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 4, 2011 5:14PM
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Growth is not the only solution to this problem and not nearly the best one, if can be only achieved through inflation. It is much better to sell (privatize) government assets or go into default.
Dec 4, 2011 4:48PM
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    Our economy is totally out of balance. The middle class is declining, poverty is growing and the top few are taking mote and more. This is a certain formula for depression and chaos.

    Our big corporations are making record profits and paying low to no taxes. They get special treaties, tax breaks and all possible help for outsourcing for slave labor.

    When the CEO of Disney made 600 million in salary and God knows what in bonuses, he had children working in Haiti for 12 cents and hour. This is the coldblooded greed and evil that is destroying America.

 

    Big banks have been getting billions in 0% loans to play the market. Insane, unless you are a big banker or a wall street billionaire. These lowlife pigs have been driving up the price of gas and food on our hurting people by manipulating the commodities market. Everyone knows this and nothing is done to stop it.

    Banks, wall street, hedge funds, insurance companies and the commodities exchange all have much in common. They produce nothing and take mountains. Here are a few things they control: Our government. our money supply, housing, interest rates, education and the price of many essential commodities. We will go down hill until we get a government  and a finincial system that serves instead of rapes America.

 

    Hear are two simple steps that would help greatly; But, they are not going to take place with these two owned parties.

    Force all public owned corporations to pay our minimum wages wherever they go. This would bring back jobs and show a little respect for workers.

 

    All government guaranteed loans should be made directly to qualified buyers for a low interest. This would cut house notes by half or more and leave trillions in the hands of our people instead of thieving banks.

    Why should anyone pay a bank 600k or more for a 200k house when the tax payer backs the loan. We give the giant leaches like banks, hedge funds, insurance companies, and commodities speculators a license to steal and they do, big time.

 

    This government acts like there is nothing they can do to stop the pigs from destroying our country. Most of the giant income is made on 15% capital gains tax

while middle class are taxed to death. We are crazy if we allow this to continue, Millions in the streets may be our only hope.

 

   

 

Dec 4, 2011 4:38PM
Dec 4, 2011 4:35PM
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There is social unrest the world over, the population of the world has reach the point it can't sustain greed and arrogance without social unrest.  Leaders will blame other countries and wars will escalate until we have world war.  This cycle has been the history of the world and will again be so.  Greed and arrogance says let the none achievers die, such is the way of evolution, so the cycle goes own.  Governments are not allowed to control greed and arrogance and the drunkenness of self grandeur will never embrace self control.  Get ready for the next cycle. 
Dec 4, 2011 4:33PM
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I am a government employee and have been for 27 years.  I take exception to the comments made by Rousseau SC.  My wages have been frozen for the last three years, no cost of living increase.  My insurance has gone from best in the world to a straight up joke.  We have gone from 15 paid holidays to 11.  We have lost half of our FTEs(Full Time Positions) and we have to fight for every nickel we get budgeted.  We have more work and less people and resources to do it.  Granted there is a lot of waste in the Federal Government--99% of it is in top 1% of the Fed.  Next time you feel like making a blanket statement,  remember there are a lot of honest hard working federal employees that are in the same boat as you are.
Dec 4, 2011 4:31PM
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IN GOD WE TRUST...... ALL OTHERS PLEASE PAY CASH
Dec 4, 2011 4:22PM
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Sure we've been betrayed. Nothing new about that. The Korean Conflict purged this country of the 'beat generation' because they protested against McCarthyism and the loss of out Constitutional guarantees. The police action in Vietnam purged this country of my generation. Perhaps you remember the 'flower children'. We protested, we occupied, we were shot and killed by our own government, here in our own country. Each time, the betrayal is greater.
This time, tens of millions of you are out of work, and have lost your homes. You are a tremendous army of anger, insult and outrage. As Popeye used to say, when he was black and white,"That's all I can stands, cuz I can't stands no more!"

But please, do not speak of revolution. The cost to our children and our friends, not to mention the destruction of our country, would be unbearable.

