A Lot of Caveats to This Recovery Scenario

One of the big questions for investors these days goes something like this: “Are we out of the woods yet; is a 50% rally in stocks warranted at this stage?” The consensus view seems to be “Yes.” But going through my list of daily reads, I was reminded of some the risks that may be worth keeping in mind. Here is today’s round-up:

The U.S. has failed to fix the problems of its banking system, notes Joseph Stiglitz, the Nobel Prize-winning economist. The “too-big-to-fail banks” have become even bigger; the problems are worse than they were in 2007 before the crisis, he told a reporter on Sept. 11 (or thereabouts).

Chinese stockpiling of commodities could taper off and remove a prop supporting commodity prices.

U.S. tariffs on Chinese tires and China’s likely retaliation in the form of tariffs on U.S. chickens and car parts could signal the start of a trade war; the longer China and U.S. refuse to take a co-operative approach to addressing lingering structural imbalances in the world economy (i.e. undervalued yuan and unbalanced growth), the more they risk failing to achieve a sustainable recovery.

U.S. bank credit continues to contract at an alarming rate, down $200 billion since the end of July to the beginning of September. Credit deterioration tends to lag but the annualized drop of 12% over the past 13-weeks has been unprecedented. “The credit system is still … broken,” writes David Rosenberg of Gluskin Sheff.

Loan-loss provisions at banks are piling up and likely to get worse according to Moody’s.

Comments

[User 353732:]

If you ignore the ten minor items listed below, then no doubt there will a recovery, a boom even; already underway; and the great economic compression was really just a brief, mild recession and the domestic and trade deficits of the US mere transient abnormalities-----or so Wash Dc, Wall St and the MSM are beginning to have us believe.
1. The Middle class and even the Lower class has much less money to spend than a year ago ; 90% of Americans are poorer to much poorer than a year ago and their confidence in their future is substantially lower than a year ago
2. Big companies announce large layoffs every day and there is hardly news of much new hiring by large companies
3.Credit availability and terms continue to deteriorate for ordinary Americans and for most small and medium business
4. The CRE calamity still lies mostly ahead and the residential real estate disaster is still unfolding,as evinced by the foreclosure rate
5. Financial markets are more massively and overtly manipulated than a year ago
6.Global trade continues to decline and global shipping is in a depression
7. Tax, regulatory and Govt interference , incompetence and coerced resource misallocation risks to investors are cascading and compounding in many parts of the world
8. National indebtedness is rising at a rate not experienced in American economic history while the National ability to service this debt is falling fast
9. The fiat dollar is becoming an object of global anxiety and derision
10. The US Govt is now the largest generator of economic and financial risk and fear in the world

Sep 15 06:35 AM

[CautiousInv...:]

1) Stubbornly high unemployment
2) Massive fiscal imbalances
3) Financial delevering through reduced consumption and increased savings
4) No new industries to support growth in employment
5) Likely explicit and implicit tax increases
6) Increased government regulation
7) Failure to deal with existing or future toxic assets
8) Growing foreclosures
9) Rising bankruptcies, both personal and business
10) Contracting international trade and growing protectionist sentiment
11) Indications contractions in money multiplier is offsetting growth in the money supply
12) Loss of trust

Sep 15 07:25 AM

[MikeD71:]

Though I don't believe China will develop into a major problem, (I think they are merely drawing a line) my first thought was what I believe my fellow posters above are eluding to. This doesn't even begin to touch on the adversity facing us, and the consequences of actions already taken.

Sep 15 08:13 AM

[tunaman4u2:]

How about the general lack of NEED to grow...
Here north of Boston on Route 1 we have 5 pharmacies, 8 Dunkin Donuts, 12 banks, 4 pet stores, 5 furniture stores...

Do we really need to grow in housing and construction? Even if printed money makes it into the consumers hands we have a saturation point

Sep 15 08:33 AM

[Ed Zimmer:]

We seem to have become adept at putting things off until they grow from the molehill into the mountain of toxic waste and then we continue to try and ignore it, rather than roll up our sleeves and do something about it. MSM doesn't want to devote the airtime to looking deeper into the numbers that are being rolled out showing "improving" conditions, they just take the press release and find people that will verbalize it for them. Where is 60 minutes when you need them? A minute-thirty package doesn't begin to scratch the surface of what for contributors on SA is a massive exploratory effort. I agree that there are a lot more clouds in the forecast and a pretty good chance of severe storms ahead.

