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The current economic rebound is not a healthy and sustainable one. That’s because it is the result of the largest monetary and fiscal stimulus program ever!
For proof, just look at disposable income: A record 20 percent is derived from federal transfers. And these transfers are coming from a government that is already up to its eyeballs in red ink!
The deficit could hit a record $1.6 trillion this year, or 10.7 percent of GDP. And as shown in the chart below, it’s been heading skyward since 2002.
And that has put the …
Housing and Labor Markets
in Dire Straits
According to the Case-Shiller Home Price Index home prices are again in a freefall. December marked the fifth consecutive monthly drop. And the declines were not insignificant: 11 percent in December alone.
As far as the labor market is concerned, a disturbing weak picture emerges …
Nearly two years after the official end of the Great Recession, there are 7.5 million fewer jobs than in 2007. Plus, the employment-to-population ratio just dropped to a new low for the cycle — lower than at the depths of the recession.
The chart below shows the percentage changes in that ratio so you can compare today’s labor market with what occurred during and after previous recessions. As you can see, the current period is indeed bleak.
Housing and employment are two very important segments of the economy. Neither is participating in the current rebound. Meanwhile, budget deficits and transfer payments are at record highs!
This paints a crystal clear picture of a dangerously unbalanced and vulnerable economy that is exposed to two major risks …
Risk Number One:
Soaring Oil Prices
With parts of the Middle East in turmoil, crude oil prices have risen considerably. The potential impact: A $10 a barrel price increase translates into gasoline prices sucking an additional $30 billion out of consumers’ pockets.
As shown in the following chart, the most recent price increase — some $20 per barrel since November — comes on top of an uptrend that started March 2009.
During this surge prices have increased to a degree that has historically triggered — or at least coincided with — recessions. And since the economy is now so unbalanced and fragile, risks are high that the recent oil price shock could set off another recession.
But in the unlikely event the economy as a whole can escape unscathed, profit margins cannot …
They are already at the high levels not seen since 2007. So even without rising energy prices, profits are due to turn lower. And higher oil prices will accelerate and aggravate this process.
Analysts’ earnings estimates for 2011 are also very ambitious. They leave absolutely no room for either of these two events without major earnings disappointments taking place.
Risk Number Two:
Lower Money Supply Growth
I have written in past Money and Markets columns how China, India, Brazil and many more emerging markets have started to implement restrictive monetary policy measures like interest rate hikes and higher reserve requirements. These steps are showing some effect in that most emerging stock markets have not joined the S&P 500 in making new cyclical highs during the past weeks.
Neither the Fed nor the ECB have followed this return to a more restrictive policy. Especially in the U.S.; QE2 has dominated the monetary policy discussion — and worked its way into the stock market.
But now it seems as if an important change has taken place behind the scene. At least that’s what money supply growth figures are telling me …
In July 2010 the 3-month annualized growth rate of MZM declined 1.5 percent. Then in August Fed chairman Ben Bernanke stepped up and announced QE2. Money supply growth quickly responded …
The 3-month annualized growth rate of MZM jumped to:
- 9.2 percent in October,
- More than 11 percent in November, and
- More than 11 percent in December.
In January it was back to 6.8 percent, and now it’s down to 1.9 percent.
Only a few weeks ago Bernanke bragged how QE2 had caused the recent stock market rally. Never mind that lowering interest rates and supporting the housing markets — not a stock market rally — were his original goals.
Well, since QE2 failed miserably as far as the original goals are concerned, he probably felt it necessary to at least have a stock market rally back to bubble territory as his big achievement.
I have no doubts that QE2 did indeed play a major role in rescuing the economy from double-dipping and the stock market from another severe slump. If so, the above described considerable slow down in money supply growth should be seen as another major risk for the economy and the stock market.
To protect your wealth from a potential economic setback and market decline, you might consider an inverse ETF, like the ProShares Short QQQ (PSQ). This fund’s return is designed to correspond to the inverse of the daily performance of the NASDAQ-100 Index. So when the Index drops 1 percent, PSQ should rise 1 percent.
And with a price/earnings ratio of 24 and a dividend yield of a miniscule 0.4 percent, this index looks massively overvalued.
Best wishes,
Claus