For several months Fed Chairman Ben Bernanke has been assuring Congress - and by extension, investors - that the Fed stands ready with ammunition to re-stimulate the economy "if it becomes necessary."
It has become necessary.
In each of the last two summers the Fed waited until the economic recovery had stumbled near the point of sliding into recession, and the stock market correction was close to crossing the 20% line into a bear market, before coming to the rescue (with QE2 in 2010 and then "Operation Twist" last summer). And it lucked out. Both times the economy picked up for another six months before rolling over again. Both times the stock market recovered and resumed the bull market that has been in place since early 2009.
But the global problems of the last two summers were picnics in the park compared to what is going on this year. Sure, both times the eurozone debt crisis had reared its head again, and there were worries about how much it would cost to bail Greece out, and how much it would cost to put a ring fence around the rest of the eurozone.
However, this year we are witnessing a train-wreck of historic proportions taking place in the eurozone, Greece expected to fall off the tracks and tumble clear out of the eurozone, with who knows what results to the European financial system, with Spain's train following and now potentially piling into the wreckage, while economically the 17-nation eurozone is already clearly in a worsening recession.
In the last two summers, the worries from Asia were merely that China and India faced rising inflation, and in their efforts to bring it under control might slow their booming economic growth, which could have a marginal effect on economies elsewhere.
This year, Asia's problems are much worse. The slowdown in China, the world's second largest economy continues to worsen. Its manufacturing output has declined for seven straight months, with its HSBC PMI now running under 50, indicating recessionary contraction. India reported this week that its economic growth slid to its lowest level in nine years.
In South America, Brazil, the world's 7th largest economy, cut its official interest rates to a record low this week in an increasingly desperate effort to re-stimulate its slowing economy.
And then there are stock markets, which tend to lead the economy by six to nine months. They sure don't seem to like what they're seeing down the road.
While in the U.S. the S&P 500 has declined less than 10% since mid-March, global markets outside of the U.S. have been in serious corrections. The stock markets of the world's next 11 largest economies have plunged an average of 18.4% and show few signs of bottoming. Several have exceeded the 20% decline that defines entry into a bear market.
Meanwhile, U.S. economic reports have been grim for several months, and the additional dismal reports this week do not encourage the thought that the U.S. recovery can get back on track on its own.The week's reports included economic growth for the first quarter being revised down to just 1.9%, from the previously reported 2.2%. Consumer Confidence fell in May in its biggest monthly decline in 8 months (versus forecasts that it would rise). The Pending Home Sales Index (contracts for future home sales) fell 5.5% in April, its first decline in 4 months. The closely watched Chicago PMI, which measures business conditions in the Fed's Chicago region, fell to 52.7 in May from 56.2 in April. Any number above 50 indicates that businesses are still expanding, but it was the third straight monthly decline, clearly headed in the wrong direction. And the national ISM Mfg Index dropped to 53.5 in May from 54.8 in April.
On Friday, the Labor Department released a bomb of a jobs report. Only 69,000 new jobs were created in May, versus already pessimistic forecasts of 150,000. And perhaps worse, as it provides further evidence that the economy has been weaker even than feared, the previous report for April that 115,000 jobs had been created was revised down to only 77,000.
For the Fed, as the U.S. economic recovery stumbles again this summer, that's a much uglier backdrop than in the slowdowns of the last two summers.
It makes it much less likely the Fed will luck out if it waits until the last minute to come to the rescue this time. In fact there's no assurance that the Fed even has firepower that will work this time. But at least an effort might pick up confidence enough to make some difference.
Observers believe that stimulus needed to reinvigorate China's economy is on hold until the Chinese government leadership changes in October. But, analysts expect the European Central Bank to step in with renewed stimulus efforts next week.
The Fed's next FOMC meeting is June 20. Expectations have been for it to take no action. But this week's economic reports and further plunges in global stock markets should change its mind. It's time for the Fed to act.
In the interest of full disclosure, I don't really mind what's going on. My indicators came off their October buy signal in mid-February, and I and my subscribers took our profits, and we currently are 40% in inverse etf's (SH and RWM), and 60% in cash. But, it's not as much fun to make profits from the downside when many are experiencing losses again.