Stock market momentum is an amazing thing….it defies logic and refuses to address some very blatent short-term (and long-term) problems. Much like Nortel at $110; investors couldn’t get in fast enough, even though earnings started to dissappoint, and the sales channels were backing up. Similarly in today’s markets, US GDP numbers are looking rosy, jobless claims have stopped rising, and the housing market looks like it may still have a pulse…….as such, stocks continue to rally. Meanwhile, an unbiased observer would note the following:
- Higher GDP numbers (around the world, but particularly the US) are simply a result of a concerted effort of world governments throwing a virtual endless amount of “stimulus” (read: borrowed or printed money) at the economy. What happens as this stimulus gets pulled back ?
- The US housing market is still in terrible shape. “Based on the data from one of the nation’s biggest mortgage servicers, nearly 7.5 million loans are in some stage of delinquency or foreclosure, while an additional one million properties are already bank-owned”. “What’s more, with nearly one-quarter of US mortgages now “underwater”, almost 11 million borrowers are now trapped in loans backed by assets, the value of which is dropping like a stone”. (Wealth Daily, March 22, 2010)
- ” Kansas City, MO, school district votes to close 29 schools (out of 61 total) to address $50 Million budget shortfall” *(Associated Press-March 11, 2010)
- “New Jersey Governor Chris Christie on Thursday declared a “fiscal emergency,” allowing him to reserve or freeze state spending as part of his plan to tackle one of the largest 2011 deficits among the US states. “The deficit in the current budget is $2.2 billion, while the gap in the following budget has spiked to $11 billion from a forecast of $8 billion in November. Next year’s deficit is the largest-per-capita budget shortfall of ANY US state.” (Reuters Feb 11, 2010)
- “The mire facing California, for example, makes Greece’s woes look somewhat manageable. California, staring at a $20 billion budget gap during the next 17 months, accounts for about 13percent of the U.S. economy. Greece accounts for just 3 percent of the economy of countries that use the euro…. Things are so bad in Nevada, meanwhile, that the state could lay off every worker paid from its general fund and it would still be $300 million in the red, according to state Assembly Speaker Barbara Buckley.” (Associated Press, Feb 14, 2010)
- “For those who hold to the consensus view and its rose-coloured glasses, it looks like we are on the cusp of a renewed job creation cycle in the United States……..Dig deeper still into those jobs numbers, however, and you will start to see that there are some signs of rot beneath the surface in the U.S. labour market – signs that should give one pause as to the sustainability of this nascent economic recovery…..Looking past the headlines, what I find myself pondering is that if the best the U.S. labour market can do is print modestly negative headline payroll reports at this stage of the cycle, what are the numbers going to look like when the government stops doling out all the cheques that are supporting demand?”(David Rosenberg, Globe & Mail , March 10, 2010)
Our largest trading partner and neighbour is in a very precarious financial situation. It will take years and perhaps decades to right these deep rooted debt problems (not just in the US, but also the likes of Greece, Portugal, Spain, Italy and the UK). With sovereign debt risk rising, bond yields are rising as well, which will raise interest rates globally on bonds……AND other debt, like mortgages, making the problems even worse.
To me, this market is full of BULL ! When the stock market finally discounts the “reality” of what is actually happening, stock prices will be significantly lower. I don’t like this any more than you do, however, it will bring another round of glorious buying opportunites for those of us that have the patience.
Tags: debt problem, interest rates, US economy
