US stock market relief rally built on false hopes for Independence Day
Posted on 02 July 2011 with 7 comments from readers
Last week US stocks rallied more than five per cent, regaining 75 per cent of the losses of a bruising two months of falls. Nothing changed in the US to merit the rise. The immediate risk of a default on sovereign debt by Greece was avoided, nothing more.
Not that the eurozone sovereign debt issue has gone away. There remains a huge problem, much bigger than Greece alone, with no viable solution on the table. This is a can kicked down the road to return as an even bigger problem someday very soon.
Bad economic data
Stateside commentators struggled to dig up something in the recent constant stream of bad economic data to justify the rally in financial markets. A marginal improvement in manufacturing yesterday was trumpeted from the roof tops, although in the detail new orders were near to 18-month lows.
Indeed, that has been the pattern for economic data around the world for the past few weeks. Lows that point back to the last recession not a glorious recovery. The Chinese slowdown is particularly alarming and food price inflation of 11.7 per cent in May.
Even if US manufacturing was to spontaneously rebound on a strengthening dollar which is surely bad for exports then it is only 10 per cent of GDP. It is the 70 per cent accounted for by consumer spending that is failing due to rising food and energy prices and the continued allied slump in the US housing market.
Housing depression
The US housing data alone is sufficient to dampen any hope of a strong economic recovery. House starts are still at depression levels and house prices are still on a falling trend as Professor Schiller has so clearly demonstrated.
Goldman Sachs threw its hat in the ring to say things might be getting better yesterday but offered no strong reason for that assumption beyond bold optimism and presumably a desire to crank up a rally for a little longer to trade its own book. The same house had oil prices heading to $120 a couple of weeks ago and look at them now.
For Goldman Sachs to proclaim a better second half for the economy and by implication for stocks is pure Wall Street and there is really nothing to justify such false hopes for the US Independence Day Holiday.
7 Comments posted by readers:
It wasn’t really a rally. It was just retracing the previous downturn from where it fell.
Word here in Asia has it that the market will hold steady in the US and in Asia until after Chinese New Years next year. Locals predict that the big crash or correction will take place next year right around or after Chinese new Years but will not tank before then. Next year after or around Chinese New Years is when Banks in China raise rates.
I’m going to guess that we see a major correction after Chinese New Years next year which should be around or after February of 2012.
A$..food price inflation USA style ranges from 5 to 30% PER ITEM EACH INCREASE
milk last increased in quickstep to add a dollar per gallon..for the percent of the population WHICH HOLDS NO STOCK, the Washington/Wall st axis of evil is a death sentence..the once proud free press is in league w/ this devil worship, humming the same tunes the Titanic band played as the ship sank..All comedy aside, because the financial joke is @ our expense, this is subterfuge by the very entity charged w/ the General Welfare!
Spot on assessment.
Thank you
“pure Wall Street” is brilliant!
I usually watch Kudlow every evening (6 P.M. here in Slidell, Louisiana on CNBC) to see the mood of his guests. Most of his guests trade stocks for their livelihood. Friday, two of them looked spooked and worried about the apparent lack of progress on the debt limit talks. They were discussing the Chinese economy, when one of them told Kudlow that he had better worry about Washington, instead of China, because as the end of July approaches, if no agreement is reached on raising the debt limit, the market will suffer a MAJOR fall. As he was speaking, the other guest was shaking his head up and down in agreement, with a scared expression on his face.
Someone else speculated that the Republicans can’t vote for any tax increases because anyone who does will become a target of the Tea Party’s wrath.
To me it means that a government shut down is no longer beyond the range of possibility. I had wanted to buy utilities, telecoms and oil for their dividends, but won’t until the debt limit is raised.
On the McLaughlin Report on PBS TV, Pat Buchanan said that the Republicans in the House will not pass any bills that raise taxes. So unless Obama backs down on his idea to raise some additional revenue, get ready for a MAJOR financial crisis.
So you might not want to worry about what will happen next year, just yet. We have to get through this year first.
And the IMF has warned that the kind of spending cuts that the Republicans want could send the US economy south, if enacted before the economy improves at a faster rate.
For a clear view of what’s going on, I think Peter Schiff nails it yet again: http://www.youtube.com/watch?v=eyPexrBrRtE