Between a Rock and a Hard Place

Includes: DIA, DOG, IVV, QQQ, SH, SPY
by: Jerry Slusiewicz

Everyone knows that being between a rock and a hard place is not a good place to be. That is where the market is right now. We continue to have terrible news in the housing sector. There is no general economic recovery as of yet. Jobless claims continue to mount, while net new jobs are not being created in a significant enough number to even sustain the population growth (approximately 150,000 net new jobs per month needed). By far the majority of economic reports for May, June, July, and now August, have been worse than forecast. That includes home starts, home sales, home-builder confidence, retail sales, auto sales, consumer confidence, durable goods orders, manufacturing, jobs, etc. Yet the market rallies or barely goes down on these bad reports. What gives?

It seems that bad news is good news right now. Market investors are hoping that all this bad news will lead to more government stimulus. Pundits talk about more stimuli as if it was a good thing. Our European partners are telling us to be more fiscally responsible or we will be the next Greece. But investors are hopeful that another round of quantitative easing will be announced by the Fed next Tuesday and there is hope for a mortgage bailout for those one in five households with a mortgage that is underwater by August 17th. Now if you have been prudent on your investments and spending the last decade or so and find yourself without any bailout potential (except to maybe write the check for these bailouts in the form of higher taxes) don’t worry because the government is telling us that you will benefit because this will stem the continuing downfall in home prices. Really?

After trillions of dollars of global government stimulus the markets are still down 30% from their highs three years ago. Housing is down by about the same percentage. Jobs are scarce and we continue to reward bad behavior or just plain bad luck in the name of ‘for the good of all.’ St. Louis Fed President James Bullard said recently that, the U.S. is closer to a Japanese-style deflation outcome today than at any time in recent history. That hit the head on the nail better than Fed Chair Ben Bernanke’s recent “unusually uncertain” assessment of the economic outlook. Japan has been performing various forms of government intervention for two decades and they are still in a troubled environment.

So what happened to capitalism? What happened to free enterprise? What happened to the concept that the markets will reward the winners and the companies that don’t manage well, or produce products that aren’t needed or overpriced, or did a heap of bad loans would perish. That worked for us for over 200 years. Now the markets appear to be cheering for more government intervention. I never thought I would see this day. I for one would like the markets to decide the winners and the losers. Free enterprise might be a short term more painful path – but it would be quicker and the economy would surely regroup much quicker. Don’t believe me – look at Japan! That is what we should not do – yet we are following their path.

Intervention is already here. These markets do not want to go down on every piece of bad news. Let the markets clear the air. Volume has traded at the lightest of the year recently. It is so light that it is lower than levels from not only this year but most every year’s light summer volume has not been this paltry. I think that the markets have become a controlled environment. It’s as if some major investors are saying. “Don’t worry about all the bad news; we’ll hold it up for now, because help is on the way (in the form of more intervention).”

Granted earnings season was pretty good, relative to expectations. But when those expectations are lowered dramatically, sometimes it becomes easy to beat those reduced levels. To be fair, some companies are actually doing better than before the recession began – but those companies are few and far between. Consumer credit is still shrinking and higher taxes starting in January is just around the corner. The consumer is needed to drive the economy. Savings is also up causing another crimp in spending.

I remember when the following old saying was a joke. Next week Tuesday could be very telling when we hear some variation of it: “Hi - we’re from the government – we’re here to help!” Let’s all hope it all works out – but I for one am not in favor of any more of this kind of assistance. I wish more people felt the way I do and believed we should just let the chips fall where they may and then let’s band together to pick up the pieces. But the likely hood is we’ll just add more scotch tape to the crumbling dam. I hope I am wrong for the good of us all!

Disclosure: The author owns only SLV and holds mostly cash as he awaits the next significant market move.