11/30/2011 6:15 PM ET|
Has the new bear market arrived?
Yes, stocks just had a big up day. But growing debts and tighter budgets here at home and in Europe are leading us toward a new recession and a prolonged downturn. In fact, we may already be there.
The bank bailouts and stimulus efforts of 2008 and 2009 gave us a shot at getting the global economy revved up before booming debt in Europe and the United States choked it off.
It was a race against time. We needed the economy to outgrow our rising burden to creditors, be it Chinese sovereign wealth managers or domestic pension funds and bank executives. And 2010 looked promising, with most of the economic numbers picking up.
But after the problems we've seen in 2011 -- including an energy price spike due largely to the Federal Reserve's stimulus efforts and the Arab Spring, economic head winds from the Japanese earthquake, political bickering in Congress and the European debt crisis -- I'm afraid we've missed our chance.
It didn't have to be this way. There were glimmers of hope in June and July, and again in October. Yet they faded like the winter sun as politicians shied away from tough choices and businesses remained cautious. A new recession and a new bear market for stocks now appear unavoidable.
Scarily, recent evidence suggests the downturn has already started. Although stocks are down only around 10% from their May highs -- below the 20% decline that commonly defines a bear market -- I believe the shift has already happened. Stocks have been locked in a downward pattern for the better part of the year. And, as I'll explain below, internal measures of market strength are flashing warning signals.
Yes, the Federal Reserve and the European Central Bank did act on Wednesday to try to ease dollar funding in Europe, and markets rallied. But this merely delays the inevitable and does nothing to fix the solvency problem in the eurozone. The West, including the United States, is on a path to debt destruction, plagued by tepid growth and the lack of political will to raises taxes, cut spending or do both.
There is simply too much debt to be serviced at rapidly rising borrowing costs. Helping banks with their day-to-day dollar funding merely treats a symptom, not the disease.
Mind you, I hate to sound so bleak; I've never been part of the run-and-hide crowd, in investing or in life. But without a course correction, this isn't going to be pretty. In fact, it's already getting ugly.
The new recession's epicenter
First, let's talk Europe.
In late October, under intense pressure, eurozone leaders huddled in Brussels to hatch a plan for a 1 trillion euro ($1.35 trillion) insurance fund to attract new capital from overseas and pay for possible bailouts for Italy and Spain. It was the latest in a long line of incremental moves that have likely doomed the euro.
The idea was convoluted from the start. With the Continent's bailout fund -- known as the European Financial Stability Fund -- down to just 250 billion euro, the plan was to leverage it up four times using loan guarantees and special investment vehicles to lure private capital. The money would then be used to go out and buy eurozone government debt.
Ostensibly, this additional rescue funding would give the governments of troubled European governments the time they need to enact painful tax hikes, spending cuts and economic reforms such as higher retirement ages and lower wages and benefits.
The trouble is that governments that inflict such pain on their people don't tend to stay in power. Leaders in Greece, Italy and Spain have all been replaced this month as voters rage against austerity that makes it harder to put food on the table. Ireland, under pressure from pensioners at home, is seeking to renegotiation its 85 billion euro bailout. And protesters have taken to the streets in Lisbon as Portugal warns its 78 billion euro bailout isn't enough; it may need 100 billion instead.
So the bond market has staged a revolt of its own: It is increasingly unwilling to fund Europe. Borrowing costs have surged across the eurozone, with Italian two-year bond yields jumping from around 3% back in August to nearly 8% this week. (Yields rise as companies have to pay more to attract creditors.)
For Italy, the world's third-largest issuer of government paper (behind Japan and the United States) with nearly $2.6 trillion in debt, these levels are crippling.
It gets worse. Italy's contribution constitutes 20% of the European bailout fund. If Italy is in trouble, private investors have to question the viability of the fund itself, and of any plans to leverage it.
France, another key contributor, is also coming under pressure. French financial newspaper La Tribune reported this week that Standard & Poor's is within days of revising France's credit outlook from stable to negative -- the first step in a possible debt downgrade.
The European Financial Stability Fund itself, as it was originally structured, is already having trouble raising private capital. Earlier this month it delayed a bond auction due to adverse "market conditions" before finally using its own money to buy its own bonds to complete the auction. Embarrassing.
As a result, eurozone leaders are acknowledging their expanded EFSF will be able to come up with only around 500 billion euro, and that only by becoming increasingly reliant short-term funding -- of the kind that sank Bear Sterns, Lehman Brothers and MF Global. Oh, and it won't be operational until January.
Too little, too late.
All the while, France and Germany continue to push for "more Europe" as a solution to the eurozone crisis. That means moving toward tighter fiscal integration that would require spendthrifts like Portugal, Greece and perhaps Italy and Spain to give up national control of their budgets.
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best article of the entire blog strom ... accurate, concise and realistic.
as for the audience, i fear you are casting pearls .....
i love the post not because i am partisan (i am an independent swing-voter) but because we must accurately understand the lessons of history or we are doomed to repeat the failures of the past.
sorry next time, your time is up. the highest rated president of the past thirty years is clinton by far (see sienna group 2010 ratings). republican economics have put us in the abyss, foreign policy has gained us most-hated-nation status and the social policies of look the other way and don't tax but spend has further nailed the coffin.
obama is being forced to the center ala Clinton, and if we clear out this TP deadwood who are simply "do nothings" we can make some progress. see you next november for the deadwood cutting.
p.s. read the simpson-bowles BI-PARTISAN debt reduction report and ask yourself why NO TP OR CONSERV REPUB will support this broad based bi-partisan plan. the answer is heaping helpings of greed, insanity, egotism and stupidity.
don't get me started ...
excellent post 3x4 (and others) .... lmao - you reminded me that i did see that 3x short call tony issued a few days back - that level of instant loss is difficult to recover from unless you enter the maddening, whipsawed world of day trading leveraged directional funds. you may as well just walk into a casino and drop it all on red a few times in a row until it is swept away rather than prolong the pain and anguish. sad.
hmmm... W's tax cuts cost 120 Billion a year at the most. They were basically a 2% reduction across the board.
