6 Reasons Not to Sound the All-Clear Signal for the Economy

I'm still enjoying the rally. Unless something really bad happens now, we had a global bottom on March 9: the Haines-Kass bottom. Let's remember the people who nailed it.

I'm looking at the stock market with huge optimism. Yes, the current rally is probably losing steam. There are indications that sentiment has changed to bullish, and the market usually does directly opposite from what is expected from it. We might have a retracement, maybe quite a deep one. But I don't think it's going to cross Dow Jones 7500, never mind reaching bottom again.

So, can we honestly say that it's all clear for the economy? After all, a lot of economists claim that market usually recovers 6 months ahead of economy (if you do a quick check, sometimes it does, sometimes it doesn't). Not so fast.

Let's remember the previous depression, the Great one. The market bottom happened in July 1932, but the depression lasted many more years afterwards. There are a lot of different opinions on the reasons for the Great Depression, why it was so bad etc. But everybody agrees that tax hike in 1937 made things much worse.

Are there any headwinds in the government? The answer is simple: plenty. They are listed below in no particular order.

Tax hikes. They are on the agenda all the time. New taxes on securities traders, tax rule changes on international companies, additional taxes on the rich. Don't forget, this year started with a huge ($1 a pack) tax increase on cigarettes. That's on the federal level. The states are pushing their own increases. That's probably the biggest danger right now.

Medical reform. I don't know how to make health care work, but I know how to make it not to work: "single payer system", i.e. outright nationalization. I lived in such system. And if you believe that USA can make such system work better than USSR, I have some lakes for sale in Minnesota. Any health care reform under the current administration means essentially new (and not small) taxes.

Commodity prices. The picture of the oil futures market is clear: huge index buying, which, when translated into plain English means that funds which lost billions last year in oil futures investments are back in the same game. They (again) think that they can bet on a limited (in their minds) resource when inflation (in some inflamed brains, hyperinflation) makes money useless. The danger is that these guys can run the price of oil up to the levels when they start hurting economy, which is not in the best shape.

Attacks on Wall Street. Yeah, there are greedy people there. I just wonder if there is any place in the world without them. But those attacking Wall Street don't understand that without it, the US economy won't work.

Armed conflicts. Keep a worried eye on Pakistan, North Korea, Iran and Russia. Any significant conflict can damage the economy of the world.

Piracy. Don't underestimate its effect on the world trade.

This list is not complete. But I think these are the biggest dangers for economy. Let's enjoy the stock market but remember the bigger picture.

Comments

[fxmaven:]

European health care systems deliver proven better results for lower costs - because there is a profit motive which was absent in the USSR. But the social benefits which outweigh private greed are a benefit to all - and especially to companies who are not burdened by excessive health care costs. Also, the European social democracies invest in medical and pharma technology for their citizens, rather than military technology and corruption which was the USSR.

The US system of employer funded health care is also failing, so companies who have no interest in their employee's health shed these obligations as fast as they can. The extreme for profit medical system also results in poor or denied care for even insured persons, and the collusion between drug companies and government is criminal.

The US system also scores very low on many world indexes, even though there are groundbreaking success at the top end. But that is no excuse for the greed of doctors, pharma and insurers- the first heart transplant was performed under a single payer system, South Africa.

May 12 06:46 AM

[H. T. Love:]

You forgot the biggest threat of all, predicted and theoretically protected against by the founding fathers of the U.S.A: our own government. The constitution's separation of powers and formation of the three branches of government was a "best effort" to forestall the threat.

Now that we have all three branches that ignore the constitutional limitations, the government is the biggest threat to *everything* we value as a nation.

My humble opinion,
HardToLove

May 12 08:43 AM

[Larry House:]

Thanks, Alex. Caution should not yet be dismissed.

May 12 11:04 AM

[Larrysyr:]

Great insights. I would add terrorism as a wild card threat in your analysis.

I disagree on health care, however. The current system burdens employers with costs their overseas competitors do not bear AND leaves large swaths of lower-paid workers uninsured.

The uninsured represent a huge inefficiency in the system as they crowd emergency rooms rather than seek treatment or preventive care when less sick.

The system also generates huge inefficiencies as health insurers spend large amounts of money figuring out ways to deny coverage to people who actually do have insurance. Providers then spend non-medical time trying to outwit the insurers in order to receive appropriate compensation for services properly delivered.

