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.
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.
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.
"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.
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!
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.
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.
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.
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.
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