Economy

As expected, the “dance of the big, round number” is underway, with the Dow flirting with 12,000 all week, plunging under it, bounding over it, bouncing off of it, and then landing on it to end the week. My view is that a stock market rebound is likely over the next couple of weeks, but this view is based on charts and momentum and liquidity, not economic fundamentals, which are deteriorating.

The macro view here is that much of the value to be found and prices to be seen in various credit markets and the stock market is really just a reflection of the belief that the system will be bailed out. “Too big to fail” is now an operating maxim applied equally to the next Lehman wanna-be and Greece. All of the big players took appropriate notice of the actions of the monetary and fiscal authorities to prevent big institutions from suffering the fate of their poor risk management practices and investment decisions.

The faith that nobody (of any substance) will be allowed to fail is now a pronounced feature of our markets and partially explains the elevated prices we are currently seeing in nearly everything. Another major component of these elevated prices is the excessive liquidity that the Fed, ECB, BOE, and Japanese central bank continue add to the markets

However, we are now less than two weeks away from the end of the second round of quantitative easing (QE II), and everyone should be concerned with the impact that the loss of this liquidity will have on various markets. I think the early warning signs are already in place.

First, the fundamentals.

The economic data coming out now is really quite dismal. What appeared to be a reasonable, if unspectacular, recovery is now in serious doubt. Even more notable is that the economy remains this weak despite all the trillions in stimulus and Fed balance sheet expansion.

The stock market reacted badly to the news, shedding roughly 1.5% on each index, with the Dow closing below the big, round number 12,000.

Here are my thoughts and observations about the past week’s stock market performance and recent economic and monetary news that drove the recent losses.

Understanding The Endgame

Wednesday, June 8, 2011

Executive Summary

• Greece as a case-study in sovereign debt collapse
• Why peak oil assures we will not be able to pay our debts
• Understanding the dynamics of a future of less/no growth
• Steps we as individuals need to be taking in preparation
• How to preserve purchasing power during the coming market rout

Part I – Death by Debt

There has never been an economic recovery without a rebound in housing. Of course, we don’t really have an economic recovery now; it’s more of a statistical mirage, thanks to trillions in thin-air money printing.  And we don’t have a recovery in housing.

I have written extensively on the housing topic over the years because a rebound in housing will be an important signpost that some sort of stable economic recovery is actually underway.  

The first-quarter economic results for Japan were grim, revealing an annualized rate of contraction of -3.7% over the first three months.  Note that the earthquake struck on March 11, so there really are only a couple of weeks of “earthquake impact” in that number.

The next quarter’s numbers will be even grimmer (that’s a prediction), and this will catapult the Japanese deficit and sovereign-debt readings into brand-new territory.