Single-payer may or may not be the best answer to the problems, but it is a straw man at the moment. The administration is not proposing it, and the insurance lobbies will not stand for it. The administration's proposal is a hybrid system using a governmentally provided option as a backstop.

The current system needs reforming, desparately. Perfection is not in view, but the current situation is deplorable. We may be doing better than the USSR did, but that's hardly a standard for worthy comparison.

May 12 11:21 AM

[Alex Filonov:]

Cetin,

I'm not selling anything right now. By the way, all my trades are reported in my blog. But I can change my mind any time and buy or sell some stock because I feel like that.

About health care reform: may be something should be done. I don't know a solution. I just know that single payer (nationalized) system doesn't work. You get what you pay for. In USSR it was simple: government paid to have more or less healthy working population. It took between 40 minutes and 1.5 hours to get ambulance to somebody over 60, if it came at all. Granted, in Europe governments are under people control, and probably run better systems. But such systems work in interests of governments, not the patients. And as in any planned system, you get deficits and significant waiting times.

May 12 12:39 PM

[Larrysyr:]

How about the 1973 Arab-Israeli war which was followed by the Arab oil embargo which precipitated the first energy crisis which led to the 1970s inflation/recession and bear market?


On May 12 01:02 PM Cetin Hakimoglu wrote:

> Interestingly, middle east conflicts have never had a negative impact
> on the stock market. The war in Iraq & Afghanistan was bullish
> back in 2001-2007. The first Iraq war and Iran Crisis in 1980 also
> didn't hurt the stock market.
>
> ----------------------...
> Armed conflicts. Keep a worried eye on Pakistan, North Korea, Iran
> and Russia. Any significant conflict can damage the economy of the
> world.

May 12 02:44 PM

[Larrysyr:]

I'm willing to be enlightened. What did cause the 70s recession?

There have been 5 significant gas price shocks in the last 45 years - 1973, 1979, 1990, 2005, and 2008. 4 were followed by recessions, 3 of which were (are) very painful. When gas goes up, other spending goes down.


On May 12 03:29 PM Cetin Hakimoglu wrote:

> The oil embargo didn't case the bear market. Correlation doesn't
> equal causation.

May 12 03:56 PM

[CJJ:]

How about risks due to:
A."Journalism and Fact" being replaced with "Opinion, Editorial and Blogging". Nothing against this blogger or bloggers in general, but Blogs are not pieces of journalism. They are editorials and opinions. They should be used to supplement or question ideas not replace facts.

B.The internet age. More of the above. All agendas have an internet cheerleader. Lamenting on the internet is becoming more important and influential than actual activity in the real world.

C.Spread of FEAR. More of the above. Peak Oil, Peak Water, Global Warming, WMD's, Swine Flu, War, Terrorism, Pirates, Religion, etc, etc. You can read daily about what new "thing" is going to destroy humanity.

D.Lack of accountability on an individual level. The individual citizen is sure full of a lot of excuses. A lot of their gripes are nothing new although they will sure as heck tell you it is with their posts on the internet.

---Just an aside to the Constitution comments---These are stale and never actually back up anything---The lack of update to the Constitution over the years is the biggest problem with it. Face it, it was written in the 1700s. Its kind of like having an industry, lets call it Newspapers and then something called the internet is invented and the Newspaper industry doesn't update its business model and it goes out of business.

May 12 11:22 PM

[H. T. Love:]

On May 12 04:57 PM Cetin Hakimoglu wrote:

> But the total GDP remains the same. It's not that consumers are spending
> less overall; they are just allocating more money to gas.

'Splain it to me Lucy! (Thanks to Dezi Arnaz).

If I buy gas or any oil related product, most of the $$ leaves the country. That money is not used to buy other products, some made here. Some folks get laid off, they have no money to spend, causing other layoffs, etc.

This seems to be a reduction in GDP to an ignorant person like me. Further, businesses pay more for energy, leaving less for payrolls, investment, etc. Another reduction in GDP.

All offset by the *huge* inflation we experienced during that '70s period. Having lived through it and seen the unemployment, inflation, closed gas stations and long lines, I can't fathom how the GDP would be considered the same.

HardToLove

May 16 12:18 PM