We are drifting. We take comfort in bits of good news, but we are in dangerous waters; the Great Recession is being starkly revealed as a global crisis with the US, the traditional engine of recovery, sputtering on every cylinder.

The US government responded with dramatic financial support by transferring money to the household sector. But outside of these transfers the personal income of Americans is still declining; the residential market remains stagnant at best; consumer growth is nominal. The only real energy in the economy has come from the cessation of inventory liquidation, which is now the main factor in rising industrial output and any modest improvement in the economy.

The mood of US households is despondent. In May only 11.3 per cent believed they would see their income rise in the following six months, while 16.6 per cent thought they would see it decline. This is the first time in over four decades that more people believe they will be worse off than better. Any massive fiscal and monetary stimulus that might reverse the trend is likely to be politically unsustainable given the growing concern over the exploding national deficit.

Wherever you look the scene is bleak. Leading economic indicators fell in April – unusual at such an early stage in the up-cycle. Jobless claims were up by 25,000 to 471,000. And up again above expectations in the first three weeks of May – raising the four-week moving average to a level consistent with 100,000, or more, net job losses. For the past several months, claims have been nowhere near the levels of 400,000 and less that in the past were consistent with sustained job creation. We are not enjoying the normal cycle of economic improvement. If we were, employment would already have reached a new high and made up all of the jobs lost, as it did during the previous postwar recessions. This time we remain short of the old peak of employment, by an astounding 8.4m jobs. One in six Americans is either unemployed or underemployed. This is not a normal cycle when compared with a typical recession, which sees no more than 2m to 3m jobs lost.

….read more HERE

“For Many, Recovery Means Lower Expectations” (Associated Press)

PROSPER, Texas — Advised by a Walgreens superior that a promotion was “very highly likely” if he transferred to the drugstore chain’s Dallas division, Chris Cummings uprooted his family and bought a spacious house in this hopefully named suburb.

“The sky’s the limit,” he was told.

But instead of a promotion, the company for which Cummings had been an assistant manager three and a half years cut his hours so drastically that he had to take a second job. In March, he was laid off, and his part-time second job became full-time.

And so that is how a 40-year-old father of four with a master’s in business administration from the University of Notre Dame finds himself bagging groceries at Sprouts, a local health-food store.

Quotable
“It shouldn’t surprise anyone that the nine states without an income tax are growing far
faster and attracting more people than are the nine states with the highest income tax
rates. People and businesses change the location of income based on incentives. 

“Likewise, who is gobsmacked when they are told that the two wealthiest Americans—Bill
Gates and Warren Buffett—hold the bulk of their wealth in the nontaxed form of unrealized
capital gains? The composition of wealth also responds to incentives. And it’s also simple
enough for most people to understand that if the government taxes people who work and
pays people not to work, fewer people will work. Incentives matter.” – Arthur Laffer

FX Trading – Key Long-term Themes Still in Play but there are Questions

We put together the chart below for a presentation we made back in January this year; it is a visual representation of the four primary underlying themes we think will drive the long- term dollar bull market.  

To phrase it another way, global healing and a strong US dollar are mutually reinforcing and the process itself could lead to a virtuous circle of strength for the US dollar.  

Global healing requires global rebalancing.  Global rebalancing will be much easier if the US consumer gets back in the game (a strong dollar increases Mr. US Consumer’s purchasing power).  A rebounding real economy and money flowing to the US economy are critical factors that will allow Mr. US Consumer to rebuild wealth. 

Let’s briefly examine where we may be since we first presented this framework:

1) A rising dollar (falling euro) has relieved a modicum of pressure in Europe; note the increase in German exports reported today.  This is not to say German exports are all that is needed, there is a very long way to go, but it is part and parcel to the story.

2) US real economy rebound driven by the force of money making it into the real economy is key to global healing.  I think the jury is still out here, as small businesses still are not seeing the credit they need, or the opportunities, to drive US employment.  But, because this is a relative game, I have to think the US is leading Europe and Japan on this measure (lagging Australia and Canada).  But longer term we need to see improvement.

