Stimulus Can't Save the Stock Market

By now we all know that governments around the globe have implemented the largest single stimulus plan in the history of economics. There is no doubt that the global stimulus plans have been highly effective. What is less certain is how much of the underlying structural problem we have actually solved with these programs. Let’s not forget – debt got us into this mess and much like the Great Depression and Japan, it is unlikely that short term stimulus will solve these long-term structural debt problems. In fact, you could argue that much of what governments have done have actually made the problems worse. Unfortunately, we haven’t solved the problem of excess debt and all the stimulus does is prolong and delay the eventual day of reckoning with this mountain of debt. Comstock does a wonderful job of detailing these long-term issues.

Strategists at Morgan Stanley Europe are still quite optimistic that the stimulus plans will continue to inject equity markets with life. They do a nice job of connecting the dots between the short-term effects of this stimulus and the long-term structural problems that still exist. In essence, we’ve stimulated the markets in the near-term, but kicked the can down the road:

We have a positive bias to equities in the near term and believe in range-bound markets for years to come. We believe downside risks to equities are limited until this new growth (and earnings) cycle ends, probably when rates / inflation go up by too much, or when there is a negative growth surprise in China. Our economists expect the 1st Fed hike by mid-10, and expect 10% China GDP growth in 2010.

Post the rebound rally, we expect some sort of trading range for years to come because of the structural problems of the financial sector and household deleveraging as well as the poor state of government finances. We expect MSCI Europe to be in a broad trading range for years to come, between 600 and 1200 (Latest value 1046). Timing-wise, we do not expect material fiscal tightening and/or significant spending cuts in the next 12-18 months, but the 95/96 VAT hike in Japan highlights the risks of a policy mistake. The implication would clearly be negative for growth and equities, as evident in Japan. At the sector level, we would highlight A&D, Building & Construction, Bus & Rail, Healthcare and Software as the biggest potential losers from a significant cut in government spending.

The accompanying chart shows just how beneficial the Japanese stimulus was in the short-term. Ultimately, it proved to solve none of the problems that actually caused Japan’s financial crisis. The stock market, obviously, continued to suffer over the long-term:

David Rosenberg at Gluskin Sheff notes the extreme effects of the stimulus and the unlikely long-term impacts:

While the U.S. economy (global, in fact) looks like it is emerging from recession, the reality is that the patient is so loaded up on medication that it is next to impossible to conduct an accurate assessment. All we can ascertain is that while a -1.0% real GDP growth rate in 2Q doesn’t look so bad, and sequentially is a fabled green shoot, the reality is that without all the doses of fiscal stimulus, U.S. GDP would have contracted at a 6.0% annual rate. We see from the folks at Goldman Sachs that the dramatic initiatives this quarter in the auto and housing sectors are making the difference between a 0% GDP performance that we would otherwise see and the 3%+ GDP print we are likely to see.

Investors do have a right to know what the economy does look like organically, and it will probably get a chance to have a peek in the fourth quarter, where the odds of a 4Q 2002-style relapse are better than 50-50, in our view. The consumer needs steroids on a constant basis — without them, auto sales head back to 8 million units (as they are seemingly doing now that cash-for-clunkers is history). And, we can see that MasterCard Advisors’ SpendingPulse data found that sales at apparel and specialty stores were 6.6% below depressed year-ago levels in August — maybe we need a cash-for-clothing program too.

We’ve administered a short-term solution to a very long-term problem. Unfortunately for the global economy, the only solution to our problems is patience and prudence. We’ll get through this, but no short-term cure is going to fix the underlying structural debt problems that continue to plague the consumer and the global economy. The global economy is still addicted to debt and leverage. It is unlikely that we’ll solve these problems until we admit we have a problem, bite the bullet and begin focusing on the real problems that got us in this mess to begin with. Printing more dollars and encouraging more reckless lending is not part of that solution…

Disclosure: No positions

Comments

[Roger Knights]

"The global economy is still addicted to debt and leverage. It is unlikely that we’ll solve these problems until we admit we have a problem, bite the bullet and begin focusing on the real problems .... The only solution to our problems is patience and prudence."

