Ebbing Economic Tide is Lowering All Boats

by: Richard Shaw

Pretty grim out there.  Where is the basis for current optimistic stock market views?

Markets may anticipate recovery, but how soon could that recovery be, given the depth of the problem?  How many more stimulus programs are needed? How many more can be paid for now or later? Are we sowing the seeds of greater disaster later by adding more easy money to a problem that was caused in substantial part by easy money in the first place?

The US stock market (proxy SPY or IVV) and some others are working hard to form a bottom, but against an ugly economic backdrop.

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Top banks became illiquid and needed a bailout (proxy KBE). Debt instruments wouldn’t trade.  Daily volatility is at unprecedented levels.  Intra-day moves resemble monthly or even yearly changes on some days.  Whipsaw effects for traders are daily events.

Hedge funds failed and more are expected.  Leading investment banks failed. AIG, our largest insurance company needed a bailout.

California (proxy CMF), our largest state says it doesn’t have enough cash to meet obligations in the near future and seeks federal assistance.

GM, our largest automaker says they don’t have enough cash to complete next year, and seeks federal assistance.  Chrysler is searching for a white knight.

GE, our largest industrial company needs a capital infusion.

Former Fed Chairman, Greenspan, said he never could have imagined our current economic situation.  Current European Central Bank Chairman Trichet said this is worst economic crisis since World War II.  Major central bank overnight rates are at historic lows with little more benefit cutting can provide.

Unemployment is at a 14 year high.  Retail sales last month were at multi-decade lows.

House prices continue to fall, mortgage foreclosures continue to climb, financing is harder to obtain.  Even China is now worried about house price declines there.

Major pension plans are suspected of being underfunded and needing more capital than the PBGIC has — a federal bailout may be needed.  The FDIC says they have enough money now, but may need more — the source would be a federal bailout.

The US economic relief packages have ballooned from a few hundred billion (imagine talking about a few hundred billion in the diminutive) to a few trillion, yet more is planed and requested.

The IMF is bailing out emerging countries.  Iceland’s financial system collapsed.  Argentina nationalized private pensions to capture liquid assets, replacing them with IOU’s.

Oil’s decline (proxy USO) provides some relief, but creates stress bordering on crisis in producing countries that built up cost structures and capital funding commitments they cannot support at current oil prices.

This year, the last month and the last few days reached multi-decade record decline levels. Yet, P/E multiples are above long-term norms and are not bargains.

Emerging countries have not been shown to be decoupled from the US and other developed world economies.  They are suffering too.

An ebbing economic tide is lowering all boats.

The new Congress and the new President will come at the problem in the US with renewed vigor, and other nations are doing much of the same, but it is beginning to seem like pushing on a string.

We certainly hold out hope for a swift and good outcome. Only time will tell.

We prefer to stay behind the skirmish line, and to move forward only after the current Bull/Bear battle is over and the Bull is the last one standing.

Right now it is a serious struggle.  The Bull knocks the Bear down, but the Bear gets back up.  The Bear knocks the Bull down, but the Bull gets back up.  Both are bleeding, battered and tired.

We are probably in the 8th or 9th round of this fight.  We just don’t know if it’s a 10 round fight or a 15 round fight.  That’s a key question and nobody knows the answer.