Let us, instead, make one more attempt to 'unfix' this twisted system. I demand that the Votes be printed in a big book at each election. No Names, just the digits on our voter receipt. And that book is to be published across the country, held in every library, to be accessed by the public. So that I can take my voter tag and check to see that my votes registered as I intended.
I want to see totals for everything on the ballot. I want to call my sister, give her my number,  and have her assure me that her book in Omaha reads the same as mine in Pittsburgh. Then, for the first time in the history of this country, the will of the people shall be known.
Dec 4, 2011 4:19PM
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Why is it taboo to tell the simple truth?  Sovereign debt is out of control and those of us who work hard and pay taxes cannot afford more taxes.  People are losing their homes to foreclosures and ad valorem property tax sales.  Federal, state and local govts spend like taxpayers have unlimited resources.  Govt employees are too numerous, paid too much, work too little and enjoy far too many benefits.  We cannot afford local school administrators making $200k or $300k or more, troops stationed in Europe, Asia, the Middle East and everywhere else, perpetual unending wars, generous salaries, health insurance and retirement programs for govt employees, govt waste and corruption, etc.   
Dec 4, 2011 4:16PM
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People will never get their house in order. Young people don't think they need healthcare, then it's to late. People want more so they take risk, then it's to late. People say it's not my fault that other people don't have their house in order, but then the economy falls apart, because people didn't have their house in order, then it's to late. Wake up people you are your brother keeper because if you are not, the house of cards will fall in on you, then it's to late. Let the government do its job and oversee unfair practice and provide security for all, not promote con men that prey on the innocent and naive, so it will not be to late. Get rid of bums in congress and elect people that believe in government and work to make it work.  The top 10% have not been paying their share and are willing to let the ship go down rather than lend a hand and bucket out the water. 

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The players have been artificially inflating the World economy at every opportunity available.

It is based on quick returns, with no long range planning. You reap the crop you sow.

Dec 4, 2011 3:55PM
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We are definitely going down in the very near future.  I don't know how to prepare for it.  It will be so bad I think a person will have to be under 30 years old now to live long enough to see it get better.  For all us 'working class' who saved, budgeted and still have some assets, it all will disappear into thin air.  eat, drink, and be merry, for..........
Dec 4, 2011 3:43PM
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I think the news media is part of the problem. By continuously projecting gloom,
and doom. Rather then letting people live normally, spending money, and creating
jobs!

Dec 4, 2011 3:37PM
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In the old book, I can not remember where" I,m ashamed to say", People were trying to build a mountain to heaven, in short  God separated them. seems to me this global economy will not work. The people are trying to reconnect under one policy no where in the Bible and anytime in the past  has that ever worked in any form, economically, industrially or agriculturally. As for government and monetary, God warns of that. Do you think he will be so lenient this time? Some empires worked for a while, never anything global  
Dec 4, 2011 3:26PM
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WE DON'T WANT THE CURRENT ECONOMY, ITS FULL OF THIEVES
Dec 4, 2011 3:14PM
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All I can suggest is gather up Gold, Silver, Food, Water and the firepower to hold on to it.  Be prepared for the zombie apocalypse---I'm not a doomsdayer, I'm a Boy Scout.  Be Prepared.
Dec 4, 2011 3:11PM
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It seems like the government is escalating the greedy actions being used against the common people. Who can afford to participate in America's politics? If these political frustrations continue will violence occur? I certainly hope not but that is the story line of my new fictional book suggesting that a civil war or class warfare could indeed happen over social in-equalities. The book is the 1st class Warrior and it definitely adds a new perspective on any conversation about the middle and lower economic classes and income in-equality, access to medical services, affordable education, the bribery of politicians by lobbyist, corporate greed and the harsh tactics being used by the government to quiet protesters . Violence has no place in the fight for social change but any discussions need to accept that the possibility does exist and how expensive it would be for all sides of American society. The book preview is available here at 1stclasswarrior .com

Dec 4, 2011 3:08PM
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Just as things are looking better the media freaks everyone else out again! If the media would take time to make it look better it will get better because people will go back to spending which helps the economy. This just makes it worse.
Dec 4, 2011 2:51PM
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We here it all the time about the economy. All we have are talkers and not doers. Maybe it is about time to fire every politician  and start anew. I mean do not put the same people back in office. I also believe the Wall Street people are to blame also. Maybe if they had a positive attitude instead of GREED-ETUDE  then maybe just maybe something good may happen. 

Dec 4, 2011 2:46PM
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For all of you who say this bad news is not really bad or even that it is B S, only confirms to me the old law of common sense, "prepare for the worst, hope for the best". The only thing I have seen constant in this economic state is GREED. I'm sure some of what we hear is propaganda,{ and most if not all coming from the government is}, I have never seen anything the government stuck their nose in be better than it was before, even itself. I wonder in the last few presidential elections how many of them elected was the one who spent the most money? Do you find that strange? I do. What about governors or reps. Has there been a study to see this? if so I would like to know the outcome.

Dec 4, 2011 2:38PM
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Adam Corolla could not has said it better. Listen to what he said last week on his show. And as for you, my fellow americans........enjoy all the things you have. Your cars, your big screen TVs, your fancy telephones and I pads, your lifestyles, monday night football, your American Idols, the American dollar, your greedy workers unions and the thugs that run them, your religion, your families, your country and your beloved freedoms .Because in a few weeks from now, you are going to lose it all.      YOU DO"NT DESERVE IT.. And  You can thank the leader of the free world for it.     GOD SAVE THIS COUNTRY!
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