They’re lining up in the wake of last week’s rally. You know who I’m talking about. The “second half recovery” crowd.
Two years ago, in the summer of 2009, they said a short-term pullback in the market and the economy was just a correction. And thanks to the $800 billion-plus in economic stimulus spending, plus the Federal Reserve’s asset-inflating “QE1” program, they were right.
One year ago, in the summer of 2010, they said the Flash Crash and market pullback wouldn’t amount to anything. Because Helicopter Ben Bernanke launched QE2, they got that right too.
But this summer, it truly is different!
The Fed can’t ride to the rescue with QE3, with multiple policymakers nixing that notion …
Congress and the Obama administration can’t launch any significant new stimulus programs. They’re focused on tax increases and program cuts, not more over-the-top spending …
Even the bailout brigades in places like Europe are running out of power to spike the markets with more monetary booze. Not even ONE WEEK after European policy makers managed to cram a Greek austerity package down that country’s throat, bonds in all the PIIGS countries have started melting down again!
Bottom line: Nobody is riding to Wall Street’s rescue this summer. So unlike in 2009 and 2010, more rallying just isn’t in the cards!
Lack of Stimulus Spending,
Rate Cuts, and Bailout Crutches
Could Send Market Tumbling!
|Congress only has about three weeks to approve an increase in the federal debt limit.|
Let’s start with Washington. We’re coming down to the wire there in the great debt debate. While Treasury Secretary Timothy Geithner has said Republican and Democratic lawmakers have until August 2 to reach a deal, it takes time to draft legislation that authorizes any debt ceiling hike. So the real deadline is more like late July.
A last-minute deal could be reached to avoid a short-term default. But that’s not “good” news for the markets. I say that because any legislation will contain some combination of spending cuts and tax increases … an “anti-stimulus” package! I expect we’ll get $2 trillion or more in spending and tax measures, more than twice as much anti-stimulus as we got in stimulus two years ago!
What about more QE?
No way! Bernanke himself put the kibosh on that idea a few weeks ago. So did many of his deputies. The U.S. Fed obviously can’t cut interest rates anymore, either, with rates already pegged in a range of 0 percent to 0.25 percent.
At the same time, foreign central banks continue to hike rates unremittingly. China surprised the markets yet again by raising rates 25 basis points on Wednesday, the third increase this year. The benchmark lending rate climbed to 6.56 percent from 6.31 percent.
Then there’s Europe. Remember that “big” rally in the euro and European bonds spurred by the passage of the second Greek bailout? Well it’s already ancient history!
Moody’s downgraded Portugal’s debt to “junk” status a few days ago, sending Portuguese bonds into the toilet. Yields soared to a record-high 956 basis points over comparable German government bunds, and 10-year borrowing costs hit 12.5 percent!
In Italy, the 10-year bond yield jumped to 5.08 percent. That was the highest level since November 2008. And the cost of borrowing for only two years in Ireland surged above 15 percent for the first time ever.
Bottom line: Just as I predicted, the Greek bailout is failing to stem the tide of selling in European bond markets. You simply can’t paper over a SOLVENCY crisis by adding excess LIQUIDITY to the market. Nor can you solve a multi-nation sovereign debt crisis by putting more debt on the balance sheets of those governments!
Don’t Be Blinded
by the Perma-Bulls!
Look, it’s easy to fall victim to the siren song of Wall Street pundits. They pointed to last Friday’s ever-so-slightly-better-than-expected Institute for Supply Management report as evidence the economy is rebounding, and they promptly drove the Dow Industrials up by more than 160 points.
But did they note that the lion’s share of the strength came from inventory building? That’s not what you want to see. It suggests manufacturers are stuffing the wholesale and retail channels with inventory in anticipation of a rise in final sales.
|Construction spending has fallen for six straight months.|
But the latest consumer confidence and spending figures suggest no such rise is coming. That means they’re going to be forced to rev down their factories again in the future, a bearish development for the economy.
I bet they also didn’t highlight the fact that a sub-index which measures orders booked actually slipped below the 50 mark to 49. Nor did they note that the new orders index barely budged, ticking up just 0.6 to 51.6. Or that the export index slipped to 53.5 from 55.
Meanwhile, the University of Michigan’s confidence index fell to 71.5 in June from 74.3 in May. That was worse than forecast. We also recently learned that construction spending tanked 0.6 percent in May. That was the sixth straight monthly decline, and far worse than the 0.1 percent increase economists were expecting. And the ISM services sector index sank to 53.3 in June from 54.6 in May. That’s the second-lowest reading this year.
What about jobs?
Outplacement firm Challenger, Gray & Christmas said job cut announcements rose more than 12 percent between May and June to 41,432. And while ADP Employer Services said job growth rebounded somewhat in June, unemployment remains stubbornly stuck around 9 percent.
Look, I’d love to tell you the economy was in good shape … that the sovereign debt crisis was “solved” … or that we’re in for a rip-roaring rally, just like what we saw in 2009 and 2010.
But rather than a summer of market love, I believe we’re in for a summer of discontent. And that’s why I continue to urge you to take profits off the table, and hedge against a market decline with inverse ETFs.
Until next time,
P.S. In my Safe Money’s Crisis Trader I use five major kinds of ETFs to help you grab substantial profit potential as America’s financial crisis unfolds. To learn more, read my latest report, 3 Investments with the Power to Protect Your Family and Your Wealth.