![Texas Dust Bowl 1936 [photo: britannica.com]](http://www.getmoneyenergy.com/wp-content/uploads/2010/01/Texas-Dust-Bowl-1936.jpg "Texas in the Great Depression, 1936 [photo: britannica.com]")
Highest ever one-month inflation rise in the UK for December, fiscal imbalances in Greece, weakened macro-economics in Germany, a Canadian housing market bubble, higher than 50% gains in the commodity currencies since last March (2009), and the return of hubris and risk-taking in the U.S. investment banks… what do these all have in common?
Is it just “business as usual”? For some analysts, that might be just the problem. I have to say that the “jobless economic recovery” is feeling a bit strange.
New York State ended last year in debt… for the first time, ever.
Job losses in the U.S. have slowed, but there are no new ones being created.
Massachusetts just elected a Republican to Senate, potentially jeopardizing many Americans’ hopes of some kind of health care reform that could benefit them. As one tweet declared, “This is the beginning of the end.”
And, let’s not forget the gorilla in the room – China’s overheating economy is leading it to raise its own reserve requirements, tighten up its money supply, and as many think, probably allow the yuan to further appreciate against the U.S. dollar before mid-2010.
Short-Term Advantages of a Weak US Dollar Won’t Last
I don’t list all of this to make it sound like the proverbial sky is falling – it’s not doom-and-gloom for the sake of doom-and-gloom. But you have to pay attention where attention is due. January is often a great month for stocks. Post-holiday highs help push rallies further and earnings this year are looking great on a year over year basis since at this time last year (2009) we still thought the world economy might really come crashing down.
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Interest Rates Raising Double-Dip Concerns
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The Bank of Canada chose to hold its overnight rate unchanged at 0.25% – as usual, waiting until the Fed makes it move, apparently, so as not to further disrupt exports. But this can only go on for so long. Analysts expect rate hikes as early as mid-year, or possibly the fall of 2010. This will undoubtedly happen before the Fed moves on its own rates.
And in other news this week, we learned that China might soon allow the yuan to float higher against the USD, which would put it at more fair value and give greater purchasing power to its own citizens. China is trying to move away from an export-dependent economy anyway, toward one dominated more by domestic consumption. A stronger yuan would be a large step in this direction.
Why We Could See A Second Stock Market Crash in 2010-2011
What’s your feeling? Do the markets seem hesitant to you? Does it feel like there’s another shoe to drop? Will the U.S. dollar collapse? (Or is it just “trendy” now to talk about that?)
Keep in mind that the stock markets don’t necessarily have any one-to-one relationship with the underlying economy. We can see this right now as the U.S. economy is still in awful shape but markets have rallied, pricing in what is expected to be good future earnings. But has the grace period expired?
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{ 13 comments… read them below or add one }
“Keep in mind that the stock markets don’t necessarily have any one-to-one relationship with the underlying economy.”
Brilliant! I think this is truly the elephant in the room. Most who see the economy improving point to the stock market first and foremost. The housing and job markets–the real economy–haven’t tagged along. The advantage of the stock market rising is part psychological–a large slice of the population feel richer, certainly more so than 10 months ago, so they feel better about everything. But if that doesn’t transfer to something tangible in the real economy, then we have a disconnect.
We seem to be at a critical point where either the economy follows the stock market to higher ground, or the stock market comes back to earth. I’m not claiming to have a crystal ball, but I have a feeling we’ll have a solid idea which way things are going in about six months or so.
@Kevin – yes, and with the Massachusetts election it seems another psychological resistance/support point has been breached. By mid-year I am sure we will have more important developments: China’s currency, North American interest rates, and the ensuing option-ARM wave of defaults. Today it was just announced that a prominent ski resort in Whistler (Canada) is foreclosing and will be auctioned off during the Olympic games, while it is hosting one of the events! We are not out of the woods yet.
I still think a 2nd swoon is the more likely event. No, economies and stock markets do not always march in lock step, but they are tied together. At some point the rope between the two will pull taught and if the economy is going down the market is probably going down.
Plus, we didn’t fix any of the problems. We just tried to cover them up and pretend there weren’t real issues causing this downturn.
@Chad – exactly, and the job losses keep showing that. Since the US economy is purportedly 70-75% consumer–driven, how can it possibly recover if at least 10% of those consumers have no income, or not enough income? Spending more than one had used to be possible in 2006, but it will be increasingly harder to do so.
MoneyEnergy – I agree, it will be harder to increase spending. In order for that to happen, the banks will have to go back to the credit standards they had in 2006, which is to say close to no standards.
I was in the mortgage business until the end of 2008, and what we saw in the 15 years prior to that was a progressive loosening of guidelines until practically none existed. Downpayments were nearly eliminated as “barriers” to homeownership–and here we are.
We have to hope that we don’t ever get back to that give away mentality in the area of loans. A loan is, after all, someone else’s asset, and shouldn’t be issued without due consideration as to how it will be paid back even and especially in less than favorable circumstances.
@Kevin – well said. What do you think of Obama’s new regulations? His speech today sounded awfully clear and logical. I understand the arguments from “free-markets” against all regulations, but it seems regulation needs to step in wherever basic ethics steps out. If you want capitalism without ethics in the picture too, well, do your business on the black market, I guess – it’s no prescription for a society.
Hopefully Obama starts listening to his best economic advisor, Paul Volker, and not the two morons at the Fed and US Treasury.
Volcker’s trying to save the $, Bernanke and Geithner are trying to save the economy. Both need to be done but it’s a tense balancing act. This feels a lot like the 1970s, but the stakes are higher.
I would not want to be in any of their shoes right now, no matter whether public opinion holds that they’re doing either a good or bad job.
I completely disagree with you. For one your assumption is far to simplistic and definitely not the main driving force behind Volker.
If Bernanke and Geithner are trying to save the economy they are doing a rather terrible job. Copying the Japanese was foolishness. One of the best analysts agrees with me.
http://www.ritholtz.com/blog/2010/01/who-bears-the-costs-of-post-crisis-recovery/
http://www.ritholtz.com/blog/2009/09/volcker-reinstate-glass-steagall/
There are plenty more from a guy who has been dead-on since before the downturn.
Interesting that Volcker is in support of the regulations, this seems to lend more weight to Obama’s reform. I’m a bit surprised that it’s had this much effect on markets already. When I wrote this article, markets were going up due to the Mass. win. We’ll have to see what happens on Monday (and/or if anything is announced over the weekend) and if Obama introduces another round of regulation on it, too. This will be a good test of the rally, though.
Chad – the operative word in my statement about Bernanke and Geithner was “trying”–I didn’t say they were succeeding. It’s a let ‘em eat cake approach that at best has kept the economy from falling farther than it has. The long term is what will be the key here, and that hasn’t played out yet.
True, I probably jumped on your statement a little harder than it deserved.
From my point of view, as someone who supported Obama, but is a true conservative (Republicans certainly aren’t), it seems like the Mass. vote was not for the Republicans, but against the Democrats. There isn’t anyone who truly likes any of these candidates unless you are a psychotic Republican or Democrat and only vote one way.
I’m a bit surprised that it’s had this much effect on markets already. I was in the mortgage business until the end of 2008, and what we saw in the 15 years prior to that was a progressive loosening of guidelines until practically none existed.