12/19/2012 4:00 PM ET|
Welcome to the new recession
It may not have felt like it, but stocks have been in a 4-year bull market. That's coming to an end as a new recession nears -- and in fact, may already be here.
It may be hard to believe, but the bull market is turning four years old. And from the looks of things, it isn't going to make it to its fifth birthday.
That's because, despite the nice little Santa Claus rally Wall Street's been enjoying over the last few weeks and rising hopes of a "fiscal cliff" deal in Washington, some serious warning signs for both the market and the economy are emerging. In fact, one of the most respected economic forecasters in the business believes we're already in a new recession.
If true, now's no time for aggressive optimism. Instead, it's time to move to cash and batten down the hatches for what looks to be a rough 2013.
I'll explain why in a moment, but first, let's review how we got here.
Following the Fed
Just as a wintry chill was setting in, between Thanksgiving and Christmas 2008, the economy faced an imploding housing market and financial-system meltdown. At the Federal Reserve, desperate policymakers decided to start using freshly created dollars to buy mortgage securities. This drive, which came to be known as "quantitative easing" or QE1, was expanded in early 2009 to include Treasury bonds.
Corporate bonds, which have been an area of focus for the average investor this cycle, responded right away. Stocks, initially disappointed by President Barack Obama's election, found their footing in the spring, and the bull market was on. The economy didn't respond until the summer, while the job market took a full year to begin turning around.
The year that followed was promising until a government bond crisis in Dubai revealed that developed governments were overextended. Then, the impact of U.S. stimulus spending faded. That was followed by Greece kicking off the ongoing eurozone woes. Central banks kept the economic ball rolling with an alphabet soup of programs that all amounted to the same thing: more cheap money.
Things slowed, job growth leveled off, and stocks have pretty much been sliding sideways since the Fed ended its second round of quantitative easing, known as QE2, in mid-2011. Investors have pulled out since then. The U.S. economy is barely moving forward.
So while the Standard & Poor's 500 Index ($INX) climbed more than 120% from its March 2009 low to its September 2012 high, there is evidence that the current bull market has run its course.
And now, the drag
With rich-world governments collectively set to tighten their budgets by 1% of combined gross domestic product, according to the International Monetary Fund (1.3% here at home, worth nearly $180 billion next year) more weakness lies ahead.
This fiscal drag is already baked in. It could be made worse by any turmoil related to the process, from a fiscal cliff breakdown here at home to ongoing political tension in Europe or a bond market revolt in Japan.
What's scary about all this is that the recent slowdown has happened despite very aggressive action by the major central banks. The Fed is currently engaged in unlimited quantitative easing (QE3 plus QE4) of $85 billion a month, saying it will continue until the unemployment rate falls below 6.5% or the inflation rate rises above 2.5%. The European Central Bank has threatened unlimited bond purchases if a country -- such as Spain -- requests help and commits to a budget-cutting plan. Prime Minister-elect Shinzo Abe of Japan has said he will push the Bank of Japan to engage in unlimited bond-buying. The Bank of England is pushing hard, too.
It seems the global economy just isn't responding to cheap-money stimulus anymore as the credit channel remains constrained. Governments and households are focused on paying off debts, not borrowing more cheap money, while banks are busy rebuilding their capital reserves.
The stock market doesn't seem impressed, either: The Dow Jones Industrial Average ($INDU) actually finished with a loss on the day the Fed announced QE4 -- the first time stocks have moved lower in response to a new round of quantitative easing.
Welcome to the new recession
In fact, the folks at the Economic Cycle Research Institute, who have made some remarkably prescient calls on the business cycle over the last few decades, believe we are already in a recession that started in July.
Corporate executives have pulled back on capital expenditures in a big way, sending ripples throughout the supply chain. Industrial production is on a downward glide path despite a temporary lift from Superstorm Sandy rebuilding. Small-business confidence has collapsed. Personal income is down. All are consequences of the fact that real equipment and software spending -- a proxy for capital spending -- has suddenly sliced into recessionary territory.
