Déjà vu all over again?
The market has now risen five days in a row and we’ve been predicting a downtrend. What gives? After a 20% decline in the markets, some sort of temporary uptrend is not surprising. We note that the rise has been on declining volume, evidence of the lack of conviction. Don’t be fooled by the recent trends, the underlying economic conditions have not changed.
Once again the bulls are getting giddy about all the meetings, summits, speeches, announcements, photo ops and “leaks” coming out of Europe. Oh will they never learn! I seem to recall similar such enthusiasm after we were all assured in 2007 that, according to Fed Chairman Ben Bernanke, the sub-prime mess was contained and there was nothing really to fear. There were meetings and discussions and rest assured all is well. We all know how that little tale turned out. It is wise to keep in mind that a politician or bureaucrat in a tenuous situation like the current Eurozone crisis is obligated to do everything possible to assure the markets that all is well so as to not either exacerbate or accelerate the impending crisis. Their duty is not to provide the public at large with an overabundance of accurate analysis.
Let’s recap just a few of the reality highlights that we believe cannot be ignored:
- The income of the typical family has dropped for the third year in a row and has dropped to 1996 levels, adjusted for inflation. Real weekly earnings dropped for the third time this year in August with the year-over-year pace at -1.8%. The downtrend has been accelerating since June and is closer to -4.8% at an annualized pace.
- The household sector is still reducing debt, and has a long way to go. From the mid 1960s to the mid 1980’s household debt to income was relatively stable at about 70%. By 2002 it was 105%. By 2007 the leverage level was a staggering 140% and is currently 120%. There is no quick fix possible here. We are in for a prolonged period of rising personal savings in order to reduce debt, which means weak private sector demand.
- The Israeli-Egyptian relations situation continues to degrade. It appears Jordan may be getting involved.
- In August the unemployment rate rose in 26 states, improved in just 12 and remained flat in the other 12. Rising personal savings with rising unemployment makes for deflationary pressures.
- The consumer spending segment of GDP was the weakest for the year in August. In four of the past five months real consumer spending declined so it was of no surprise to see that US retail sales stagnated in August.
- The recent moves by the US and ECB to improve liquidity in the EU only temporarily alleviates funding pressures but doesn’t do anything to address sovereign default risks and inevitable bank write-downs. This just addresses a symptom, not the root cause of the problems.
- US Industrial Production ex-auto in August came in at a feeble 0.1%, the same for the past three months.
- The Conference Board has upped its probability of a recession to 45%. Whenever this group has taken its recession odds above 40%, a recession has followed. Gulp.
Bottom Line: Economic conditions remain strained, to put it mildly. Temporary market shifts ought not be viewed as the tail wagging the dog.
