‘The US Presidential election ended
November 6, 2012. Since that time, the market has fallen 3%.
There are a multitude of reasons for
this, but the primary one is the fact that the markets is beginning to realize
two key items:
1) Everything that was a
problem in the run up to the US election is still a problem (in fact
many issues are now worse than they were a few months ago).
2) Having engaged in
pre-emptive and extreme actions to keep things calm in the run up to the election,
the US Fed and ECB have run out of effective monetary bullets.
Regarding #1, according to the ECRI, as
of June 2012, the US is back in recession. The ECRI has proven far more
accurate and timely in predicting recessions than the NBER. And now that the
election is over I expect other US data (the ISM, LEI, and employment numbers)
to start moving towards reality (bad).
By the way, the US just hit a new record
for food stamp usage.
Across the pond, the European banking and
sovereign debt crisis continues to worsen: Greece has to redeem €5 billion
worth of bonds on Friday. The country just managed to pass its latest budget
proposal (which undoubtedly the country will fail to meet… just like all the
others) but the troika has yet to issue its latest report on Greece.
Germany has stated point blank that
without the troika report, Greece won’t be getting more funds. Is Germany
finally ready to let Greece fail? It’s hard to say. But Germany did
put together a special advisory panel to focus exclusively on assessing the
cost of a Grexit back in August.
Elsewhere in the EU, Spain continues to
implode. The mainstream financial media notes that people are now killing
themselves when evicted from their homes. However, things are in fact worse
than that. My contacts in the country inform me that in some regions the
government hasn’t even paid its pharmacies in six months. Indeed, the
region of Valencia owes its pharmacies an insane €500 million.
This is nothing short of a societal shut
down. Expect the civil unrest and economic implosion to accelerate in the
coming weeks and months.
And finally, France’s private sector is
falling to pieces. September’s auto sales numbers were worse than those of September
2008. The country’s PMI reading is back to April 2009 levels. And the
French Central Bank has announced the country will re-enter recession before
year-end.
Again, nothing has been fixed in the last
six months. In fact, things have gotten much much worse.
As for #2, it is now clear that the ECB
and US Fed used up their last remaining effective bullets this summer in their
efforts to aid the Obama re-election campaign (Romney stated he would fire
Bernanke, hence the Fed’s decision… while various EU officials admitted the
Obama administration requested that they keep things calm in the build up to
November).
Indeed, stocks are now sharply down
since QE 3. Gold and Silver, in contrast are up. If this dynamic does not
change immediately then the positive consequence of the Fed’s actions (namely
stocks rising) is now obsolete while the negative consequence (higher
inflation) is about to hit lift off.
What would the market look like without
the Fed’s aid? According to the business cycle the S&P 500 would be closer
to 1,000.
In the EU, the ECB announced a plan to
make unlimited bond purchases for EU nations that meet various reforms and
“conditions.” The problem with this is that none of the countries that need
money (namely Spain and Italy) want to meet any conditions as their economies
are already imploding without additional austerity measures (see the
information on Spain above).
Thus, the ECB promise has in fact turned
out to be a colossal bluff. At the end of the day, Mario Draghi can say
whatever he wants, but unless Germany is willing to go along with the ECB, he
can’t do much of anything. Germany demands “conditions” therefore so does the
ECB.
So… the global economy continues to slow.
Europe is burning (literally in some countries). And the primary Central Banks
(the Fed and the ECB) are out of ammo.
Buckle up… things are about to get messy.
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