Something's wrong with the economy

Forget Friday's misleading drop in the unemployment rate. The evidence is building that global growth has stalled. And it's about to get much worse.

By Anthony Mirhaydari Dec 2, 2011 4:59PM

The market has been on crazy pills lately. Massive, bear market type volatility has even the most steel hearted market veterans feeling seasick from the undulations. Adding to the confusion has been some political and economic developments that -- while they make for nice headlines -- mask some serious underlying problems.

 

Take Friday's big drop in the unemployment rate to 8.6% from 9%, the lowest level since March 2009. The problem is, the number of actual new jobs added in November (120,000) came in under expectations. So the real reason for the drop was that a huge number of people (316,000 to be exact) left the workforce out of frustration and lack of opportunity. Not exactly good news. It was the same story with Wednesday's European "bailout" by the Federal Reserve -- which I discussed in my last post.

 

All of this distracts from an emerging truth: The global economy is rapidly falling into a new recession. And the U.S. stock market, despite this week's gains, is showing signs of tipping into a new long-term downtrend. Here's why.

 

 

I think the most notable development this week was Thursday's big release of global factory activity surveys. It wasn't pretty. Overall, the JP Morgan Global Manufacturing PMI dropped for the third straight month and fell below the 50 level -- the line of demarcation between growth or contraction in monthly factory activity -- for the first time since recession was descending upon us back in early 2008. Scary stuff.

 

Although U.S. activity was buoyant (no doubt a remnant of the sentiment tailwinds enjoyed from the market rally in October), we cannot remain an island of tranquility as Asia and Europe fall into the abyss.

 

Here are the highlights (any reading under 50 indicates a drop in activity):

 

*Brazil PMI: 48.7 vs. 46.5 prior
*Ireland PMI: 48.5 vs. 50.1 prior
*Sweden PMI: 47.6 v. 49 estimated
*Norway PMI: 48.6 vs. 50.2 estimated
*Denmark PMI: 47.7 vs. 43.6 prior
*Poland PMI: 49.5 vs. 51.7 prior
*Spain PMI:  42.8 vs. 43.9 prior
*Swiss PMI: 44.8 vs. 46.6 estimated
*Czech PMI: 48.6 vs. 51.7 prior
*Italy PMI: 44 vs. 42.8 estimated
*France PMI: 47.3 vs. 47.6 estimated
*Germany PMI: 47.9
*Greece PMI: 40.9 vs. 40.5 prior
*South Korea PMI: 47.1 vs. 48 prior
*Taiwan PMI: 43.9 vs. 43.7 prior

 

And, now for the big boys:

 

*Eurozone PMI: 46.4 -- lowest reading since recession ended in July 2009
*U.K. PMI: 47.6 vs. 47 estimated -- lowest since June 2009
*China PMI: 49 vs. 49.8 estimated -- lowest reading since February 2009
*China HSBC PMI: 47.7 vs. 51 prior -- 32-month low

 

In addition to signs of economic weakness -- which was enough for a Chinese vice finance minster to say the global economy faces a "worse situation" than in 2008 -- there was evidence that the financial system remains under severe stress despite the freak out over Wednesday's move by the Federal Reserve to lower dollar funding costs for foreign banks (which, as I discussed at the time, wasn't really a game changer). The European Central Bank reported that eurozone banks borrowed nearly €9 billion in overnight emergency cash -- up from €2.7 billion earlier this week. Not good.

 

Other signs of strain could be seen in the way German 12-month bill yields dropped below zero on Wednesday as European investors were willing to pay Berlin for the luxury of lending it money. The motivation is that, if you're holding a big wad of euros, German short-term debt is one of the few "sure bets" left out there. It's a sign of extreme risk aversion and fear.

 

Of course, the epicenter for all this is Europe.

 

Adding to concerns were comments this week from new ECB chief Mario Draghi that while downside risks to the economic outlook have increased, he cannot ride to Europe's rescue by engaging in unmitigated money printing and bond buying; instead, it must adhere to its founding principles, including an inability to engage in monetary financing of government debts (exactly what the likes of Italy would love right now).

 

Draghi's comments were akin to yelling "fire" in a crowded theater before announcing all the fire extinguishers are empty. Whoops.
 
According to the team at Capital Economics, based in London, the eurozone economy is on track to contract by 1% next year and by 2.5% in 2013, with risks to the downside for both forecasts. Recession will only deepen the budget deficits at the center of the eurozone debt crisis. The only way out is growth. And the only way the likes of Greece, Portugal, and Italy can restore growth is via massive currency depreciation and domestic inflation -- something that's not going to happen as long as they're in the eurozone.