Paging Cotton Mather!

2009 Sep 04 05:33 AM

[User 353732]

The stimulus has succeeded in :
1. Diverting scarce national resources to low or negative value added job destroying but , politically favored , and enormous,industrial and financial companies. Wall St approves.
2. Creating another stock market bubble which allows Wall St to recapitalize and then allows Inside money to exit as ignorant and desperate Outside money comes rushing in borne on the vapors and lies of the Govt and Wall St. Again Big Money wins while Little money loses. Wall St approves
3. Turning financial markets into manipulated trading machines that benefit the few at the expense of the money. Wall St approves
4. Continuing to foster and amplify the delusion amongst scores of millions of Americans that Govt is a magic, bottomless, wishing well external to the economy and civil society. From this well endless bounty can flow: it is no longer necessary to work, save, learn or even think. All decisions and responsibility can be outsourced to the genial genie that presides over the magic well.
Just believe in the magic well, adore the genie and borrow, consume and gratify your digital addictions.....the laws of finance, economics and nature have all been repealed.
Ignore vast continuing job losses, great and systematic wealth destruction, debasement of the currency, compressing business revenues and profits, and lack of access to reliable and affordable credit for average people and ordinary business. All that is old, vexing, economics that the genie of the magic well has made obsolete.
Just drink the waters of the Stimulus, close your eyes, lie down and dream away your jobs, your house, your community,your liberty and your Nation. None of these are needed any more in the paradise of The Stimulus. Wall St approves.

2009 Sep 04 05:50 AM

[Deven Patel]

Agree with your statement that the solution has been deferred to "a later date", but current laws of economics will keep us in these cycles. We have always just been fending off inflation / deflation by adjusting money supply and interest rates amongst others .

Roger, "patience and prudence" will also not solve the problem, but merely defer it to the "later date" for the "next president":

Solution in my perspective does not exist using current economic models. The solution will only come about once we start re-defining our basis of Money.

2009 Sep 04 05:52 AM

[jimboy]

Very good article and excellent comment from user 353732 (wouldn't a name like Fred be easier?). My feeling is that cheerleaders for this phoney recovery will have plenty to shake their pompoms at for the rest of the year but reality will bite in 2010 and quite hard. The point about a stimulus is that it is supposed to stimulate something to take its place as a driver of the economy - a boom in corporate investment, exports, construction or consumer spending that doesn't require 4,500$ government bribes. I'm sure all of these things will perk up but not enough to prevent things sliding back to square 1 as soon as the stimulus effects fade.

2009 Sep 04 06:13 AM

[SeeTheLight]

This follows very closely what I believe. That the stimulus is propping up a global zombie economy similar to Japan. Can the markets continue to rally while the stimulus continues to go full blast? Of course, but even MS Europe's bullish outlook shows a 71% bullish retracement, of which we've already accomplished over 55%! That's followed by another 25% correction. How is that good risk reward at these levels?

Already China has toyed with removing stimulus (via credit tightening) and the response? A 25% drop in Shanghai over a two week period. The US consumer is punch drunk and on the mat. Any new discussion of additional stimulus will be political suicide, so the question is how long can the current stimulus prop up the market? I don't have the answer but I want to be on the sidelines when the medicine starts wearing off, because it is not going to be pretty.

I just keep looking at the risk / reward and saying is it worth chasing that 10-15% upside when the downside is at least as much or much more? Until then I remain in cash / gold / silver and some UUP just in case we get a flight to safety. Of course I will continue to trade equities judiciously based on individual risk/reward merits too, but in small amounts.

Good Luck all

2009 Sep 04 06:36 AM

[Schweizer]

The $787B "stimulus" was simply money the feds borrowed to backfill tax revenue drops experienced by state and local governments. It temporarily saved thousands of government jobs that should have been scrubbed-out like private jobs have, and allowed some already planned transit projects to continue rather than be halted. Very little was stimulative - just raw spending.

And if you look closer, there is also a strong social engineering overtone to where the money was mandated to be spent. Obama used the economic crisis to fund his socialistic agenda. Despicable.

