Obama debt deal fails to reverse downward stock market momentum
Posted on 02 August 2011 with 2 comments from readers
If you wanted any more proof that the US stock market’s sentiment has decisively reversed direction and is now gaining downward momentum then you only had to look at the reaction to the $2.1 trillion raising of the US debt ceiling and accompanying austerity measures.
This should have been the moment for a reversal to Wall Street’s losing streak. In the event it lasted only a matter of hours before some much lower than expected manufacturing figures poured a bucket of water over stocks which ended down again on the day.
Global economic slowdown
Global stocks also first rallied on the news from Washington but then tanked on the ISM manufacturing data. But Wall Street is not alone in disappointing data. There are clear indications of a gobal economic slowdown from Beijing and Mumbai to the eurozone where Italian debt blew out to record spreads against the German benchmark yesterday.
That the euro zone crisis is moving out of the periphery countries and into the bigger economies is an ominous if inevtiable contagion. It will get much worse from here. There is a momentum and logic to the euro zone sovereign debt crisis that most commentators are not willing to face.
In the UK the newspapers would rather spend their time investigating the Murdochgate phone-hacking scandal. There is relatively little analysis of the crisis now enveloping Europe.
It matters not a jot that the UK is not a part of the euro, the contagion will be the same if not worse for a smaller economy heavily dependent on trade with its fellow members of the European Union.
In India house sales in Mumbai have slumped and unsold inventory is growing. In Beijing it is evident that the Chinese manufacturing collosus is finally slowing down; will that slowdown turn into a crash as the increasing exit from local stocks suggests?
Everywhere the global economy suddenly looks in trouble with no easy solutions. Even the US debt ceiling increase is hardly positive with its implications for higher public debt, and the austerity package that accompanies it will be a drag on a weak economy.
Just look at the job trends. HSBC is making 30,000 redundant; Cisco 6,500; Merck 13,500. Blue chip companies are axing staff. This is the downward spiral of a depression not a recovery.
In the bond markets outside of the United States the trend is to higher interest rates. That is negative for bonds, real estate and equities. Yet still for the moment the central banks are desparately trying to keep interest rates below mounting inflation rates.
Inflation is soaring because of money printing, bailouts and stimuluses. This is the unintended and inevitable consequence of deliberately loose monetary policy. But it has its impact on bond markets pushing up interest rates.
Bond trap
How long can US treasury yields keep falling? That is happening now as the world dumps stocks and needs a safe haven and that is mistakenly perceived to be US bonds.
Yet to buy bonds in a currency that is being printed ad infinitum is suicide. US inflation is already well above the coupon paid on bonds. This can only end badly.
So the place to be is in assets that will benefit from inflation, not those whose prices have been inflated in the past and now look very vulnerable to changing global economic realities.
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2 Comments posted by readers:
I am now convinced this is going to end badly for the US. The whole situation is unsustainable and the current approach of dealing with thier self imposed crisis is by digging themselves into an even bigger hole. Never in all of history has anyone got themselves out of debt by taking on more debt.
Several decades ago (starting in the 60’s and accelerating uncontrollable after the Nixon shock of the early 70’s) the US became drunk on debt. I liken what has happened since to ‘giving an alcoholic the keys to the drinks cabinet’ – and then trusting them not to strip it bare!
Currently, the US Dollar is ‘backed’ – not by Gold, not by a strong economy, but by the US ‘war machine’. This is why the dollar has /will decline at a slower than expected rate. However, as the value of the US dollar does slowly weaken (and it becomes apparent that no other countries are buying US debt anymore) the ‘war machine’ will weaken, thus the fear that some countries have of dropping the dollar – lest they become the latest ‘Iraq / Iran / Libya’ will subside and trade in other currencies and or precious metals will increase. A positive feedback loop will then take hold (albeit at a slow pace, likely as per the decline of the British empire). Eventually the US war machine will no longer be able to enforce dollar hegenomy and there will emerge a new (or basket of new) global reserve currencies.
The whole world can see that the US – its entire economy, Dollar, et al , is in serious trouble, except it seems the people who live in the US and lead the government.
Perhaps having the keys to the drinks cabinet truely has made them all drunk.
I hope that the US doesn’t pay off its debts TOO quickly, otherwise the soup kitchen queues of the 1930s and all that’s associated with very great human misery will appear once again.
Yet, like you, I hope that the US will BEGIN to pay off its debts seriously each year. Perhaps the Tea Party have brought some sense to US government in the formation of this committee for future debt repayment.
Bill Gross’ comment that Americans alive at the moment are “debt-men walking” is mildly funny because it’s a clever pun particularly on death. However, I think there must be a middle-way between fully paid-up social security, on the one hand, and dire poverty, hunger and rooflessness, on the other hand.
If such a middle-way could be found so that the bad human misery of the 1930s does not recur, then most Americans would, possibly, accept the curtailment of other social security benefits for the benefit of their children and grandchildren, particularly if the US would stop its expensive role of world policeman.
Beside all this, I am so pessimistic about the Middle East expanding from a regional conflict into a war, that there might be a partial solution for US sovereign debt in this type of inhumanity.