 

Sure, there will be distractions like Wednesday's move by the Fed or additional stimulus measures out of places like China and Brazil. That's just how the market gods like it. All the better to keep the masses confused and complacent as the fundamentals just get worse and worse.

 

To put it differently: When you look around the theater, everyone's still focused on center stage blissfully unaware what's happening around them. Turn around. The balcony level is in flames.

 

 

I know patience is hard to muster in times of epic volatility, like now. Yet trying to catch the short-term oscillations of a new bear market is a futile effort. Better to lock in defensive positions like cash or Treasury bonds via funds like the iShares 20+ Year Treasury Bond (TLT) before buckling up and grabbing the Dramamine.

 

For short-term traders and my newsletter subscribers, I continue to recommend a net short positioning. Maybe I'm digging my own grave here, but the clouds on the horizon are too dark to justify anything else. 

 

Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.

 

The author can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


 

611Comments
Dec 2, 2011 10:37PM
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Nothing will change until people figure out they have been duped into being a republican or a democrat. It is like choosing between  Hitler and Mussolini. Both are the problem and neither is the solution. Until we fill the Presidency, Congress, House and the Supreme Court with real people that actually care  we are screwed.
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it took charts and stats to tell you what all us common people have been saying the last few years. the so-called recovery was statistical smoke and mirrors. our government has wasted time and tremendous money fixing NOTHING!  Incumbents need to go from both parties until reason returns and the power that owns their votes decide to let the middle class up for air before revolution becomes the only alternative. How many working class people are better off than 10 years ago in the private sector???
Dec 2, 2011 8:17PM
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I think things are absolutely great!!  Lets see:  US debt is increasing at over 100 billion a month, we have the worst, most expensive health care system in the world, incomes haven't increased in yrs, 50% of Americans are illiterate or nearly so, 40% of national expenditures are spent on killing people, 50% of Americans owe more on their home than it's worth (not their fault of course), we are printing money like there's no tomorrow, Wall Street is totally out of control, 1 in 4 kids live below poverty level, untold millions haven't any health insurance, 1 in 3 families are at or nearly at poverty level and had enough.  You bet!! Things are great. 

 

And most of all is the number of people who believe none of this is a problem and say the dumbest things I've ever read.  I will admit, I'm one of those old fools who grew up before shopping was a recreational activity, debt was considered a negative thing, we paid for things as we went, average home size was 950 square feet, we had one phone, a new car was a novelty that everyone gathered to see, one income supported a family and all the other things that make me a left over from a totally different reality. Know what? I'm thankful.

Dec 3, 2011 8:01AM
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"Something is wrong with the economy."

Brilliant observation. The one and only reason for the United States economic miasma.- Outsourcing.

We have sold our industrial might to the Communist Chinese. We no longer as a country possess the Arsenal of Democracy which led us through World War Two.

Wall Street greed and Corporate avarice have decimated the middle class and the industrial output of America  by their support of outsourcing to Communist China.

We fought the Chinese in the Korean conflict and the Vietnam war and are now engaged in another battle with them. The battle for the survival of the US.

Is it not appalling to find a preponderance of Chinese made junk occupying the shelves of American stores?  At one time we made all those products which are now made in China. It is not the abortion issue, immigration issue, environmental issue, gay rights issue, gun rights issue that politicians should be discussing. They should be discussing jobs and discussing the real reason for the lack of jobs. We have no manufacturing base. Constant bombardment from all news sources about jobs, but never is discussed why we have lost these jobs.

Bring back the jobs that were shipped to Communist China.

 

Dec 3, 2011 11:40AM
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1) Buy "MADE IN AMERICA" rather than China or Japan and our economy will turn around faster than Charmin rolls out toilet paper!

2) Stop congress from voting 10% raises for themselves every year! They're rewarding themselves for doing NOTHING and getting away with it... reminds me of the Veggie Tales song, "The Pirates Who Don't Do Anything"!