People should not expect this money to jumpstart anything other than outrage about how Washington behaves.

2009 Sep 04 07:14 AM

[rick12345]

I'm sick of all this left wing BS. Eight years of Bush policy have created this mess, and now suddenly it's Obama's fault for trying to introduce more transparency in an attempt to stop these criminals from reoffending. Yeah, we'd be in a much better position had the Government alllowed the whole banking and finance industry to collapse. Think about the joys of a seriously depreciated dollar and the resulting inflation brought about by massive foreign investment. Japan allowed their banks to fail in the 90's and now they have the largest level of debt in the industrialized world. Seriously, some of you just don't get it.

2009 Sep 04 07:42 AM

[John Bowman]

Unfortunately so true. The average short-sighted American will connect the dots and believe this ongoing fairy tale.

I hope you don't mind if I post this summary to another forum I belong to.


On Sep 04 05:50 AM User 353732 wrote:

The stimulus has succeeded in :

Continuing to foster and amplify the delusion amongst scores of
millions of Americans that Govt is a magic, bottomless, wishing well
external to the economy and civil society. From this well endless
bounty can flow: it is no longer necessary to work, save, learn or
even think. All decisions and responsibility can be outsourced to
the genial genie that presides over the magic well.

Just believe in the magic well, adore the genie and borrow, consume and gratify your digital addictions.....the laws of finance, economics and nature have all been repealed.

Ignore vast continuing job losses, great and systematic wealth destruction, debasement of the currency, compressing business revenues and profits, and lack of access to reliable and affordable credit for average people and ordinary business. All that is old, vexing, economics that the genie of the magic well has made obsolete.

Just drink the waters of the Stimulus, close your eyes, lie down
and dream away your jobs, your house, your community,your liberty and your Nation. None of these are needed any more in the paradise of The Stimulus. Wall St approves.

2009 Sep 04 07:50 AM

[Mr. Yukos]

I'll sum of all of your idea's in three words, threee words that I also agree with: We Are F*cked.

2009 Sep 04 08:21 AM

[Old Trader]

rick,

This goes back further than 8 years of GWB; BOTH parties are culpable, and no, the Japanese did NOT allow the banks to fail in the 90's, which was a big part of the cause for the duration of their problem(s).


On Sep 04 07:42 AM rick12345 wrote:

> I'm sick of all this left wing BS. Eight years of Bush policy have
> created this mess, and now suddenly it's Obama's fault for trying
> to introduce more transparency in an attempt to stop these criminals
> from reoffending. Yeah, we'd be in a much better position had the
> Government alllowed the whole banking and finance industry to collapse.
> Think about the joys of a seriously depreciated dollar and the resulting
> inflation brought about by massive foreign investment. Japan allowed
> their banks to fail in the 90's and now they have the largest level
> of debt in the industrialized world. Seriously, some of you just
> don't get it.

2009 Sep 04 08:55 AM

[TCK]

The government solution to a failed "bubble" economy is to create another bigger bubble. Government also perpetuates the myth that inflation is good and deflation is bad.

Inflation only helps the the government idiots that want to buy votes through the philosophy of more spending and larger debt.

2009 Sep 04 09:06 AM

[djc]

Nobodys saying the mess is Obamas fault -- Obama is just carrying on the tradition.

He campaigned on change we could belive in, and a basically centrist stance -- then took a hard left turn when he got in office, and has paid off many of his various constituencies/supporters in teh guise of stimulus.

Please. Theyre all despicable crooks. Obama is jsut another in a long line. hed be a great used-car salesman though !

