'Green Shoots' Sprouting in Global Markets (Part 1)

An eight-week-long upturn in European, Japanese, US and emerging stock markets since March 10^th has sparked a wave of optimistic commentaries in the financial media, that the worst bear-market since the 1930’s has finally come to a merciful end, and the rocky road to recovery lies ahead. Since hitting a 12-year low on March 6th, the key global benchmark – the S&P-500 Index has rebounded by +34%%, while the KBW Index, measuring 24 US banks, doubled off its lows.

The stunning rebound from March 6-20th was only the fifth-time since 1929 that the S&P-500 Index has run-up by more than +20% in 14-days or less. The rebound has been dubbed the “Green Shoots” Rally, signaling the initial stages of a recovery in the battered global economy. Most importantly, under heavy political pressure from the Fed and Congress, FASB altered rule #157, to allow American bankers to value toxic assets, at their own discretionary judgment.

The switch-back to “mark-to-make-believe” accounting is an expedient scheme that allows the banking elite to conceal their losses, and use the same obscure and discredited models to inflate their balance sheets. The recent spate of better-than-expected earnings reports by US-banking giants, Goldman Sachs (GS), JP-Morgan (JPM), Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) is a testament, not to the strengthening of the real economy, but rather due to accounting gimmickry.

Barack Obama, elected by appealing to a popular rejection of the Bush administration’s economic policies, has become the new political lackey for the financial aristocracy. His pick for US Treasury chief, Timothy Geithner, is continuing the same policies as his mentors, former Goldman Sachs CEOs Henry Paulson and Robert Rubin. Step by step, the Fed, the Treasury, Congress, and the White House have allocated an unprecedented $12.9-trillion of taxpayer money and guarantees, to rescue the nation’s top financiers from their own greedy mistakes.

US Treasury chief Geithner was a leading architect of the bank bailouts during the financial crisis, while forging close relationships with executives of Wall Street’s giant financial institutions. His actions, as a regulator and bailout king often aligned with the industry’s interests and desires. Wall Street’s share of all company profits in the S&P 500 reached a record 42% in 2006, and with it, greater influence over corrupt politicians in Washington from both political parties.

The Wall Street oligarchs are now utilizing trillions in US-taxpayer bailout money and government guarantees, to bolster their balance sheets and generate profits, and speculating in turbulent financial markets. Since March 6^th, what’s evolved is a rising US-stock market and inflated bank profits, which in turn, conjures-up hopes that banks will start lending again, to free-up capital for new investment and spending.

Many investors are skeptical of the “Green-Shoots”rally, and prefer to call it a “bear-market” suckers’ rally, one that is destined to fizzle-out and unravel. Yet today’s bargain hunters see a “once-in-a-lifetime” buying opportunity, and are guided by the sagely advice of Sir John Templeton, “Bull-markets are born in pessimism, grow on skepticism, mature on optimism, and die of euphoria.”

Referring to the 1930’s Great Depression, Warren Buffett pointed out that the Dow Industrials hit bottom in July-1932. “Economic conditions continued to deteriorate until Franklin Roosevelt became president in March-1933, but by that time, the market had already climbed 30%. “While short-term stock-market movements can’t be foretold, the likelihood is the market will recover before the economy, or general investor sentiment does, and if you wait for the robins, spring will be over,” he said.

IMF Issues Grim Forecast for 2009,

On April 23^rd, IMF chief Dominique Strauss-Kahn sounded some strong words of caution, which were ignored in the marketplace. “Despite some red lights and green lights, our belief is the financial crisis is far from over. There are still long months of economic distress in front of us,” Kahn warned. The IMF predicted on April 21^st, that worldwide financial institutions could suffer $4-trillion in losses from the global credit crisis. “Historically, wherever recessions are preceded by financial crises they are more severe and longer lasting,” warned IMF Chief Economist Olivier Blanchard, “there would be no rapid recovery from the current economic crisis.”

The Group-of-Seven economies, which account for two-thirds of the world’s output, experienced an “unprecedented” -7.5% contraction in real GDP, on an annualized basis, during the fourth quarter. The world’s steel industry, a key lynchpin in the auto and construction industries, is bracing for a sharp -15% drop in demand, the biggest annual decline since World War II, as the global economic downturn rips through the sector, lowering output to an estimated 1-billion tons. Demand for the steel is seen falling 36% in the United States and 28% in Europe.