No. That's not all what they did. They cut capital gains taxes and also introduced credits in lots of areas.
The CBO already spelled out exactly what that costs. Minus the Iraq War and Medicare Part D, it's around 400 billion dollars a year. And no, those cuts didn't improve revenues in real terms (i.e. as a measure of the economy). They declined them as a % of GDP from peak economic activity (2000) to peak economic activity (2007).
(10.2 Trillion when he too office, 15.1 Trillion today).
Objectively, if you are actually measuring something, budgets are in place prior to the incoming president. Fiscal Years are measured from October 1 thru September 30th. And it's recorded by the budget office the same way. I.e. FY 2009, is October 1 2008 thru September 30 2009.
Federal Spending grew 6% a year from FY 2001- FY 2009. It Grew 8% a year from FY 2010 - FY 2011. It's understandable when it grows during a massive recession.
Why? Because tax revenues decline and its not easy to reduce spending. In fact, businesses, people, everyone is begging for assistance during those recessionary times. What's not execusable is to have a generally expanding economy from 2001-2008 and to not show any kind of spending restraint at all.
In fact, one of the reasons government spending is so uncontrollable is a lot of the automatics that have been allowed because PayGo was repealed. Which allowed programs to be started without estblashing sources of revenue for the programs.
And of course, the deficit hasn't increased from 10 to 15 trillion.
We need to INCREASE SS and Medicare taxes.
It's really nonsense to cheer for either side. The side you seem to be rooting for have been in virtual control for over a year and the spending really didn't drop. And they aren't going to increase SS or Medicare Taxes.
Mentioning one tax is also ludicrous. Everyone has accepted tax handouts over the last 30 years. But no one proportionally larger to their incomes than the most wealthy.
"Shared sacrifice" - If you're going to ask workers to be paying more SS taxes, you have to ask Seniors to take SS cuts. You have to ask capital gains taxes go back to a higher rate. You have to ask mega businesses to stop accepting massive direct tax credits and actually pay something resembling the supposed 35% rate.
Seems like lots of programs that support those on the lower end are receeding. From the state, local, and federal level. Except those that help the least effective job creation businesses and people. Why on earth should healthcare programs that help needy families end, while an Exxon Mobile gets massive direct tax credit payments?
hmmm... W's tax cuts cost 120 Billion a year at the most. They were basically a 2% reduction across the board.
Over 10 years thats 1.2 Trillion. The 2 unesssary wars are estaimated to have cost 1.5 Trillion. (1.1 Trillion under W, .4 Trillion under Obama). That totals 2.7 Trillion. Mr. Obama's deficit SPENDING will total over 5 Trillion by years end. (10.2 Trillion when he too office, 15.1 Trillion today).
Yes, by all means LET the W tax cuts expire! Everyone will then contribute towards that 120 Billion extra revenue. This utter nonsense proposed by the Donkeys to future slash Social Security taxes is nonsense. We need to INCREASE SS and Medicare taxes.
But don't think for one minute letting the W tax cuts expire will even dent Obama's massive SPENDING increases.
We need to SLASH spending back to W's levels of 400 Billion.
You're right Papa, most of these big boys, don't know whether to sh!dt or go blind.
They put way too much into it, to gain so little, and worry about their importance.
Maybe tomorrow, they get lucky and become a hero or a guru...but until then.....
American banks are fragile because they have billions in non performing mortgages and loans outstanding. Millions have homes that are underwater and many are simply walking away from their debts. Unemployment is at about 9% and isn't budging. Cities and States are in the hole for hundreds of billions in defined benefits plans for too many state and municipal employees. Recent college graduates are holding massive student loans and are back with their parents attempting to pay off loans for dubious degrees that may never help them obtain employment.
So, folks, the entitlement society is coming to an end because it's time to pay the fiddler. Except there isn't enough money to pay all the debts. Everyone could roll over their debts forever I suppose, but no one really believes that's a good solution. Thus, we muddle along.
as for you and your opinion tony, what are we going to do with you?
rewind a few weeks back and then what will you be posting if the S&P peeks through it's 200 DMA??? will you once again become an instant "technical" bull, throw out all of the fundamental analysis and tell everyone to jump on the bull bandwagon yet again??
are you also the policy adviser to mitt "they call me Flipper" romney??
nice post hava. a bit unclear on the tax cuts which will expire in 2013. here is a good detailed article on the expiration and why the repubs held any debt reduction agreement hostage in an attempt to derail the expiration. unbelievable insanity on their part given the facts of their failed impact on American success.
nice post ..
".. and nibbling at municipal bonds. They seem to be averaging around 5% tax-free income."
are you buying those nice IL muni's or CA? how about harrisburg PA muni's? 5% tax-free income vs. only what on taxable risk-free 30-year treasuries? what does such a high yield tell you about credit quality and the potential for greek-style "public participation" (a euphemism for haircuts)??
... just sayin' ... be careful out there ....
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