2009 Sep 04 09:18 AM

[Towgunner]

Agreed,

actually your other posts have been very interesting a la elitist running the show etc. Please expound on your thoughts regarding the decline of the US. I am curious to know. Thanks in advance. TG


On Sep 04 05:50 AM User 353732 wrote:

> The stimulus has succeeded in :
> 1. Diverting scarce national resources to low or negative value added
> job destroying but , politically favored , and enormous,industrial
> and financial companies. Wall St approves.
> 2. Creating another stock market bubble which allows Wall St to recapitalize
> and then allows Inside money to exit as ignorant and desperate Outside
> money comes rushing in borne on the vapors and lies of the Govt and
> Wall St. Again Big Money wins while Little money loses. Wall St approves
>
> 3. Turning financial markets into manipulated trading machines that
> benefit the few at the expense of the money. Wall St approves
> 4. Continuing to foster and amplify the delusion amongst scores of
> millions of Americans that Govt is a magic, bottomless, wishing well
> external to the economy and civil society. From this well endless
> bounty can flow: it is no longer necessary to work, save, learn or
> even think. All decisions and responsibility can be outsourced to
> the genial genie that presides over the magic well.
> Just believe in the magic well, adore the genie and borrow, consume
> and gratify your digital addictions.....the laws of finance, economics
> and nature have all been repealed.
> Ignore vast continuing job losses, great and systematic wealth destruction,
> debasement of the currency, compressing business revenues and profits,
> and lack of access to reliable and affordable credit for average
> people and ordinary business. All that is old, vexing, economics
> that the genie of the magic well has made obsolete.
> Just drink the waters of the Stimulus, close your eyes, lie down
> and dream away your jobs, your house, your community,your liberty
> and your Nation. None of these are needed any more in the paradise
> of The Stimulus. Wall St approves.

2009 Sep 04 10:14 AM

[Snitzer]

The future belongs to the quick and nimble, those who adapt to what is rather than what should be, and to those who can chart a course through the vagaries of probabilities and potentials instead of being frozen in rigid postures of "right" and/or "wrong". Going forward (I like that phrase) there will be companies/stocks that gain value and pay dividends (keepers) and those that slide into a trading range and become cannon fodder stocks. On any given day any security can be either/or so one must be, at all times, flexible.
Good hunting.

2009 Sep 04 10:41 AM

[Tony Petroski]

Mr. Capitalist opened the article with:

"By now we all know that governments around the globe have implemented the largest single stimulus plan in the history of economics. There is no doubt that the global stimulus plans have been highly effective."

The rest of the article demonstrates why the stimuli weren't effective.

Mr. Capitalist wraps with:

"We’ve administered a short-term solution to a very long-term problem. Unfortunately for the global economy, the only solution to our problems is patience and prudence. We’ll get through this, but no short-term cure is going to fix the underlying structural debt problems that continue to plague the consumer and the global economy."

Pragmatic. The points in your article are generally correct. I only wish to point out that "patience and prudence" is not the cure for the global economy. Actually, Americans should mind their own business, get their own economy humming and then worry about the globe.

Growth and development is the key to global recovery. The Keynesian stimulators always assume that production is out there for the taking if we can only "stimulate" demand. Actually, demand is omnipresent, will never diminish, and is regulated by supply. You consume what you produce.

The labor statistics today said that employment in the mining industry was down by 5000 (or was that 15,000?). And yet we face all sorts of increased costs for electricity, commodities, etc. Wouldn't sending a few more miners into the mine help with our problems along with drilling for more oil, extracting and refining more of it, building cars that free people want (rather than building cars the government wants them to want)?

Our problem today is practical (I've outlined a few above) and political. The goose that laid the golden eggs is taking flight. We've got to get back to production and that means making things more congenial, predictable and profitable for the producer. We've had our fling with redistribution, spreading the wealth around and government-led stimulus.

2009 Sep 04 10:43 AM

[Foreigner]

Good article. I’d like to read the author’s opinion on how he envisions the US is going to get out of this mess. The US is taking on huge new debt, but not for “productive investment” — rather, a lot of it is going to buy non-productive assets like the cash-for-clunkers program, and for rebates to stimulate more consumption. Analogous to a business, the US is borrowing to maintain its level of expenses, not to invest in factories or for R&D to develop new products. This is very worrisome to me. Over the last 20, 25 years the US has lost a lot of its manufacturing base, and competitors from Brazil to China are stealing its industries’ market shares. The car industry is a perfect example. Even in the US, foreign brands have taken 56% of the market. People around the world no longer drive American cars.

