trade near this level for long, as the pendulum of sentiment swings from greed to fear and back again.
Inflation will also become a bigger and bigger problem as the Fed's stimulus efforts mix with structural impediments to faster GDP growth, from a higher "natural" unemployment rate to weak labor productivity and minimal capital investment by businesses.
Continued on the next page. Stocks and funds mentioned include Apple (AAPL), PowerShares DB Commodity Index Tracking (DBC), iShares FTSE China25 (FXI), iShares MSCI Emerging Markets (EEM) and iShares MSCI Hong Kong (EWH).
VIDEO ON MSN MONEY
Yes! Another round of QE to get that dollar down and manufacutring jobs back in America. Just in time for inflation to kick in and the interest rates to go up.
The banks will start to invest all that money they got from the last 3 QEs, because they will make a better return on investment at higher interest rates.
This will then cost the borrower more, which will result in higher costs for services and products, but it will put the housing market back to at least a even keel, and now that house may be worth 400K.
So long story short even with higher wages we (99%) will still be in the same postion 6 years from now, we are in today. It will take another 10 years to pay down that deficit.
Once that comes down, we Americans begin buying crap we don't need on credit, cause the Fed will lower interest rates (since inflation has subsided) and we will start this party all over again.
The corporations then get another 10 years of bailouts and layoffs that streamline their buisness model (more profits) on the backs of the tax payers.......Just a guess.
If President Obama doesn't win re-election, do we get to get rid of Bernanke? Oh boy!
Who is Wall Street ? If youare talking about big money ; they hacve been against him from the start !!The only thing ,the big money barons fear , is a Democrat Party Justice Department , with a Democrat Party Congress !! Wake up America , and start voting ,with your Pocket book . KGK
1. There is no point of working Fridays and Saturdays like I used to do in the last decade. We have to keep our reported income under 250K now as it will effect our many stock transfers under Obama care taxes. Unfortunately I have signed less paychecks as a result of this.
2. In a down economy you can also make money. $9,000 tax credits for buying real estate you do not need, clunker cars, QE I, QE 2, and operation twist. The stock market has really responded to the printing of money! In fact it is so much easier than working honestly very hard in your business employing people making products competitively. (I do not have to pay the bonuses I used to pay in the last decade.)
3. It is much easier to read the new Obama game rules and go with the flow and make money. (Too bad about the hourly workers who can not do this.)
Anyway, another weekend.
Get real! President Obama inherited a ton of problems before others were piled on.
You cannot rid the country of the inherited problems and the subsequent problems in 4 years.
He is intelligent, caring for the middle class and the poor, does his best to get along with other countries while all the time the right wingers and Tea Partiers are doing their very best to tear him down.
Look at Congress and look at even trying to defeat Richard Lugar.
Stop the petty politics, that is all it is. I don't think half of them even believe what they are saying themselves, just playing to groups that they think will re elect or elect them.
Mitt Romney can't even decide what he really is.
Straighten up and quit acting like spoiled brats.
"If Americans finally realize that Obama is incompetent and sees through the smoke and mirrors, it will eventually wear off leaving one hell of a hangover on our economy and burden it even more making Romney and the Republicans look inept".
SSG K, you've given an excellent description of the Bush administration and Republican efforts since then at obstructionism and the shifting of responsiblity, to make Obama look inept in the eyes of all the suckers like yourself. Your theory is a valid one, except you've got things 180 degrees a** backwards.
By the way, the Republicans and Romey are inept.
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The news from Europe knocked the key indices from their early highs, while giving a boost to safe-haven assets like gold futures (+0.5% to $1290.80/ozt), Treasuries (10-yr yield -1 bps to 2.69%), and the Japanese yen (102.30 ... More
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