Global Markets in Review: Economic Rescue Boat to Nowhere

“Words from the Wise” this week comes to you from my abode in a visibly depressed Europe, from where I am compiling this report as welcome relief from gloomy conversations with taxi drivers and cheerless meals in deserted eateries.

Events during the past few days were dominated by the announcement of U.S. Treasury Secretary Timothy Geithner’s financial stability plan and a deal reached by Congress on the economic stimulus bill. However, the much-anticipated bailout bang soon whimpered as investors were disappointed about the lack of “beef.” Meanwhile, markets were also mired in uncertainty on the back of fresh evidence of headwinds facing the global economy - notably in major economies such as the U.K., continental Europe and Japan.

Jim Rogers gave the bank rescue plan a big thumbs-down:

(Geithner) … has been dead wrong about everything for 15 years in a row … This (the rescue plan) is not going to solve the problem, it’s going to make it worse.

Referring to the stimulus bill, Steve Forbes said:

It’s just a grab bag of every spending proposal that’s been banging around Congress for years.

And Bill King (The King Report) commented as follows:

A cure should have something to do with the diagnosis. The classic argument for fiscal stimulus presumes that the central cause of our current economic problems is this: We, the people and our government, are not doing nearly enough borrowing and spending on consumer goods. The government must step in to force us all to borrow and spend more. This diagnosis is tragically comic once said aloud.

Stock markets were on the receiving end as risk-averse investors sought out the safe havens of the U.S. dollar (+0.8% in the case of the U.S. Dollar Index), gold (+3.1%) and bonds (with the yields of 10-year Bunds and Gilts down by 21 and 17 basis points respectively).

The week’s movements of the MSCI Global Index (-3.9%, YTD -9.0%) and MSCI Emerging Markets Index (-0.6%, YTD -2.2%) reflect global investors’ skepticism about the rescue plans. Strong performances came from China (+6.4%) and Russia (+14.3%), but these markets were still left in the red by 61.9% and 63.0%, since their respective bull market highs. As mentioned before, the chart pattern of the Chinese Shanghai Composite Index arguably shows one of the most bullish formations of the major stock market indices.

The major U.S. indices suffered their worst weekly losses this year (to record five losing weeks out of six): Dow Jones Industrial Index -5.2% (YTD -10.6%), S&P 500 Index -4.8% (YTD -8.5%), Nasdaq Composite Index -3.6% (YTD -2.7%) and Russell 2000 Index -4.7% (YTD -10.2%).

John Nyaradi (Wall Street Sector Selector) pointed out that among the exchange-traded funds (ETFs) none of the main economic sectors registered positive returns, as summarized in the chart below. Not shown are the KBW Bank Index ETF (KBE), which lost 14.3% on the week, and the Dow Jones U.S. Real Estate Index ETF (IYR), which lost 12.0%. The ProShares Short Dow30 ETF (DOG) led the way among inverse funds with a gain of +5.3%.

click to enlarge

Source: StockCharts.com

As investors became more fearful of the economic situation, gold bullion (+3.1%) assumed its traditional safe-haven role.

As reported by the Financial Times, Barclays Capital said:

Inflows into gold-backed exchange-traded funds surged in January, pushing their bullion holdings to an all-time high of 1,317 tons. Last month’s flows of 105 tons were above September’s previous record of 104 tons, and absorbed about half the world’s gold mine output for January.

The chart below shows the long-term trend of the yellow metal (green line) together with a 14-month rate of change (ROC) indicator (red line). Monthly indicators come in handy for defining the primary trend. In this case the ROC line above zero depicts the bull market in bullion that commenced in 2001. And there is more to come: According to Gary Dugan, the chief investment officer of Merrill Lynch, gold prices may hit $1,500 an ounce in the next 12 to 15 months.

click to enlarge

Source: StockCharts.com

In addition to last week’s bailout actions, policymakers are also working on a housing subsidy plan that will use government money to help reduce interest rates for struggling borrowers. The details are to be announced by President Obama on Wednesday.

Needless to say, Capitol Hill’s various actions come at a hefty price. According to The Wall Street Journal, Strategas Research estimates that the federal budget will work out to roughly 13.5% of GDP in 2009. Asha Bangalore (Northern Trust) added:

2009 will go down in history as the year during which the US economy recorded the largest federal budget deficit as a percent of GDP in a span of eighty years, excluding the war years. The budget deficit as a percent of GDP through the war years of 1942 to 1945 was 14.2%, 30.3%, 22.7% and 21.5%, respectively.

click to enlarge

Next, a tag cloud of the text of all the articles I have read during the past week. This is a way of visualizing word frequencies at a glance. As the saying goes: A picture paints a thousand words …

Go to Page 2 - Global Markets in Review: Markets, Economy

Comments on this article>>

Comments

[Ferdinand E...:]

I don't know about Jim Rogers, but I know about Steve Forbes: he makes a practice of being wrong. And the thing that he is really afraid of is that President Obama has got the answer - that he will succeed and be reelected. For people like Forbes, that would be even worse than Obama getting to the White House.

