Let's call it a victory. Despite spending most of yesterday's trading session in the red, the Dow Jones Industrial Average staged a late-day rally to eke out a 42-point gain. Nevertheless, the selloff that started early last week has erased all of the Dow's progress since November 9, 2009 - a day on which headlines gushed that the Group of 20 nations would continue to save the world by maintaining their economic stimulus efforts. Investors celebrated that news by rallying the Dow 203 points to 10,227 - a fresh 13-month high.
At the time, most folks seemed to believe that the bear market was dead and gone, and that a bona fide recovery was well under way. After all, the US Commerce Department had just reported 3.5% GDP growth for the third quarter. "Third-quarter GDP numbers knocked the socks off of expectations," billionaire investor, Kenneth Fisher, declared on November 10, expressing the pervasive optimism of the moment. "The economy is not recovering at a slow pace."
Fisher probably should have held his tongue at that point. Instead, he predicted that the S&P 500 would hit 1,300 "as early as February." The S&P is currently below 1,100, and February arrives next Monday. We don't like his odds.
But lest we be accused of throwing stones in a glass house, we would point out that the robotically bullish Fisher is the 289th-richest person in the United States, according to Forbes magazine. Conversely, your frequently "cautious" California editor picks up pennies off the ground...even though he has a bad back.
We mention Fisher's November optimism merely to illustrate the pervasive attitudes of that moment. Even Alan Greenspan jumped aboard the bandwagon and grabbed some sheet music. The rallying hot stock market is "re-liquefying the whole [recovery] process," he trumpeted on November 9. The former Federal Reserve Chairman also remarked that manufacturers would need to rev up production lines in order to replenish inventories.
We now know, of course, that inventories surged during the ensuing two months, as end-user demand failed to materialize. But once again, we have no interest in tweaking noses (other than Greenspan's); we would merely point out that the common wisdom is rarely wise.
"What was The Daily Reckoning saying in early November?" you may be wondering. In the November 9th edition of The Daily Reckoning, our own Bill Bonner observed, "The financial crisis of '08-'09 was not a head cold. It didn't go away. It was more like diabetes, a stroke, or cancer. It was serious. Life threatening. We may not recover. Our only hope is to change our habits, undergo some nasty treatments...and endure a long convalescence.
"But that's not what most people think," said Bill. "They are convinced that the feds gave the economy a miracle drug. It cleared up the trouble lickety split. Now, our troubles are behind us. According to the news reports, the US economy is 'growing' again. Yes, that's the official storyline.
"But wait, what kind of growth is this? [Economist] David Rosenberg answers: 'All we can say is that if the overwhelming consensus is correct that the recession is behind us, then what we have on our hands is the mother of all jobless recoveries and whatever economic growth is being squeezed into the system comes courtesy of the most dramatic intervention by the government in recorded history, including the New Deal 1930s era. President Obama is now running fiscal deficits that would have made FDR blush.'
"The quacks at the Fed and the Treasury department have delivered the biggest jolt of adrenaline in history," Bill continued. "People in the private sector won't spend? Heck, the feds will spend for them! It took the Fed nearly one hundred years to grow its balance sheet - which is the foundation of the US money supply - to $800 billion. Then, after Lehman Bros. went broke, it doubled its balance sheet...to more than $1.8 trillion."
Bill continued kvetching the following day when he remarked:
"The Dow rose 200 points yesterday, bringing it only about 75 points below the 10,300 level. Why is the 10,300 mark important? It's not really...it's just the point where this bounce will equal the bounce following the crash of '29. No reason in particular that this bounce should be the same as the one 80 years ago. But no reason it shouldn't, either."
Hmmm... Isn't it interesting that we have returned to Dow 10,300? So what's next? What are your Daily Reckoning editors saying today?
Well... Pretty much the same old thing we've been saying for months: "flat" is the new "up." The economy is not recovering. Not no way; not no how. It may be bottoming, if by "bottoming" you mean, "not getting materially worse." But as Bill observed back in November, this is no head cold, folks. It's more like diabetes...the Type II variety that results from over-consumption.
The latest housing sales data support our diagnosis. Now that the benefit of the government's $8,000 tax credit has passed, home sales have retreated to levels that would have been unthinkable just two years ago.
Existing home sales languish at levels last seen in 2001; while new home sales have plummeted to levels we have never seen during the last 50 years!! Apparently, to repeat one of our earlier observations, individuals without incomes or credit buy very few homes.
Therefore, given the fact that signs of economic weakness continue to litter the US economic landscape, and the fact that China is halting credit growth, we should not be surprised to see the global economy decelerate once again. And if the global economy were to decelerate, we should not be surprised to see bond yields fall once again.
