‘We’ve entered a truly dangerous
environment in the financial markets.
Economic fundamentals are
deteriorating rapidly. Consider the US…
By all counts, the latest ISM (a
measure of manufacturing in the US) was a complete and total disaster. In
August the ISM hit 49. Anything below 50 is considered a recessionary rating.
However, things are even worse below
the surface. The ISM is made up of several components. Its Production component
is back to May 2009 levels.
The New Orders component is back to April 2009 levels.
And worse of all, Prices Paid is up
to 54, up from a reading of just 39 in July.
In very simple terms this tells us
that inflation appears to be hitting “lift off” in the US at the very same time
that we are entering another recession that could potentially be on par with that of 2008.
And with corn and soybean prices at or near record highs, we could be on the
verge of a stagflationary disaster combined with a food crisis at the very same
time.
We get additional confirmation of a
major economic contraction from corporate earnings. Recently we’ve seen
earnings forecast cuts from Fed Ex, Bed Bath and Beyond, Proctor and Gamble,
Adobe, Starbucks, McDonald’s and more. Indeed, when you remove
financials, S&P 500 earnings FELL year over year for 2Q12.
This is hardly indicative of a strong
economy. The fact a record number of Americans are on food stamps doesn’t bode
well either. And the Rasmussen Employment Index indicates worker confidence is
at levels not seen since the FALL OF 2008!
Against this backdrop, stocks have
rallied higher and higher on hopes of more liquidity from global Central Banks.
As a result, the market has completely disconnected from underlying economic
realities. Based on the business cycle alone, the S&P 500 should be closer
to 1,000. And even the NY Fed has revealed that without the impact of Fed
meetings, the S&P 500 would be at 600!
This is a truly staggering admission
from a Fed official. This is the Fed admitting to us, point blank, that without
investors trading based on hopes of Fed intervention, the markets would
essentially be even lower than they were in March 2009.
Again, this is a truly dangerous
environment. Because if investors lose faith in the Fed or ECB, then it’s GAME
OVER. This process is definitely already underway already as the impact of each
successive intervention by a Central Bank is having a shorter and shorter
lifespan.
I cannot say when exactly the Central
Banks will lose control of the markets. But we’re not far from it. Some major
takeaway items you should consider:
1) The Fed will likely be
dismantled or restructured in the coming years. It’s clear from various
dynamics that some Fed Presidents are positioning themselves to replace
Bernanke if Romney wins. Moreover, even former Fed Presidents are admitting
they’re concerned about the future of central banking.
2) Politicians,
worldwide, have proven incapable of implementing real fundamental fiscal
reforms (all the talk of “austerity” is a lie as few if any countries have
begun a serious process of deleveraging). Central Bankers are beginning to
catch on to this game and are increasingly blaming politicians for the fact the
Crisis has yet to be resolved. Look for this relationship (between Central
Bankers and politicians) to continue to deteriorate with serious consequences.
3) Europe will be the
first area in which the “End Game” hits. We’ve just had the promise of
“unlimited” bond buying. In terms of verbal intervention, you cannot go any further
than this. When this promise turns out to be a bluff (see yesterday’s article
for why this will prove to be the case) then the markets will crater.
I give this last item perhaps a month
or so before it takes hold. Unless Germany completely changes and goes along
with the idea of Eurobonds (unlikely given that it violates the German
constitution and would cost Angela Merkel her bid for re-election in 2013),
then the ECB is essentially out of bullets. You cannot say “unlimited” and
bluff about it. And the ECB is doing nothing now but bluffing.
On that note, if you’re looking for
someone who can help you navigate and even profit from this mess, I’m your man.
My clients made money in 2008. And
we’ve been playing the Euro Crisis to perfection, with our portfolio returning
34% between July 31 2011 and July 31 2012 (compared to a 2% return for the
S&P 500).
Indeed, during that entire time we
saw 73 winning trades and only
two losers. We’re now positioning ourselves for the next
round of the Crisis with several targeted investments that will explode higher
when the next leg down begins.
To find out what they are, and take
steps to protect your portfolio…
Graham Summers