3) STOP THE BAILOUTS! Capitalism is based on the law of "survival of the fittest," when we start helping the businesses (and countries) that are in a death spiral, we're screwing-up the circle of life!
Dec 2, 2011 7:19PM
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I agree with this guy. A day of reckoning is coming and it isn't going to be pretty. Look at a chart of the Dow and S&P from the beginning. It isn't sustainable givin all the debt problems around the world. Think about our situation alone, and the US economy is suppose to be getting better ? Look at our state and government coffers. They are broke already. How in the world are they going to make the budget cuts necessary to reduce the deficit without damage to an already damaged economy ? One example is the Postal service. Its insolvent and loosing money daily.. Look at the job cuts that need to be made there. The government wont do it because of the damage it would cause. This is just one small problem out of many. Its like being stuck between a rock and a hard place. There is a storm brewing. Better take shelter.. 
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The problem and the solution is simple. As long as America keeps shipping jobs over seas we are bound to fail. Our country is running on fumes. The rich investment bankers do not contribute to the actual GDP of this country but manage to skim the cream off the top and stifle our economic growth. The large corporations use third world labor to maximize profits and we lose our tax base here. As long as you have individuals taking out 100's of millions of dollars from a system without putting in any kind of growth it will fail.
Dec 3, 2011 12:49PM
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Seraphim, I will tell you where they get the money. They rob Peter to pay Paul. Let me explain. For 12 years I have been in the self storage industry.( Was a regional manager till my boss got caught stealing and cheating.) I got wise and got terminated. Glad to be gone. In this 12 years, every year I have seen the same trend. Right after Halloween or close to Thanksgiving people quit paying their storage bill and use that money to buy Christmas gifts, then by the skin of their backs, before I have to auction the unit, they get their tax money and pay it off. Happens every year across the country. And, it isn't just storage. Of course not everyone has that. They don't pay something (robbing peter) to pay for Christmas.

 

What I find extremely sad is that when they rob someone else, that business suffers. If my customers don't pay, the owners of my storage locations suffer. It is selfish really. The true meaning of Christmas was lost. I am financially drained this year and my family knows that there will be NO gifts. I don't have it and I refuse to rob someone else for things I cannot afford. It is a vicious cycle.

 

And quit blaming democrats or republicans. They ALL lie so it doesn't matter who is in office, it isn't going to make a difference. They are all a bunch of liars, and there are so many people that belive their load of crap. It doesn't matter what party is in office, the economy will still SUCK. The blame is people sending our jobs and money overseas. The blame is people hiring undocumented workers instead of legal Americans. The blame is ourselves because we are screwing each other when we do this.

Dec 2, 2011 11:21PM
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Save your money, pay off your debts as quick as possible. Do not be a slave to the economy.
Dec 3, 2011 9:16PM
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until we stop drinking the Kool-Aid nothing will change. might be time for a good ol revolution , remember why we started this country in the first place?
Dec 2, 2011 7:22PM
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Max, you need to wake up. We were never on the way to recovery, and the few members of the tea party that are in the house are not enough to do anything. Your problem is that you believe that your messiah is Obama and that he will solve all. Problem is, all he has done is bankrupt the country, destroyed jobs, and spent, spent, spent. You need to wake up partner because you are in for a rude awakening. The 8.6 % unemployment is a lie. We just lost 300,000 more off the roles, and because they are not on unemployment, the number look better. It occurs because they are no longer counted.
Dec 3, 2011 5:45AM
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Let all agree to disagree for a moment.....Now for America to rebound from a nasty place we are and the darker place we are heading lets just first accept what is going on.  Since the late 1950's maybe even 1960 there has been a drive towards a One government World....the powers that be for the last 50+ years have been ebbing and flowing that direction.  By financially locking the world economies together they feel that the control of global banking will allow them to "win" at collecting the gold.  By keeping the world and its subsets divided this will be a much easier task.  The problem with this is that all currencies Must be eliminated prior/during this change which will require economic break down to occur to permit this to necessitate that change.  This equals bad for everyone 99.99999875% and good for the .00000125% our own apathy is going to be our undermining.  By the time the people who think they are wealthy figure this out it will be too late.  It may already be to late to formulate a correction due to the exponential growth curve that is in play.  Please whatever happens in the next few years fight to protect your constitutional rights at all costs and DO NOT allow this world currency be based in electronic format.  Sticks and rocks, chickens, pieces of paper with world leader faces, ect. anything but pure electronic systems there is no secure form of electronic system that will allow your monies to not be "turned off" with the push of a button.  This is one case of the planet needing to stay "old fashion".  UNITED WE STAND DIVIDED WE FALL.
Dec 3, 2011 6:21PM
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This isn't brain surgery, it's economics 101: supply and demand.

 

When politicians talk about the "job creators" they mistakenly says it's the top 1%. The real "job creators" is the 99% or the middle class. Which is dwindling, which is why our economy is going to hell in a hand basket. This is what needs to happen to get our economy back:

 

1)  Corporations need to start giving the laborers/consumers a living wage. When people have money in their pockets they spend. When people spend their money they create demand. When demand is created, jobs are created to meet that demand. When the people who take those new jobs get paid a living wage they spend their money which creates more demand, more jobs. It's a snowball effect.