So does that mean we are abandoning our "Trade of the Decade" already? Does that mean we would suggest buying Treasury bonds instead of selling them? The answer is a resounding "No!" - not for a 10-year trade. But the answer might be "yes" for a 10-week trade. It is entirely possible, if not likely, that bond yields will drop during the coming weeks in response to new indications of economic weakness. But we would advise selling all bond market rallies, rather than buying the dips.
At the time, most folks seemed to believe that the bear market was dead and gone, and that a bona fide recovery was well under way. After all, the US Commerce Department had just reported 3.5% GDP growth for the third quarter. "Third-quarter GDP numbers knocked the socks off of expectations," billionaire investor, Kenneth Fisher, declared on November 10, expressing the pervasive optimism of the moment. "The economy is not recovering at a slow pace."
Fisher probably should have held his tongue at that point. Instead, he predicted that the S&P 500 would hit 1,300 "as early as February." The S&P is currently below 1,100, and February arrives next Monday. We don't like his odds.
But lest we be accused of throwing stones in a glass house, we would point out that the robotically bullish Fisher is the 289th-richest person in the United States, according to Forbes magazine. Conversely, your frequently "cautious" California editor picks up pennies off the ground...even though he has a bad back.
We mention Fisher's November optimism merely to illustrate the pervasive attitudes of that moment. Even Alan Greenspan jumped aboard the bandwagon and grabbed some sheet music. The rallying hot stock market is "re-liquefying the whole [recovery] process," he trumpeted on November 9. The former Federal Reserve Chairman also remarked that manufacturers would need to rev up production lines in order to replenish inventories.
We now know, of course, that inventories surged during the ensuing two months, as end-user demand failed to materialize. But once again, we have no interest in tweaking noses (other than Greenspan's); we would merely point out that the common wisdom is rarely wise.
"What was The Daily Reckoning saying in early November?" you may be wondering. In the November 9th edition of The Daily Reckoning, our own Bill Bonner observed, "The financial crisis of '08-'09 was not a head cold. It didn't go away. It was more like diabetes, a stroke, or cancer. It was serious. Life threatening. We may not recover. Our only hope is to change our habits, undergo some nasty treatments...and endure a long convalescence.
"But that's not what most people think," said Bill. "They are convinced that the feds gave the economy a miracle drug. It cleared up the trouble lickety split. Now, our troubles are behind us. According to the news reports, the US economy is 'growing' again. Yes, that's the official storyline.
"But wait, what kind of growth is this? [Economist] David Rosenberg answers: 'All we can say is that if the overwhelming consensus is correct that the recession is behind us, then what we have on our hands is the mother of all jobless recoveries and whatever economic growth is being squeezed into the system comes courtesy of the most dramatic intervention by the government in recorded history, including the New Deal 1930s era. President Obama is now running fiscal deficits that would have made FDR blush.'
"The quacks at the Fed and the Treasury department have delivered the biggest jolt of adrenaline in history," Bill continued. "People in the private sector won't spend? Heck, the feds will spend for them! It took the Fed nearly one hundred years to grow its balance sheet - which is the foundation of the US money supply - to $800 billion. Then, after Lehman Bros. went broke, it doubled its balance sheet...to more than $1.8 trillion."
Bill continued kvetching the following day when he remarked:
"The Dow rose 200 points yesterday, bringing it only about 75 points below the 10,300 level. Why is the 10,300 mark important? It's not really...it's just the point where this bounce will equal the bounce following the crash of '29. No reason in particular that this bounce should be the same as the one 80 years ago. But no reason it shouldn't, either."
Hmmm... Isn't it interesting that we have returned to Dow 10,300? So what's next? What are your Daily Reckoning editors saying today?
Well... Pretty much the same old thing we've been saying for months: "flat" is the new "up." The economy is not recovering. Not no way; not no how. It may be bottoming, if by "bottoming" you mean, "not getting materially worse." But as Bill observed back in November, this is no head cold, folks. It's more like diabetes...the Type II variety that results from over-consumption.
 |
The latest housing sales data support our diagnosis. Now that the benefit of the government's $8,000 tax credit has passed, home sales have retreated to levels that would have been unthinkable just two years ago.
Existing home sales languish at levels last seen in 2001; while new home sales have plummeted to levels we have never seen during the last 50 years!! Apparently, to repeat one of our earlier observations, individuals without incomes or credit buy very few homes.
 |
Therefore, given the fact that signs of economic weakness continue to litter the US economic landscape, and the fact that China is halting credit growth, we should not be surprised to see the global economy decelerate once again. And if the global economy were to decelerate, we should not be surprised to see bond yields fall once again.
So does that mean we are abandoning our "Trade of the Decade" already? Does that mean we would suggest buying Treasury bonds instead of selling them? The answer is a resounding "No!" - not for a 10-year trade. But the answer might be "yes" for a 10-week trade. It is entirely possible, if not likely, that bond yields will drop during the coming weeks in response to new indications of economic weakness. But we would advise selling all bond market rallies, rather than buying the dips.
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