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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I'm not sure what you mean about tying to income?
If you have currently paid in the maximum Social Security taxes during your lifetime your benefits are defined to be about $2000 a month. If your passive income, not wages, are over $25,000 then up to 85% your SSA benefits are taxed at normal progressive income tax rates. That's not the way ot used to be but it's reasonable Some states also follow that rule and some don't.. However, there are those who would like to actually take away your SSA benefits based on your income or wealth. Nothing should limit your benefits. Even Bill Gates should get his benefits he contributed to and earned. He's paid plenty of taxes.
Property tax (on housing) keeps middle income Americans from accumulating wealth
Watch out that's a double edged sword. Most property taxes go for schools. Why should childless and single property owners pay school taxes? You've basically got a socialized education system that', like many other socialized systems, isn't providing the quality that more spending keeps promising. Why should retired seniors pay school taxes. Many opt out by moving to local areas that have low property taxes or buy RVs. It's fun to have other people pay for your hobbies. Socialists thrive on that!
I agree with Anthony on this article. When a typical optimist like him and Cramer start getting pessemistic, it might be a good time for prudence. I'm taking one of two courses of action:
1. Wait to see if the usual December bull happens and then take my profits and get out after the 1st of the year. Then wait for the DOW levels detailed below.
2. If December turns out to be a bear, I'm holding pat with my current holdings (most of my stocks are dividend yielders) and waiting to buy again @ 9500, then 8500 and then finally at 7500 (if we see it, which I doubt).
Hoping for option 1, but I'm not overy optimistic. I anticipate a rough first half of 2012...
Bush tax cuts increased income tax revenue by 40% in 4 1/2 years. That's not a cost, that's a gain. Seriously, you liberals need to go to government data websites and do your own research like I do. Then you can make your own decisions instead of listening to the journalists that majored in Journalism and the teachers who majored in Education. Neither knows anything about economics, engineering, the environment, etc.
Kind of like our president who majored in ... oh that's right he never released his college transcripts so we don't know what he majored in or how embarssingly bad his grades were. You know if you refuse a breathalyzer test you're assumed to be DUI. Using the same logic, if you refuse to release your transcripts you're assumed to be maybe not the brightest bulb in the pack.
Imagine this analogy, you are the breadwinner in your family and your wife and kids are used to getting everything they want. You can no longer afford to give them everything they want and for years you have been going deeper into debt in order to give them everything they want. It begins to reach a point that the payments on your debts are getting to the point that you are having a hard time to pay the minimum payments.
You talk to your wife and kids to explain to them why you need to cut back on spending and they don't understand the problem because they never see the bills and don't understand such big numbers. They think you just no longer love them anymore and don't understand why you would want to make them unhappy. Your oldest kid tells you that you should spend less on his kid sister because she does not need all those dolls. The daughter says that you should cut your spending by taking the car away from the big brother. The wife says you should eat out less and cancel the home security system because it does not do anything anyways but make beeping noises. The wife and kids all agree that you need to make more money and then there would be no problem at all.
If you cut back on the spending as much as you need to your wife will dump you and the kids will disown you. You will be living on the street alone and your wife will get a new husband that will promise to continue spending the money on her and the kids. That guy will see the old husband warming his hands over a trash can fire in a parking lot and will not cut back the spending as long as money is still available. That man will steal, fight, and do whatever he can in order to keep spending until the money is no longer available. When the money is no longer available the poop has to hit the fan.
Too bad our leaders are more concerned with being re-elected than saving their country. Too bad we are so averse to pain that we would rather die. The pain would be now and since we can't see past the edge of our nose the imminent death is irrelevant and we will deal with it when it comes.
Well it is about time"one" of you so called experts tells it like it really is. We are in BIG TROUBLE as most of us have known for a long time,. What is it that people and soverign governments don't understand that you can't keep spending $$$TRILLIONS of dollars you will never have?
