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.
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It seems to me that more people are ignoring the wishes of the federal government to go out and spend money they don't have (i.e. credit card debt) and instead are paying off debt.
In the long run, that can only be a good thing for America.
Chasing material things which we can't afford using money we don't have is a large part of what got us into this mess we are in now.
I vowed to never pay income tax ever again. What are they going to do? Put me in jail for a year? I don't have a job anyway... Will they put me to death? No... Their imposed debt upon me is notwithstanding and fraudulent. They say I owe them, but do I really? No sir. Screw you Uncle Sam. You aint my uncle.
I have no health insurance, life insurance, cant pay my child support, cant find a job. If you fix the economy and I can do all of these things. I probably will still not pay YOU, Sam. Cause you piss me off.
New recession? When did we leave the last one? Back when the unions were trying to warn everyone about the Clinton's wonderful new plan, a thing called "NAFTA" people went, "yeah, right". Boo unions! Well the jobs went overseas, and now even Hillary Clinton has said it was a bad idea. That's O.K., though because the Clintons already got theirs for selling out America.
New recession? For the working class, the "old" recession never ended, and this has all been a deep recession all along. The "recovery" hadn't exactly existed for the so-called "99%ers" this whole time... At most, it existed for the class of peeps who stood to get bailed out.
Oh well, I guess they got to try to sell this sort of argument, to get people to feel more positive about their own dire financial situations at large....
I think most people knew that this was going to happen. First off the current administration has been bragging about the unemployment figures going down. During the holiday season retail stores hire temps only to lay them off right after Christmas. This just goes to show how deceptive the current administration really is by using temporary jobs to pad its unemployment figures. The next thing you’re going to experience is manufacturing companies getting into trouble again. They have manufactured products but the market is weak. They will be laying people off also. It's a round robin. Obama speaks with forked lounge when it comes to the economy. In order to collect taxes you have to have people with an income. In order to have income you have to work. In order to work you have to have a job. I'm not talking about jobs that require a person to say: "Would you like fries with that order sir?" I'm talking about honest to god jobs with real benefits. I can't wait to find out how much the retailors will say they lost this holiday season but figure it to be excessive.
We can't save the world, so lets save ourselves. No budget no foreign aid no federal pay no welfare no euro its on its own sink or swim euro. No foreign company bailed no currency saved except our own.
50% tax increase on all overseas money.
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[BRIEFING.COM] The stock market began the new trading week on the defensive note with small-cap stocks pacing the retreat. The Russell 2000 (-1.4%) and Nasdaq Composite (-1.1%) displayed relative weakness, while the S&P 500 lost 0.8% with all ten sectors ending in the red.
Global equities began showing some cracks overnight after China's Finance Minister Lou Jiwei poured cold water on hopes for new stimulus measures. Specifically, Mr. Lou said the government has no plans to change ... More
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