Two news items this morning I want my readers to be aware of as we start June…
The New York-based Conference Board’s index of consumer confidence fell “unexpectedly” in May to a six-month low. It wasn’t “unexpected” by readers, as I have been warning about the economy cooling in 2011.
Higher gas prices and food prices are starting to take a toll on consumers. It is important to note that consumer spending makes up about 70% of the U.S. economy (GDP). Consumers start pulling back on spending and the chances of the U.S. falling back into recession rise sharply. It’s that simple.
The Chicago-based Institute of Supply Management said that business activity in the U.S. fell off sharply in May to the lowest level since November 2009. This is an indication that the manufacturing sector is starting to cool as well.
It has been my belief that the government and the Fed have been artificially supporting the economy for years with their monetary and fiscal policies. They started “pumping up” the economy significantly after the September 2011 terrorist attacks by reducing interest rates sharply, keeping them at a post-World-War-II low until 2004. In 2005, rates started to rise, the credit bubble burst, the Fed took interest rates back down to zero, and the government bailed out whomever it felt was too big to fail.
My question is: what will the government and Fed do to support the economy on its next down leg? We know that the government will be hard-pressed to spend trillions again to support the economy. We know that the Fed cannot bring interest rates down below zero. The price of action of gold bullion, rising from $300.00 an ounce to more than $1,500 an ounce in 10 years, is a signal that serious problems lie ahead.
The chances of the U.S. falling back into a recession—while you will not read much about it in the media—are very real. Unfortunately, this time the government and Fed will not have much ammunition left to help fight the natural forces of economic contraction.
Michael’s Personal Notes:
Yes, it’s true.
Yesterday in New York, the S&P/Case-Shiller index of property values reported that the average price of a home in 20 major U.S. cities is now at its lowest level since 2003.
The housing market is going through a double-dip of its own. I expect the economy to follow suit.
In my years of economic analysis, I’ve never seen a meaningful economic recovery without the housing and construction industries recovering at the same time. With my forecast of housing pricing declining another 7.5% to 10% this year, the pain is far from over for housing and the economy.
Where the Market Stands; Where it’s Headed:
Five months of this year behind us and the Dow Jones Industrial Average has travelled 992 points, up 8.5% so far in 2011. While I wouldn’t be surprised to see Dow Jones 13,000 soon, I don’t expect another 8.5% rally in the next five months. The bear market rally born March 9, 2009, is very tired.
Inflationary pressures and debt issues throughout the world are problems that need to be dealt with sooner rather than later. The price action of the long-term U.S. Treasuries now indicates that the U.S. economy is slowing. I’m not sure which evil, inflation/debt or a slowing economy, is worse.
Same story as we start June: the bear market has some life left in it, but it’s limited. The risk in equities at this point may not be worth the reward.
Michael’s Personal Notes:
“The conversation at parties is no longer about the stock market, it’s about real estate. ‘Our home has gone up this much’ or ‘Our country home has doubled in price.’ Looking around today, it would be very difficult to find people who believe that one day it could be out of vogue to own real estate because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in PROFIT CONFIDENTIAL, June 6, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.