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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Guess Noblaba's "hope and change" isn't coming after all...
I am so depressed now.....
What a joke...
A dis-satisfied customer and voter...
Is this a surprise to anyone ? 1-Anthony is advocating a weaker dollar to encourage foreign investment & spending, 2- Boehner's plan 'B' to advert the 'fiscal cliff' is being pushed through for a vote with the Obama veto threat looming; but Obama say's "leave me out of it"? Not even a line of spending cuts !
Well, with no agreement in congress, some will get the spending cuts, everyone's taxes will go up, the job prospects will get worse because companies will be trimming their payrolls even further, our buying power will decrease if we listen to those who want to weaken our dollar even further( thank you very little Anthony). Those who voted to go FORWARD are the ones getting the brunt of this mess.
While there is no way to avoid the 'cliff', we do have the power to determine how steep it will be- there is still time- contact your congress person- you have just 2 day's until they go on Christmas break!
New recession ? The old one never left , unless you worked at Wall St . ! This didn't happen account any one administration , it is , has been , and, will continue to be , corporate greed , inspired by greedy self serving politicos.
The US has been going through a long descent since probably the 1960's (and which has accelerated in the 2000's--the 1990's were a glitch, essential like throwing mothballs into a gasoline tank).
The downward tend towards entropy will only stop when economic entropy has been reached... when the US's income (and Europe's) has averaged out with that of the billions of people living in China, India, the rest of Asia, South America. (I left out Africa, because I don't think they'll ever get their s**t together)
Look at the mathematics of this process: those at the bottom will gain less than those at the top (the US and Europe) will lose, simply because of sheer numbers.
And on a related note to the pain, GM now will "buy back" the Gov't shares of it's bailout.
Net loss to the AMERICAN TAXPAYER: 12 BILLION PLUS...
Gee, guess all of you that said GM paid back their debt and bailouts were actually, WRONG??
BTW, notice MSN won't offer a commentary on their boards about it?
Nice job lefties...
A dis-satisfied customer and voter...
This month, the monthly SNAP data (i.e. food stamps) came out for September: 47.7+ million on food stamps.
That may not say it all, but it says enough.
Fiscal cliff has become a panic term used to push the agenda of whoever uses it.
We long ago began the downhill slide and are just realizing we are getting to the bottom and we have run out of hill.
Theres no cliff, just the same abyss you have been living in since 2001, only darker.
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