Just how much debt does the United States think it can rack up before it too goes broke? We are already there. Current estimates with entitlements balloon our deficit anywhere from 65-100 Trillion Dollars depending on who and what figures you believe. It simply will not be paid back and soon all the money the government takes in, in so called revenue, will go to service the debt with not a cent left over for anything.
Our Government has royally screwed us!!! And they can't even agree on a measly $1.2 Trillion
in cuts over 10 years. Insanity.
IF both the huge defense budget and the huge entitlement budget are cut,
i'm all in favor of the move in the absence of any action by the government or
the super committee.
hey! cuts are exactly what the super committee was supposed to do.
what's wrong with getting them one way or the other?
the article assumes that the only thing moving the economy is the government
and cuts and taxes... have you noticed the discussion doesn't even include any
mention about the American people, American companies and what we contribute?
if this all leads to LESS GOVERNMENT as it's supposed to, it can
only be a good thing.. people no involved in business can't begin to imagine
the incredible day to day burdens which all forms of government place
on us simply making a go of it.
and,,, if as i think will happen, the Democratic and Republican parties
morph into the Dem,, Rep, and the Tea Party and the Occupy Party,
there will be even less chance of agreement as those at the table
of power dicker their own agendas.
it's fun being alive.
If you repeal the Bush tax cuts you will raise taxes on the more advantaged retired since their income is coming from dividends and interest. SSA payouts and Medicare should not be tied to income or wealth anymore than car, home or medical insurance payouts.
Those tax cuts by law are not permenant. No repeal is required. All that is required is to not pass legislation to extend them.
I'm not sure what you mean about tying to income?
Almost any tax should be progressive. If you don't do it that way, over time, wealth will accumulate towards one end of the system and constrain economic activity. Which is exactly what has happened by use of the stock market.
The tools for reasonable distribution of economic gains have been shut down or eliminated in favor of a system that distributes those gains entirely within one sector of the economy (financial) and within a market that represents only about 10% of the population (stock/equity markets).
One of the most shocking taxes in America is property tax. It's surprising to me that it's not addressed by more people.
Property tax (on housing) keeps middle income Americans from accumulating wealth. On the other end of the spectrum, it's equally shocking that there is no property tax on equities. Both are assets that produce capital gains (typically) over time. Why is it fair to use a property tax one but not the other?
If they cut S.S. and Medicare then the states will end up paying more to care for the old people. It will be a lot more because after they drain their bank accounts and lose their homes to cover medical, food,heat and such they will go to the state and say take care of me. The states will not have the money so the next option will be stick them out of sight and let them die. This is reality and it's time the politician tell it like it is.
That's exactly how it used to be prior to Social Security.
If you're going to ask workers to be paying more SS taxes, you have to ask Seniors to take SS cutsSocial Security tax rates were 2% 1937-1950, 3% 51-53, 4% 54-56, 4.25-6.25% 57-62, 7.25-8.6% 63-68, 8.4-9.9% 69-77, 10.1-10.8% 78-83, 11.4-12.4% 1984-2010. I started working in 1964 and my rates doubled since then. SSA can be fixed by raising the rates by 1%, .5% for each employer and employee, and raising retirement age to 69, 1 month a year, over the next 24 years. That will fix SSA for 75 years, Without SSA, you'll have a huge retirement problem in 30 years as the payouts go down and people that haven''t paid in enough age. If you repeal the Bush tax cuts you will raise taxes on the more advantaged retired since their income is coming from dividends and interest. SSA payouts and Medicare should not be tied to income or wealth anymore than car, home or medical insurance payouts. You're going to see 78 million Baby Boomers voting Democrat in 2012. We can then cut defense spending by 15-20%.
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.....
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[BRIEFING.COM] The stock market ended the Thursday session on an upbeat note with blue chips showing relative strength for the second consecutive day. The Dow Jones Industrial Average (+0.4%) and S&P 500 (+0.3%) settled ahead of the Russell 2000 (+0.2%) and the Nasdaq Composite (+0.1%). It is worth mentioning the benchmark index posted its fourth consecutive gain, registering a new record closing high at 1992.38.
Equity indices climbed out of the gate thanks to early strength among ... More
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