Credit markets continue to signal either a weakening economy or outright recession yet equities refuse to pay attention. With daily market volume dominated by intraday traders with no concern about macro data this comes as no surprise. The danger becomes that equity markets have no ability at forecasting any longer. The Great Recession saw equities peak just two months before contraction began. We may in fact be watching the same horrific forecasting ability play out if the credit markets are accurate. Below are three charts signaling trouble ahead for both the economy and the equity market. Equities have diverged from almost any correlation that existed for years. With a divergence you never know who is wrong. When countless relationships breakdown though and equities are always involved it becomes easier to say truly that "it's not you it's me."
Are we living in Narnia?
Default will be painful, but it is all but inevitable for a country as heavily indebted as the U.S. Just as pumping money into the system to combat a recession only ensures an unsustainable economic boom and a future recession worse than the first, so too does continuously raising the debt ceiling only forestall the day of reckoning and ensure that, when it comes, it will be cataclysmic. We have a choice: default now and take our medicine, or put it off as long as possible, when the effects will be much worse.
As noted by Richard Heinberg on June 22nd, 2011, the media has lacked the ability to connect the economic situations in the Middle East and their uprisings to what is happening in Europe. I would avoid the word “Revolution” in the case of the Middle Eastern uprisings, seeing as no dramatic systemic changes have taken place, only the ousting of dictators. Same as I would avoid the words of social upheaval in the case of European protests, which have been quite calm and only demanding to maintain the social safety nets produced through years of labor struggle. Rather, the odd occurrence is the ostensibly quiet population of the United States who are in many cases having the same economic problems and austerity based government solutions. This is a place where the media does want to ask the public the question, “Why aren’t you protesting?”
As German Business Morale Drops To 9 Month Low, Concerns About Health Of Europe's Core Economy EmergeSubmitted by Tyler Durden on 07/22/2011 07:42 -0400
While futures are still drunk on the euphoria from Europe's bailout, and the EURUSD has rebased modestly higher by 200 pips to 1.44, the actual "cash flow" issues that are at the base of every modern problem are once again resurfacing, this time at key EFSF guarantor Germany, whose July Ifo business climate index, based on a monthly survey of some 7,000 firms, plunged to 112.9 from 114.5, well below expectations of 113.8, a nine month low in this closely watched indicator. "Germany has been the star performer in the industrialised world since the end of the financial crisis, and economists were split on whether Friday's data points to a sharp slowdown or just a moderate easing from unsustainably strong growth in the first part of 2011." Coming on the heels of yesterday's sharp decline in European PMIs confirms that while Europe has perfected the art of wealth redirection, primarily in the direction of bank balance sheets, it may need to soon grapple with the far more difficult task of stimulating the best performing industrial economy since the GFC. Because all it would take for the latest European "bailout" to fold would be for a rating agency to say that they are now shifting their attention to the creditworthiness of Europe backstopper supreme: Germany.
Back in April, some of the most prominent economists and market visionaries took part in the annual Strategic Investment Conference among which such luminaries as Marc Faber, David Rosenberg, Gary Shilling, Neil Howe, Martin Barnes and Jean-Vincent Gave. While a few short months have passed since then we are delighted to present our readers with their comprehensive presentations and summary outlooks on the economy, markets and the world. Today we launch part 1 of this series, by sharing the outlook of Gary Shilling of A. Gary Shilling and Company, one of the original bears and a man who was one of the few to foresee the second great depression. In future posts we will complete the series by presentations the opinions and outlooks all of the above financial legends who, unlike 99% of Wall Street, stick with their opinion regardless of where now completely irrelevant intraday market gyrations push the prevailing conventional sentiment.
Business as usual on Wall Street but it won't be enough to save pensions...
John Taylor, the "Fed Chairman who should have been", has penned a terrific op-ed in the WSJ. Advocating nothing short of a great reset, this is one of today's must read pieces: "If government interventions are the economic problem, then the solution is to unwind them. Some lament that with the high debt and bloated Fed balance sheet, we have run out of monetary and fiscal ammunition, but this may be a blessing in disguise. The way forward is not more spending, greater debt and continued zero-interest rates, but spending control and a return to free-market principles. Unfortunately, as the recent debate over the debt limit indicates, narrow political partisanship can get in the way of a solution. The historical evidence on what works and what doesn't is not partisan. The harmful interventionist policies of the 1970s were supported by Democrats and Republicans alike. So were the less interventionist polices in the 1980s and '90s. So was the recent interventionist revival, and so can be the restoration of less interventionist policy going forward. "
A rather sobering report out from S&P, which has no other function than to tighten the screws even more on those who prudently are holding out against extending the debt ceiling. As for S&P: please explain to US how 120% debt/GDP is better than 100% debt/GDP, and thus more worthy of a AAA rating? Please. Because we must be bloody stupid: "In our view, the need for an agreement to raise the debt ceiling before it is breached--which the government has said would occur on or around Aug. 2--remains a major risk to the U.S. economy, in our view. Because we see a real risk that efforts to reduce future deficits may meaningfully miss the targets that Congressional leaders and the White House have discussed, we put the likelihood that we would lower the long-term rating on the U.S. within the next three months and potentially as soon as early August--by one or more notches, into the 'AA' category--at about 50-50."
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In the past few minutes both gold and silver have seen a dramatic rally of buying on seemingly no news. The reason for this rally are remarks from a Bloomberg TV interview with FX Concepts' John Taylor, who just predicted that Gold will extend its rally to $1,900 by October, or in three months, coupled with a rally in the Assuie and Loonie as the EU debt crisis eases. But not for long: this record price will be promptly followed by a plunge down to $1,100 following liquidations as the latest and greatest recession grips the world, which he believes will be worse than the 2008 one due to the US running out of "gimmicks" to avert a slowdown. He believes the EU will slow as well, and the euro will drop to $1.15, and may hit parity next year (not a new call for Taylor).
Has housing bottomed? Here is the sure-fire way to tell: Stories titled "Has housing bottomed? Here's how to tell" have vanished for lack of interest. The absence of stories about the bottom in housing will mark the final nadir, because the real bottom can only be reached when everyone has abandoned housing as a pathway to easy money. Only when the public and investor class alike have completely lost interest in real estate as a "sure-fire" investment can the real trough be reached. This destruction of long-held habits and beliefs takes a long time. The closest analogy might be the stock market in the last secular Bear market. Stocks topped out in 1966, though the economy lumbered on until 1969 before faltering. Stocks then meandered for 13 years of stagflation, losing 66% of their inflation adjusted value in 1966 by 1982. People gave up on stocks. I call this loss of faith "when belief in the system fades:" note how household participation in stocks topped out in 1969, three years after the peak in the market. Participants clung to their belief in stocks for about four years after 1969, at which point participation cratered as they finally abandoned their faith in a "permanent Bull market."
The last three years of global recession have dealt a major blow to American capitalist ideas trumpeted throughout the world on the value of “free markets.” Wall St has been revealed as a form of casino economy, with the bankster insiders gambling with other people’s, and eventually, the government’s money in the form of bailouts. As the Republicans in Congress, scenting victory in the 2012 presidential elections, hold a gun to the Obama administration’s head and rating agencies consider downgrading U.S. government bonds in light of Washington’s possible defaulting, many ideas around the world that previously seemed implausible because of the dominance of the U.S. economy are garnering renewed interest.
Is this like South Africa at the end of the Apartheid era, where those in power have to hand over some of the reins to the majority to prevent violence?
There is one hedge fund manager who I'll never forget, Ray Dalio of Bridgewater...