….no longer a financial event but rather an economic event.
In this issue
- The U.S. is now 234 years old and yet over half the nation’s money supply was created since Helicopter Ben took over the flight controls four years ago
- European bourses are slightly lower, ditto for most of Asia except in Japan and South Korea; bonds are rallying; economic data in Euroland and China coming in weaker than expected
- The week that was: the Dow is now down seven sessions in a row — a streak not seen since early October 2008; what we have on our hands is no longer a financial event but rather an economic event
- Hard landing risks in the U.S. rise further, according to the ECRI weekly leading index
- Where will the positive shock come from? Every single low in an equity market selloff occurred because of some major exogenous positive shock
- The Fed was pushing on a string, fiscal policy was pushing on a string, and now the bond market is pushing on a string too
- The problems with U.S. housing and mortgage market linger on
- A bullish Gene
- Do we have anything positive to say?
THE WEEK THAT WAS
The Dow is coming off seven losing sessions in a row, a streak not seen since
early October 2008 when we had a post-Lehman financial panic on our hands.
What we have today is something completely different. Rather than a series of cataclysmic declines, which one would like to see in order to hit a true capitulation bottom, what we have now is a slow bleed that must truly be painful for the bulls. It’s almost like the sort of market we had coming off the peak in August 1987 that ultimately morphed into something big, and those that were prepared to take advantage of the eventual plunge profited handsomely. Back then, of course, we had a ripping economy — the problem was one of Fed tightening and constricted liquidity conditions. But when the plunge did come, the Fed had plenty of ammunition to kickstart the bull market.
What we have on our hands today is much more complicated. This is not a financial event any longer. It is an economic event. The macro landscape is looking bleak and the leading economic indicators are rolling over, but this time around the Fed and the federal government have few options to restimulate the economy. It’s not just equities but anything with a cyclical feel to it is sliding in price — oil fell 8.5% last week too and was down for five days running and is now bordering on $72/bbl.
The massive rally in the U.S. Treasury market is a signpost that bond investors see the prospect of another hard landing rising by the day, and at a time when underlying consumer price trends are already running below 1%. The chance that we head into either outright deflation or a prolonged stretch of price stability is also very high right now. And, deflation in a period of debt deleveraging is a disastrous development since it drives up defaults. Indeed, solvency issues are a lingering concern, not so much with the financial or corporate sector, but at the State and local government sector — this is 13% of GDP and as such, the retrenchment to deal with the fiscal challenges is posing an ongoing drag on domestic demand. All eyes are now on Jefferson County’s $3.2 billion in sewer debt — talk about a stinky situation — which is on the precipice of becoming the largest municipal default in U.S. history (see page B11 of the weekend WSJ).