According to UBS economists, the recent lift in the job market is at odds with this, which is one reason I've been hammering on about the questionable veracity of the recent drop in the unemployment rate to 7.7%. A better measure of the job market, the employment-to-population ratio, is flat-lining near early 1980s levels. The disconnect is illustrated in the chart above.
Surprise, surprise. The drop in corporate investment and overall stupor of the global economy is starting to negatively impact corporate earnings -- which had been a rare bright spot over the past few years, thanks to strong foreign demand (from consumers in emerging-market nations) and the ability to make deep, harsh cuts to the jobs, wages and benefits offered to American workers.
You can see this in the way unit labor costs -- a measure of labor expense -- have stalled near prerecession levels despite the fact the economy has grown $312 billion over its prerecession peak to help push corporate profits to record highs.
That is what threatens the bull market.
VIDEO ON MSN MONEY
"New recession"? Did we ever finish the old one?
I see that Hillary Clinton suddenly became ill just as the investigation into Benghazi was starting & she was supposed to testify. And a lot of people in the State Department are leaving. Could it be that Hillary doesn't want to tarnish her image so that she can run for President in 2016?
For Liberals without a clue let me give you two. Obama made these statement,s "Americans have had it too good for too long". And as he proclaimed to Putin, "in my second term I will have more flexibility". And yes he was speaking in regards the New World Order which as a necessity is the destruction of the American middle class. For those Americans who have nothing and voted out of anger at those rich Republicans the New World Order will bring more to their numbers such that these poor people will no longer suffer from economic envy. They will have loads of company. When one votes out of anger the result historically has been the installation of a tyranical leadership.
Within two years .... Obama will cement his psition as the worst President in the history of the US!!
To all of you that voted for him ... thanks a freakin lot!!!
Economy is going into a recession, Obama is trying desperately to cover up Benghazi, staff members are quiting the chaos Barry is creating, there is a total lack of leadership in the Whitehouse ..... what a joke Barry is and has been. Our debt is unpayable and the country is basically BKed!!!
Taxes will hit the middle class worse than any other group!! Good luck with all of that. LOL!!
Can you say Greece or Spain!!!
I just can't get the math to add up. Tax the rich, & they must increase production in order to maintain the net income they had. They've smacked face first into the wall of diminishing returns, so they're not going to get any more from us, & they'll have to hire more producers. More people working means more money to spend, & the rising level floats all boats a little higher.
The wealthy would have to deliberately accept a reduced net income, & even flirt with no income at all to do anything else. Do we really want people who would rather get nothing than hire us to work running our businesses? So tax them, & if they're really that stupid, let them go under & leave business in the hands of rational folks.
Give me a break, you can't have 8 years of financial irresponsibility, fund meaningless wars under President Bush and then expect to turn it around overnight (Notice i am not disrespectful to one of our Presidents, unlike most of you clowns and racist rednecks that rip on President Obama and disrespect him constantly). You are delusional if you think that silver spoon boy, Twitt Romney, was going to turn things around already. (I can disrespect a Governor, because they basically buy their way into office. Not to mention, he is an absolute terrible Governor).
What we have here is a clear cut case of "sore loser" syndrome, a bunch of Republicans, CEOs, millionaires and billionaires that are pouting because they lost the election, because they couldn't buy their way in, holding on to the purse strings and not moving us forward becuase that would mean admitting that being greedy is wrong. Basically they can use this depression excuse to squeeze as much out of their employees as possible so we have an entire workforce in our country of mindless, overworked and underpaid zombies that are constantly reminded that they are "lucky" to have a job.
That's the truth.
No offense, but I think this arcticle is way off base. Unless a course, investers have chosen to run to real estate again. Maybe that would make some since to the article.
I am in construction just a average skilled worker. Were I am at, construction is on the rise. So much so I have not missed one day of work this year except for weather issues. We are so short handed for labor we are constantly behind schedule. Its been a great year!
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