I remember in the 90s how we anticipated Intel’s earnings release, to read how fast its new chip would be. Modem speeds doubled every quarter or so. Fiber optics were developed. Cellphones, satellite TV. Viagra! Since 2000, I have not felt much technological progress or innovation from American businesses. It was all financial services and “financial engineering”. It all went up in smoke. That source of revenue from the rest of the world is now gone.

If I were a creditor of the US government, I’d be worried sick. Again, like a business, the US’s expense lines keep growing, but its revenue line is stagnant. The products and services it sells to the rest of the world are seeing fierce competition. It refuses to lower costs and it’s taking on more debt to keep its expenses going. If the country were a business, you could call it a business on the road to extinction.

I have not heard a single politician or business leader talk about how America must reinvent itself. The country needs a new “business plan”, in business jargon. Which products and services will it sell to the rest of the world to generate the top line it needs to sustain its expenses?

2009 Sep 04 11:55 AM

[bob adamson]

This article sets up a straw man and then wins a sham battle. Massive government stimulus was never the sole answer to the ills of the recession; it was simply the only practical means available to temporarily filling a multi-trillion dollar void created when the market value of derivatives and other leveraged debt collapsed. Sure, loose credit practices created the bubble which led to that collapse but allowing a total, global banking collapse and credit freeze would go well beyond ‘creative destruction’ and simply cause chaos. Now that the economy is stabilizing, albeit reliant on the aforesaid stimulus, we need to begin the long and difficult process (one that does not re-ignite the collapse) of rebuilding the fiscal, banking and industrial models on a sound and sustainable basis. There are clearly several necessary stages to this process (each requiring its own set of fiscal and monetary components) and the article telescopes all this unhelpfully.

2009 Sep 04 12:27 PM

[bob adamson]

Since the current economic crisis came to a head last year there has been an important division between the centre left and centre right on how we should respond to the deep downturn and where we should ideally be headed coming out of it. The left wants to protect employment, incomes and employment benefits and rebuild public infrastructure and social and environmental programs to both maintain and rebuild better balance (economic, social and ecological) and social equality; these being the measures of a healthy and sustainable economy and society. The right wants controlled ‘creative destruction’ of wasteful public and private social and economic institutions and accelerated shifting of economic focus to the healthiest sectors of the private sector promoted by deregulation and a lowering tax and public debt burden coupled with a greater embrace of globalization; these being the way to greater growth and individual freedom. This division was temporarily masked in the third quarter of 2008 and the first of 2009 as all embraced the need for short term stabilization of the banking sector and shock stimulus of consumption. Now that (perhaps prematurely) it appears that the crisis phase has past, the right increasingly calls for a return to their core agenda while the left continues to see the need for both short term stimulus and a longer term drive to achieve the balance and equality described above. This debate is now front and centre.

In my view, those that call for a return to strict fiscal restraint now are simply inviting a deeper recession (and, paradoxically, even greater government deficits). Now is the time for continued, well targeted stimulus by deficit spending by national and state governments until the recovery is clearly established on a sustained basis. Now is also the time to develop and implement sound regulation of investment banking and finance to better balance stability and enterprise. Farsighted re-evaluation of some of the time-honoured business models is also necessary. When true recovery is achieved, orderly government pay down of the accumulated public debt should become a priority.

In short, the task of public policy is to appreciate and respond effectively to the fact that there are different roles for government spending at different stages of the business cycle and extremes in that cycle are dangerous and need to be reasonably curtailed.

2009 Sep 04 12:35 PM

[TheFounder]

I have no doubt that the analysis provided in this article is quite accurate and realistic. I am planning to make a bet on a second big leg down in the global stock market. There seem to be a broad consensus that this is very likely. The big question is the timing. I would not be surprised to see the S&P reaching 1200 later this year before reality kicks in. So patiance is important here.

All that is not to say that the stimulus was a mistake or was done sub optimally. It was a necessity and significant leadership was demonstared by Ben and his team. Nevertheless, the problems are to deep to be completely cured by any stimulus plan.

2009 Sep 04 02:40 PM