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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We never got out of the recession in the first place. The Fed pumped up the stock market but it did nothing for 98% of the country. No jobs were created. Since then, corporations have cut back to maintain profits but they can only grow by cutting for a short time. The demand side of the equation is shutting down. They kept it going with credit for a while but that's dried up now. Even the free Fed money has lost it's ability to stimulate and now is just life support to keep the artificial market from collapsing.
More and more people have become unemployed but they are only counted as unemployed while they are on unemployment benefits. Since that lasts 1 year and we have been in this for four, one can assume that the unemployment rate is at least three times the number currently on unemployment. It will go up by another third this year. If this was 1930, we would have soup lines and hobo camps popping up everywhere. These days we have food stamps. The poverty stays indoors but it's still there.
With all of this going on, all Congress and the president want to do is argue over a 1 or 2% tweak of the tax code. That ain't the problem guys.
All the wealth that was artificially created by the housing bubble will necessarily be wrung from the economy. The Feds efforts are to keep that from hitting the financial system. That means it's going to hit us. All of the money loaned for us to consume did nothing lasting for the economy and we are paying the price. For every cent of wealth that was transfered overseas to buy cheap goods , one cent was taken out of our economy. As long as our homes were appreciating at 50% a year we felt rich. We were not. Speculation is not real!
"Sick of where the coutry's headed"
Best post I've read! I agree with every point. I would add a federal point of sale tax strictly used to pay down the debt and double taxes on online purchases over in store sales
Gee whiz! Who could have seen this coming Barack voters? Certainly not you idiots!
Recession proof strategies:
1- learn to fish
2- grow a garden- (my tomato plants are about 6 feet now)
3- learn to hunt -with fire arms and a compound bow, - helps to have a dog that can hunt too :)
4- learn to surf- waves are free and you need something to decompress yourself from all the hoopla - good exercise too!
5- develop strong relations with your neighbors- we're all in the 'same boat' together.
6 - volunteer some of your time to help those less fortunate than you. Another great way to develop those strong community bonds.
None of the above require riches, just some of your time.
That means the left is out of ideas. Time for an actual change.
What the heck is he talking about?Housing is improving, jobs have increased for 33
straight months and the Dow is up 60% with Obama.We`ve made a ton of money.It`s
not the government`s fault if people don`t know how to work the market.
Basically, the s**t's about to hit the fan in the US. It's too late for Noblaba or the other bozos in washington to pull us back from the cliff that's approaching. All we as americans can do now, is try and weather out this clusterf**k thanks to Noblaba, and his minions...
Oh well, at least we'll have "affordable" healthcare Jan 1st. Go figure...
A dis-satisfied customer and voter...
1# get obamas dunb **** out of there and get some real competent person runnin the country
WE the People are required to fix it.
[REIN IN THE GOVERNMENT OVERREACH]
Poor foresight by all Americans regarding Washington legislation have created decades of inept policies. A simple, strategic, powerful fix to jump start the process:
28th constitutional amendment: Yearly Balanced Budget Required
Debt to GDP ratio
>35% = balanced
<35% = allow 10% extra yearly spending
This will not be easy to get congress to enact. The good news is we don’t need Washington to move this: The Constitution provides that an amendment may be proposed either by the Congress with a two-thirds majority vote in both the House of Representatives and the Senate or by a constitutional convention called for by two-thirds of the State legislatures.
It will take only one state to get the ball rolling!!!!!!! A STATE CONSTITUTIONAL CONVENTION!!!!!!!
This is just the beginning, do you think the MOVE FORWARD GUY and looking out for us?
We got the same BOZO's in washington that caused these problems and the problem will not go away till these MORONS leave.
Better stock pile everything you need before everything collapses.
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