Of course, I still read his magazine. It's great!..

Feb 15 08:33 AM

[ain't no fo...:]

Ferdinand, I agree with your comments on Forbes's motivations (and they are the same as MANY other Republicans's motivations - just listen to the talking heads on CNBC trotting out every Republican congressman/ congresswoman they can get their hands on to sabotage the plan) - almost sounds like they would sacrifice this country's well-being for the sake of their pathetic, failed agenda. But no, they wouldn't do such a heinous thing... would they?

For that reason, I DO NOT read Forbes... too much like aiding and abetting the enemy. There are plenty of other great sources of information out there.


On Feb 15 08:33 AM Ferdinand E. Banks wrote:

> I don't know about Jim Rogers, but I know about Steve Forbes: he
> makes a practice of being wrong. And the thing that he is really
> afraid of is that President Obama has got the answer - that he will
> succeed and be reelected. For people like Forbes, that would be even
> worse than Obama getting to the White House.
>
> Of course, I still read his magazine. It's great!..

Feb 15 10:23 AM

[ain't no fo...:]

With regard to the author's Gold chart, I note that there may be a double top forming there, and that the ROC indicator is flashing a major negative divergence wherein price is continuing to rise but the oscillator is lagging badly this past year. These negative divergences between price and oscillator very often resolve with price failing as well.

That same type of divergence showed up on the SPX (and all other major indices) versus many oscillators such as MACD and STO in August, Sept and Oct 2007, and was instrumental in getting me very cautious on the market back then. I avoided a lot of pain as I stayed net flat/short as the market rolled over.

There are also positive divergences, where the price of the asset falls while the key underlying oscillators are RISING... and that is one of the very best indicators one can find for an impending rally.

A word of caution on divergences - the longer the divergence persists, the more powerful the price move can be... so don't jump as soon as you start to see the negative or positive divergence, sometimes there are several headfakes before the final resolution, but get prepared to act when confirmation (key reversal days accompanied by volume spikes, confirmation days, etc) appears.

We are not there yet, but I am watching carefully.

Feb 15 10:56 AM

[rawdawgbuffalo:]

between Biden and Tim Geithner, seems like Obama has built an administration of cards

Feb 15 12:40 PM

[Lewrace:]

I belive the US economy will take 2 to 4 years to turn around indeed, and the real estate market up to 10 years or more part cause the aging boomers r not going 2 trade up but down their house size and value 4 their ``golden`` age. NOw that the Reaganomics+wild-Bush'... II era have sqander if not dilapidated not only the USA's wealth but a fair bit of the western World's and de facto killed the golden goose and the nest eggs. It will take quite awhile for North America and the western World to rebuilt it's lost wealth. Boomers greedy wishfull retirement is going to be anything but golden...

If Sir Barak Obama could read these lines I may have a few simple tips 4 the next 7 years he way very well be in power 4 the better not only of the USA ( I just can't call my neighboring country ``America`` just because somewhere in History some of u jolly folks stole the name of the continent...loll...) but the hole planet.

Tip number one, just reinstate the uptick rule 4 the stocks and commodity markets; deep poket fund, banks and the likes lobbyists convinced Bush II and the SEC to drop it so they could raid any decent co. 2 the ground just be4 buying it back 4 pocket change once it lost 50% to 80% of its value...And now it turned agains them and u see the results. The rule was instated after the Krash in `29 specificaly to create stability and trust 4 invertors in the market and curb the kind of unseen if not obseen Volatility we have witnessed in the market a short while after W gave in...