Sep 15 09:18 AM

[robert.b.fe...:]

Our situational awareness seems to be at an all time low. MSM is bought and paid for by nefarious people who do not have our best interests in mind. They are completely invested in team Obama and therefore will speak no evil. The deep pocketed group behind the curtain is actively trying to destroy our economy and currency as they have done before in the U.K. and elsewhere. Good luck all and watch your back. As usual keep your traveling stops tight and your stash of cash in gold.

Sep 15 09:38 AM

[SeeTheLight:]

Let me check my screens...

Dollar Up? - check
Gold Up? - check
Equity Markets Up? - check
Oil Up? - check

Nothing wrong here, Just step right up, Everyone's a winner, I just knew I was at the circus.

Good Luck all

Sep 15 11:21 AM

[TCK:]

When Bush was in office the unemployment rate was 6% and we were told it was Great Depression 2.

Today the unemployment rate is 10% ( or more ) and rising and we are told it is a lagging indicator and the recovery has begun.

Brilliant !

Sep 15 11:37 AM

[The Geoffster:]

"Other than that, Mrs. Lincoln, how did you enjoy the play?"


On Sep 15 06:35 AM User 353732 wrote:

> If you ignore the ten minor items listed below, then no doubt there
> will a recovery, a boom even; already underway; and the great economic
> compression was really just a brief, mild recession and the domestic
> and trade deficits of the US mere transient abnormalities-----or
> so Wash Dc, Wall St and the MSM are beginning to have us believe.
>
> 1. The Middle class and even the Lower class has much less money
> to spend than a year ago ; 90% of Americans are poorer to much poorer
> than a year ago and their confidence in their future is substantially
> lower than a year ago
> 2. Big companies announce large layoffs every day and there is hardly
> news of much new hiring by large companies
> 3.Credit availability and terms continue to deteriorate for ordinary
> Americans and for most small and medium business
> 4. The CRE calamity still lies mostly ahead and the residential real
> estate disaster is still unfolding,as evinced by the foreclosure
> rate
> 5. Financial markets are more massively and overtly manipulated than
> a year ago
> 6.Global trade continues to decline and global shipping is in a depression
>
> 7. Tax, regulatory and Govt interference , incompetence and coerced
> resource misallocation risks to investors are cascading and compounding
> in many parts of the world
> 8. National indebtedness is rising at a rate not experienced in American
> economic history while the National ability to service this debt
> is falling fast
> 9. The fiat dollar is becoming an object of global anxiety and derision
>
> 10. The US Govt is now the largest generator of economic and financial
> risk and fear in the world

Sep 15 12:05 PM

[Wildebeest:]

Chinese stockpiling started to taper off months ago yet metal prices continue to rise (inexplicably? ...dollar weakness?). US imports from China are down significantly relative to 2008 numbers. Presumably if Chinese production slows due to lower exports, metals will eventually correct in the face of dwindling demand.

Sep 15 02:09 PM

[Mad Hedge F...:]

aac The dinosaurs of the market, like myself, are collectively being struck by the similarity of the current stock market and that of September 1987, just before the one day, 25% plunge in the Dow. That was when I tied to buy stock with the index down 300 from a payphone in Paris, only to have the trader at Morgan Stanley burst into tears and smash the phone down on the desk (remember that David G.?). My new guru is Gluskin Sheff’s strategist David Rosenberg, who says that stocks have already discounted two years of recovery and now carry a lot of risk. It is priced for 40% EPS growth and a “V” shaped recovery, which we have zero chance of getting. GDP this year will come in at negative 2.5%, and will claw back a listless 1-2% rate in 2010. Stocks are discounting a 4% GDP growth, compared to only 2% for bonds, so he’d much rather own those. With a deflation rate of minus 2% and high yield returns of 12%, junk now offers a 14% inflation adjusted yield, not bad. The secular 25 year bull market in credit expansion is over. Rent still accounts for a third of the CPI, and they are falling for the first time in 17 years. Sure, we’ll see ephemeral sugar highs like those for cash-for-clunkers and the tax credit for first time home buyers. But at best, it will only add up to a series of small “W”’s, or what I refer to the as the “square root” shaped recovery. With the price of everything stretched, you better start reeling in some of that risk.

Sep 15 02:22 PM

[cyclingscholar:]

Not only that, 6% was national disgrace which ignored discouraged workers...whereas 10% unemployment under the Anointed One is 'funemployment.'


On Sep 15 11:37 AM TCK wrote:

> When Bush was in office the unemployment rate was 6% and we were
> told it was Great Depression 2.
>
> Today the unemployment rate is 10% ( or more ) and rising and we
> are told it is a lagging indicator and the recovery has begun.<br/>
>
> Brilliant !

Sep 15 03:11 PM