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I don’t think it’s any stretch [of the imagination] to say that we are now facing a
coordinated economic slowdown the likes of which we haven’t seen since 2008 and, frankly, something has to give — and my belief is that it will be stock prices! Here’s why. Words: 710
So says Mike Larson (www.moneyandmarkets.com) in edited excerpts from his original article*.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Larson goes on to say, in part:
Here’s what have we learned about the real economy in the past several days – and none of it is good!
- Retail sales fell 0.2 percent in May, the second such decline in a row. Strip out auto sales and you get a 0.4 percent drop, the biggest fall in any month going back two years! The Dow Industrials were trading around 9,900 at the time.
- The Institute for Supply Management (ISM) Manufacturing Index plunged to 49.7 in June from 53.5 in May. That was far below forecasts and the single worst reading going back to July 2009! [Read: Telling It Like It Is: Latest PMIs Reveal Truth About the Global Economy] The Dow closed out that month at around 9,200.
- The ISM Services Index, for its part, slumped to a worse-than-expected 52.1. That was the lowest reading since January 2010 (Dow level: About 10,100).
- Overseas, we saw China’s PMI report on manufacturing fall to a seven-month low.
- In the 17-nation bloc of countries that use the euro currency, the jobless rate just hit 11.1 percent. That was the highest monthly reading since officials began tracking back in 1995! Care to venture a guess where the Dow finished that year? Try 5,100.
None of the above means the Dow has to get cut in half tomorrow, or lose 3,000 points in the next few weeks, but it does underscore the massive economic threat we’re facing. In fact, I don’t think it’s any stretch to say that we are now facing a coordinated economic slowdown the likes of which we haven’t seen since 2008.
Judging from the chart below, something has to give — and my belief is that it will be stock prices!
The main reason stocks haven’t tanked yet is that Wall Street still believes that somehow, some way, fiscal and monetary policy will come riding to the rescue! I’ve maintained for a long time, however, that policymakers can paper over fundamental problems for a little while but, in the end, those fundamentals always win out. We saw that in the first phase of the great credit crisis a few years ago, and I believe we’re seeing that play out again. Indeed, my wariness of downside stock risk here stems from the 2008 playbook [in that], just as it did back then:
- the global economy is slowing sharply,
- a great credit crisis is sweeping through the markets,
- policymakers are trying to help by enacting several measures designed to stem the losses and now
- the half life of each bailout is shrinking rapidly.
The above makes me believe that this is a battle that policymakers can’t win for more than a few days or weeks. The numbers are just too daunting. Greece, Ireland, Portugal, Spain and Cyprus have already received hundreds of billions of euros in pledged help and reports now suggest Slovenia could soon look for its own program. If that happens, it would mean six out of the euro-area’s 17 countries are on the dole. Is that really affordable over the long term? Of course not!
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Take Action When the Market Rallies
One lesson I learned during the first phase of this credit crisis was that you have to look at intervening rallies like the one we just got as gifts. They offer great opportunities to:
- buy inverse ETFs more cheaply than you could otherwise get them and to
- unload any vulnerable stocks you may own.
I won’t always remain negative. I’ve switched approaches in the past, and will do so again but only if two conditions are met:
- we get a grand plan that actually attacks the underlying sovereign debt, rather than temporarily paper over them and
- we get a REAL washout panic. I’m not talking about a mild correction like we had recently. I’m talking about the kind of sell off where investors dump anything and everything.
Conclusion
I recommend you steel yourself against grand projections of successful “fixes” in Europe — or Wall Street talk that central bankers somehow have an ace up their sleeve to save us all!
Until next time,
Mike
*http://www.moneyandmarkets.com/deepening-downturn-to-put-more-pressure-on-markets-49978 (To access the above article please copy the URL and paste it into your browser.)
Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
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