Second tip, the kind of stimulus the US and western World economies, with Japan's and South Korea's, need most must be wealth creating if not wealth rebuilding 4 the benefit of the hole planet and it's population, not merely spending; ie. value added with long term and green sustainable developement in mind. Infrastructure repair, renovation and rebuilding is a good start, but You the people of these States, and the rest of us must be United in showing the way to the rest of the World: Africa, the BRIC and 3rd World countrys, leading by example. Social housing is one example with Intercity efficient and high speed train networks needed 4 North and South America so we do away as much as possible with the golden veal of North America simply because our way of living is not applicable in India and China..., even Sao Polo is suffucating and stranded by vegetable powered trafic jams. Cars r just not made 4 cities of 4 millions and up... US corn powered cars will starve the planet's population... There is insuffient uranium on the planet to power the 150+ nuclear central facility needed to power China... Fresh Water is the next black gold we should invest in. It's quality protection and distribution 4 the benefit of all mankind will make or break our very worthiness of existing or not on this planet... Let's lead by transfering some of that Defense budget towards worthy goals like providing North Korea with a decent level of nutrition and basic medecine, universal healthcare 4 USA and all citizen of the world. Convincing our fellow Israelis that they r world citizen be4 they r Israelis and that they r killing one of their very own kind when they kill a Palestinian. Peace will only come over there when Israel will share the water resource from the Jourdan and ali fairly with Palestine and withdraw from the occupied territory... Terrorism is merely a police matter and international terrorism is only a an international police matter, like bad weed and criminals, they may grow back and should go to gail, but one those not use a sledge hammer (at a cost of 10B$ a month like in Irak 2 kill a fly...)
God speed Sir Obama from Lew Race

Feb 15 03:06 PM

[Lewrace:]

Oh, I forgot, the Sterling pound is doomed indeed,. They sould join the Euro in the next 2 years or so simply because they used 2be the world's banker and since they lost their Empire status (which they got among other ways by poisoning China with opium), they forgot 2 diversify their economy. So it is disproportionnaly supported by a collapsing financial sector.

If I were a Britt I would buy into gold heavily just after the next low around the 750-800$ mark, let the pound fall and dissapear, wait 4 months up to a year, sell my gold position around 1500 to 2000$ and convert to a low entry point in euro....

You see the new world banker is China now, up over their heads with USD$ and other currencies with little or no det compare to the USA. And the green back will not dissappear like the pound but it will lose quite a bit of it's value since Ben and the FED r printing more and more to refinance the bankrupt economy Bush II left Obama with.

You see, Ben is actually printing $ out thin air (Fiat mony that is..., only based on trust...), buying bad real estate assets on bankrupt US banks books to make them look good instead of letting them fall and face a run on these banks and pay up the 250,000$ per account holder garanteed by Uncle Sam=Ben. Now be4 these banks see the ink dry on these fresh USD$, Ben had Henry the Tresury called the momentarily cash full banks, telling them that Ben had a better dryer 4 that cash$. So the banks had 2 buy the T-Bills from Henry with that wet cash. And now, that same cash is drying in Ben's bank; the Fed is sequestring these new $ so that the money mass is actually growing but not available in the economy..., ceating, out of the bleu, a shortage for the USD$ against the other world currencies..., thus providing Ben with the virtually only cash full bank of USD available 2 trade 4 other currencies at a 15% to 20+% discount..., just because of this artificial shortage he is creating...

After fulling the Fed with Euros, Yens, CAD$, SwissF, AUD$, NZDkiwis and the like at 20% discount, clever Ben... will eventually release the rest of these new USD$ back in the economy once the ink will have dried with the help of windfall from the ecomic stimuluses made in US and the world over. Thus after this depression we r in 4 about 3 to 5 years time, creating inflationary (rises in prices and salaries) pressure on the USD. From now on till then, the value of the USD$ (ie. it's purchasing power and trust), will fall; empovering all of the american people so the USA will be bailed out by picking up the Ben's tab on their hard earned $... But fleeing 2 gold, ( China want's 2 buy tons of it this year) might delay recovery and provoque even more pressure on the USD$, it parks and store value but it also makes wealth unavailable 4 developement and more wealth creation...

Tricky gamble Ben..., guess you will be tempted 2 cut that USD$ in half or more to pay back all these US-T-BIlls you r selling all over the planet while sequestring all these fresh USD just 2 create a market for these IOUs it will take generations and generations to pay back... Unless Obama uses the only 2 available levreage he has in cutting in the US Defense budget NOW and if he starts in a couple of years to actually taxe the US citizen making more than 250,000.00$ per year like he promised... So it will benefit all the people..., even these same over 250K$ per year that should be in line with the rest of the developped western world levels of taxation.... They will, in time, find that their additionnal taxe tab does lower their local crime rate in their cities and provide shelter for the needy so that they woun't have to pay all that additional security and useless costs for egocentric enclosed rich segragated community... Hey u never know till u try it!...loll..., this could be a win-win where even the NRA aficionados woun't need their guns 4 protection....

Good luck
Lew

Feb 15 04:44 PM

[Moon Kil Woong:]

Good article. I have ben mentioning the fact that this simulus plan is a government spending bill with a skirt of public works for quite a while now. It does nothing to solve the economic crisis asides from having government be a bigger component of a shrinking economy and costing $266,666 dollars for every new job it creates.

This is neither rational nor feasible. But neither was TARP or Bush Jr's idea to cause tax deflation by handing you back your own money (Don't you feel richer after that?).

Feb 15 11:37 PM