A Mirage Called the Stock Market

A Mirage Called the Stock MarketWhile an economic slowdown is looming over the global economy, no one seems to care, as stock markets continue to reach new record-highs—giving investors false hopes of economic growth. But how long can this mirage actually last?

The economic slowdown in the global economy I’m talking about is a worldwide pullback in growth. Take India as the first example. According to India’s Central Statistics Office, the Indian economy is growing at five percent—its slowest pace in a decade! The director general of the Confederation of Indian Industry was quoted late last week as saying, “With no visible pick-up in any key levers of the economy, the situation remains grim.” (Source: Mallet, V., “India records slowest growth in a decade,” Financial Times, May 31, 2013.)

China, the second-biggest economic hub in the global economy, is facing headwinds, as its economy is growing at its slowest pace since 2009. Japan has undergone the largest per-capita quantitative easing program in history (its debt-to-gross domestic product [GDP] is running above 200%), and that country is back in a recession.

The unemployment rate in the eurozone was reported last week at 12.2% for April. It was 12.1% in March. The unemployment rate in Spain stood at 26.8 % and in Portugal, it stood at 17.8%. (Source: Eurostat web site, May 31, 2013.)

And industrial metal prices, which are supposed to be a leading indicator, are all heading downward.

Take a look at the chart below of the Dow Jones-UBS Industrial Metals Index. This index provides an overall picture of the performance of industrial metals.

$DJAIN Dow Jones-UBS Industrial Metals Index stock chart

Chart courtesy of www.StockCharts.com

Since the beginning of the year, this industrial metals index has declined about 14%. And, as it has been well-documented in these pages, copper stockpiles are increasing, up significantly since the beginning of the year.

But large nations facing economic slowdowns and industrial metal prices facing sell-offs aren’t the only indicators flashing warnings for what’s ahead in the global economy. Other key indicators like the Baltic Dry Index are suggesting demand is bleak and depressed in the global economy.

I can’t stress this enough, dear reader: the global economy witnessing an economic slowdown means difficult times ahead for us here in North America—it’s a major global economy now, where what happens in one part of the world has ramifications for other countries worldwide.

The U.S. economy is broken. According to a survey conducted by Pew Research, 24% of Americans said in the past 12 months that they had difficulties “putting food on the table.” In 2007, just before the Great Recession struck the U.S. economy, this number stood at 16%. (Source: Pew Research, May 24, 2013.)

We can’t fight another economic crisis in an environment in which our central bank has run out of arsenal to fight an economic slowdown and the government has already raked in a huge amount of national debt. That is why I believe this coming downturn will be significant and not so easy to recover from.

Michael’s Personal Notes:

As I have written in these pages many times before, economic growth in a country happens when people are finding jobs, real wages are rising, consumers are spending, businesses are expanding and seeing their inventories decline, and the general standard of living is rising.

But all of these events are missing in the U.S. economy.

The jobs growth we have witnessed following the Great Recession has been in low-wage-paying sectors. Despite the politicians telling us we have economic growth, we still have a significant number of Americans unemployed or working part-time because there aren’t any full-time jobs for them. The underemployment rate, which I consider to be a better measure of the jobs market situation, still stands around 14%, and it’s been at that number or higher for years.

In periods of economic growth, businesses spend their money, creating higher-paying jobs as they do. In the current U.S. economy, businesses are still shying away from spending; rather, they hold a pessimistic view on the economic growth potential of the current U.S. economy. Many companies have taken to the process of buying their shares back in order to make their per-share corporate earnings look better.

According to the Bureau of Economic Analysis, personal consumption expenditure, a measure of consumer spending in the U.S., decreased 0.2% in April after a dismal rise of only 0.1% in March. (Source: Bureau of Economic Analysis, May 31, 2013.)

Disposable income (what Americans have left after paying taxes) also declined in April, shedding 0.1% in the month.

Even with all the gains in the key stock indices and politicians saying we have economic growth in the U.S., the wealth of Americans is nowhere close to what it was before the financial crisis and recession hit the U.S. economy. According to the Federal Reserve Bank of St. Louis, adjusted for inflation, Americans have gained back only 45% of the wealth they lost during the Great Recession. (Source: Wall Street Journal, May 30, 2013.)

If this is what economic growth looks like, then I don’t even want to think about how horrible a slowdown in the U.S. economy will appear—which will happen because of what is going on in the global economic conditions.

If the Federal Reserve starts to move away from quantitative easing and its easy monetary policies, the actual economic growth picture for the U.S. economy will deteriorate quickly—and that’s why I believe the Fed can’t pull back on its paper money printing anytime soon.

Where the Market Stands; Where It’s Headed:

We are in a stock market that is severely overbought. The bear market has done an excellent job at convincing investors the stock market is safe again…and this time, the bear had a helping-hand—the policies of the Federal Reserve.

Even I’m surprised at how far this market has risen. But the fundamentals behind a real, sustainable stock market rally are missing. The higher this stock market goes, the further the fall. Then what? Let me guess: the Fed will buy stocks to support the crash?

What He Said:

“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons: Borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in Profit Confidential, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.