 

2) Corporations need to realize that there is a symbiotic relationship between corporations and laborers/consumers. Corporations can't live without laborers/consumers buying their products and laborers/consumers can't live without the jobs from corporations because that's how we get our money to live and support ourselves and corporations. Corporations have lost their long term vision. All they see now is instant gratification, greed. Which is short sighted and ultimately a death sentence...for everybody, corporations and laborers/consumers alike. The top echelon of corporations need to take less money. That money needs to be distributed more to the laborers/consumers. Yes the CEO's will make less money on the upfront but the corporation as a whole will flourish and then they can pay the CEO in stock options.  

 

3) I'm sorry to say, but taxes need to be raised. When our local, state and federal governments have money in the coffers they can fix the infrastructure that is in desperate need of rebuilding. It's just like our houses that we live in. If we don't keep up with the repair maintenance, our houses will fall down around us. By giving the laborers/consumers a living wage, it will also increase the tax base. If we were given a living wage, we wouldn't worry about having to pay higher taxes. So with higher taxes and rebuilding our infrastructure that will also create more jobs which will also create more demand and more jobs.

 

4) When I was growing up my dad made a living wage. Which allowed mom to be a "stay at home mom" to raise us and keep us out of trouble...for the most part. lol. But my point is that our house hold had one bread winner and the other parent could stay at home and teach the kids right from wrong. And my dad was able to buy a house, a car, put food on the table and put us through college. All with one salary because it was a living wage. If we got back to this our prisons wouldn't be so full as they are now and our kids wouldn't be so messed up.   

 

5) Lastly, at this point, is we need to get corporate money out of politics. Corporations aren't people. People are people and people should be the only ones who should be running our government. As stated in our Declaration of Independence, "All men our created equal". It doesn't say anything about corporations because corporations aren't people. Corporate money is rotting our government from the inside out. And don't get me started on lobbyists.

 

At least this is how I see it. There is more but these 5 things will get us on the right path.    

Dec 2, 2011 6:13PM
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Anthony has writhen some articles that were not all that good, However, he is on the mark here. The solutions to the debt problem are not what investors or anyone wants to hear, raise taxes and cut spending. We are not going to have good economic grow until all debtor nations face the problem. If we did have the guts to handle the problem it will take 5 to 10 years to get it done and no one wants to hear that either. Better make plans for 10 to 20 year of very poor and no economic growth.

Dec 4, 2011 5:10AM
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We (Citizens of USA) need to take back our great country... Cleanout the government! ... there are folks in our governemnt that have been in politics for decades... like leeches... they breath, eat & sleep politics. All they care about is being in power and in control, they don't give a damn about our country. We need NEW faces.

Also, get rid of the IRS entirely and develop a FLAT-TAX accross the board.

Dec 2, 2011 7:04PM
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Best bet for a future career:  Bankrupcy attorney.
Dec 3, 2011 7:15PM
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Anthony Mirhaydari presents the clearest,  most easily understood financial news that I have read in years..we must realize that in 1965 53 % of the U.S. gross national product was in manufacturing products.   As of 2004 or so it is around NINE PERCENT.   
Dec 3, 2011 12:20PM
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Unemployment statistics are so misleading.  I, and most of my co-workers work less than full- time.  Although we are grateful to have a job in the current economy,  we would love to have full-time employment.  The statistics show us as employed, even though we don't have enough hours to earn a living.  I wonder how many others who are "statistically employed" are in this situation.
Dec 3, 2011 1:18PM
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STOP...just for a minute lets stop and look at the real facts.   Some are saying lets cut the taxes on the corporations who have moved their businesses over seas and they will start coming back to the good ole USA.  Corporations are thinking are you nuts, as soon as we start moving back guess what will happen the taxes will eventually start going go back up.  We are now spending how many Billions a WEEK  just in Afghanistan and God only knows how much in the neighboring countries.  And for what?  as soon as we pull out every damn one of those countries are going to return to the way they have lived for the past  2000 years.  We never learn from History,  these countries are controlled by tribes not governments.  Lets take these Billions we are giving away and keep it at home God knows we have enough problems right here in our own borders we need to spend that money on.........
Dec 3, 2011 5:53AM
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Lets keep our money  here in the  USA  , We all  work  here  the  money should  stay  here.
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