Virtually every economic statistic released is called a “mustard seed” or a “green shoot.” When the job loss goes to 540,000 from the prior 650,000, its being cheered and presented by the ruling party because the rate of job losses is decelerating. Half a million people loose their jobs and they find a silver lineing. Treating such news in this perspective, is equal to a fly over of Katrina damage and lost touch of the sistemic missery setting in on our society.
They don’t even point out that the statistics are greatly manipulated to make them look better. The bureau of labor estimates actually have over 23 million people unemployed right now, which include the “discouraged” and part-time workers. Be year-end, we could be closer to 30 million.
The green shoots refer to the statistics showing a lower rate of acceleration. That’s why you often hear the words “second derivative,” which comes from higher math and is an expression for “acceleration.” But just because acceleration declines, doesn’t mean that the deterioration is over.
Instead, I call it “terminal velocity.” When someone jumps from the Empire State building, his acceleration stops at a terminal velocity of about 123 mph — i.e., the rate of descent no longer accelerates. But when he hits the sidewalk, he is still going 123 mph and goes splat.
All these green shoots will wither in the wind later this year for lack of water — that is, credit and corporate profits. The few profits made will be taxed away.
For now the reflation trade is alive. The game of money managers right now is to bet on a global economic recovery, which will increase demand for materials, energy and so forth. However, money managers are very often wrong. They are often forced to get into positions to not miss a move; after all, they are being paid to invest. If they miss a meaningful move, they may get fired or lose a lot of clients. So they plunge in even if they don’t trust the move. And currently they missed this short bull run and need to generate an active postion be it long or short.
We had a reflation rally in 2008. It ended in early September and brought disaster to the bulls. The popular sentiment about reflation was wrong; in fact, that’s when deflation really got going. The market doesn’t tell you anything about the future, just about the lemming response of the participants.
With the global economies withering, there is cost-cutting everywhere. No one needs large stockpiles of anything. Only China is buying, but its infrastructure is about 100 years behind most industrialized countries. China can now put all the stimulus money into catching up, but that won’t be enough to pull the global economies out of recession. Remember, China’s entire economy is only 25% the size of the U.S. economy.
All the theories behind the current rallies are wrong and will be proven so by the fall. The smoke-and-mirrors games played in Washington have for now calmed the fears of a global financial meltdown, but that’s what is really behind the rally: The “end of the world” fear is dissipating. But all the other problems remain and they will start to get attention again very soon.
The next bear market phase is when poor economic conditions come to the forefront. It’s one thing to rescue the banking system from meltdown, but a totally different thing to engineer an economic recovery when credit creation has plunged by trillions of dollars and tax burdens are soaring.
There is just “no gasoline in the tank” to fuel a recovery at this time, and Washington tax policies will ensure that any little spark of recovery will quickly be extinguished by higher taxes.