3) We expected a rising dollar, and by definition a falling euro, and improving US real economy as a way of relieving some pressure on China.  To a small degree it has.  But, again precisely because the US consumer spending has not rebounded, the jury is still out here.  A double-dip recession i.e. falling global demand, likely means trade pressures between China and its “partners” hikes up considerably and add to systemic risk.  Again, beneficial to the dollar, but only by default.

4) Lastly, US capital investment hasn’t quite yet rebounded in a way one would expect given the amount of cash and relatively strong US corporate balance sheets.  However, international investors continue to find US assets a relative bargain.  If risk finally normalizes globally (which still may be a ways off), international money flow to the US could surprise a lot of people.  A return of long-term foreign direct investment to US shores is critical to thelong-term move in the dollar and rebound in the world’s demand driver—Mr. Consumer.  

Jack Crooks
Black Swan Capital
www.blackswantrading.com

Is the Euro Doomed?

Black Swan Currency Currents is available FREE HERE. Stay tuned-in to our currency global macro view and our analysis of key investment themes driving currency prices.

THE  E‐MINI S&P  FUTURES: 1035‐ 1037 Had Better Hold:  Those who are  bullish had better hope  that 1035‐1037 holds, for if not there is no support under this market for a very, very long way. – Dennis Gartman –  For a Trial Subscription go to The Gartman Letter

Via Don Vialoux:

The mayhem in equity markets in May could extend to June

May was a troublesome month for equity markets. It was the worst May for U.S. equity markets since 1940. The loss by the Dow Jones Industrial Average reached 7.92 percent leaving many investors uncertain about the global economic recovery.

What happened in May 1940? The Dow Jones Industrial Average fell 21.7 percent that month. In June, it recovered 5.0 percent, recording one of the biggest gains in June since the dirty thirties. However, compared with the loss experienced in May, the June rebound was a mere drop in the bucket.

Equity market losses this May were comparable to losses recorded in 1962 when a decline of 7.81 percent was recorded. The drop in May 1962 was followed by an additional decline in June of 8.49 percent. Coincidentally, 1962 was a mid-term election year, similar to the present timeframe. Is history about to repeat?

Performance by equity markets prior to the May 1962 correction looks eerily similar to market conditions in 2009. Equity markets moved higher in 1961. The gain by the Dow Jones Industrial Average topped 18 percent before stabilizing in the first quarter of 1962. And then, the bottom fell out. The Dow Jones Industrial Average fell 30% from March to the end of June. Equity markets finally regained a firm footing in October and a Fall rally ensued.

The May-to-September period has not been favourable for equity markets in midterm election years. Uncertainty about future control over the U.S. Congress and possible changes in policy following mid-term elections creates uncertainty in the economy, which, in turn triggers uncertainties in equity markets.

History shows that a decline by the Dow Jones Industrial Average by greater than 5 percent in May has not been followed by a significant recovery since 1940. June recoveries averaged only 0.91 percent with the bulk of gains occurring outside of midterm election years. Generally, losses in May during midterm election years lead to further losses in June.

A seasonal chart on the performance of the Dow Jones Industrial Average for midterm election years during the past 81 years shows uncanny similarities to the current timeframe. A February-to-April rally turns into a Spring- through-Summer downfall followed by stability and a recovery in October.

Is the loss by the Dow Jones Industrial Average beyond its 7.92 percent decline in May expected to continue? Probability is high. The short-term rebound witnessed this past week during the Memorial Day holiday period is common during mid-term election years. A close look at the seasonal chart for mid term election years shows a similar short-term rebound during the last week of May and the first week in June, precisely until release of the crucial May jobs report. Beyond that point, declines are the norm and they usually last until the end of the month.

Bottom line is that past history does not reveal a favourable June in midterm election years. Prepare yourself for a rocky road ahead.

To View the 45+ Charts in Don’s Monday Report go HERE

Jon and Don Vialoux are authors of free daily reports on equity markets, sectors, commodities, equities and Exchange Traded Funds. Reports are available at www.timingthemarket.ca and www.equityclock.com