The IMF’s “World Economic Outlook,” released on April 21^st, predicted negative 1.3% growth for the global economy this year, “Not since the 1930’s has the global economy undergone a collective contraction,” the IMF said. The Euro-Zone’s economy is projected to contract -4.2%, Japan -6.2%, Russia -6%, and the Asian tiger economies, Singapore -10%, and Taiwan -7.5%, the worst affected. China and India are forecast to grow +6.5% and +4.5% respectively, but nevertheless, a major slowdown in both countries, and likely to increase their jobless rates.

Wall Street’s best month in nine-years,

Yet despite these ominous warnings, all three major US-exchange indexes closed sharply higher in April, with the Dow Jones Industrials surging towards the 8,500-level, led by the financial sector. April was Wall Street’s best month in nine-years -- offering a glimmer of hope that just maybe, the US-economy is finally about to stabilize. Bolstering this view, pending sales of existing US-homes rose +3.2% in March, and +2% in February, and starting to work-off excess inventories, - a key to stabilization in the financial system and broader economy.

On paper, US-stocks recouped $2.3-trillion in value since March 6^th. The S&P-500’s gain of +18.7% in March-April was its best two-month rally since 1975. The junk bond market gained a record +11% last month. In previous bear-markets over the past 60-years, the S&P-500 Index has hit bottom an average of four-months before the recession ended, and nine-months before unemployment hit its peak.

The Dow Industrials’ biggest one-day surge this year, occurred on March 23^rd, when US Treasury chief Geithner, unveiled a clever scheme to enable Wall Street’s elite banks to offload up to $1-trillion of their bad mortgage loans and other “toxic” assets at inflated prices. The scheme involves the use of taxpayer funds to guarantee large profits for hedge-funds, private-equity firms, and big insurance companies, utilizing low-interest, non-recourse, government loans to purchase toxic securities that are weighing down the balance sheets of the banks.

Geithner’s scheme is designed to provide a windfall for the very same bankers and investment firms which precipitated the deepest economic crisis since the 1930’s, and the loss of 5-million US-jobs, by peddling high-risk, toxic investments that generated extraordinary returns, until the housing and debt bubbles burst, and sustained the multi-million-dollar bonuses of Wall Street CEOs and traders.

Bernanke sees “Green-shoots” Sprouting in US Economy

On March 15^th, in his first television interview, Fed chief Ben “Bubbles” Bernanke predicted that America’s worst recession since the 1930’s would likely end this year before a recovery gathers steam in 2010. “The green shoots of economic revival are already evident,” Bernanke told CBS’s program 60-Minutes. “Much depends on fixing the banking system. We’re working on it. I think we’ll get it stabilized, and see the recession coming to an end this year,” he said.

“We’ll see recovery beginning next year. And it will pick up steam over time.” Asked if the United States had escaped a repeat of the 1930’s Great Depression, Bernanke said: “I think we’ve averted that risk.” A few days later, the Bernanke Fed said it would buy $1.1-trillion of Treasury notes and MBS’s, with money rolling-off its electronic printing press. The massive cash infusion is channeled into the coffers of the Wall Street Oligarchs, and is starting to flow into the credit markets.

Six weeks later, the ISM’s index of national factory activity, a leading indicator for the US-economy as a whole, jumped to 40.1 in April from 36.3 in March, a sign that “green shoots” are sprouting in the battered sector, even before Obama’s $787-billion stimulus plan kicks in. Most encouraging, the ISM’s index for New Orders jumped 14% to 47.2 in April, the highest since August 2008, from 41.2 in March, and the employment index rose to 34.4 in April, from 28.1 in March.

In hindsight, the US factory index began to stabilize two months before the S&P-500 bear-market hit its bottom. In other words, the sharp slide in the global equity markets in January-February could have been the final-stage of selling capitulation at the tail-end of a 17-month bear market. The post March 6^th recovery rally is catching-up to the green-shoots sprouting in the factory sector.

Nowadays, news that would have sent the stock market into a frenzied meltdown just a few-months ago is now taken calmly in stride. Instead, traders search for silver linings in reports with negative headlines. For example, US-gross domestic product (GDP) plunged -6.1% on an annualized basis in the first quarter of 2009, a far steeper decline than predicted. Following a -6.3% GDP-decline in the last three months of 2008, it was the biggest six-month contraction in 50-years.

But buried within the report, was information that US-business inventories were whittled down by a whopping $103.7-billion in the first-quarter, which is good news for the economy, because it suggests businesses have cut their stockpile of unsold merchandise to levels that will soon encourage them to start placing new orders, which in turn, would stimulate production and demand for raw materials.

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