Illogical Optimisim

First, a historical note…

US equities have just come off their best July since 1989. Overall, the market is up over 8% for the year.

But if we look backward (after all, hindsight is 20/20), March 1989 also saw a huge run up. It was followed by an even stronger rally in July, during which volume dried up. It appears the same is happening now. What came next in 1989 was a big sell-off in September, followed by an even greater one in October.

Don’t look now, but history tends to repeat itself.

Also, consider the fundamental picture. We have rallied 48% from the March lows on the back of what? Good earnings? Good employment figures? Good spending figures? Expanding GDP? No.

We have rallied based on one of the largest and most concerted propaganda campaigns ever waged, supported by government stimulus. But no government can stimulate forever. The bottom line is this, if Americans do not return to work, THERE IS NO RECOVERY. Memorize this line. Post it on your refrigerator, your mirror, your dashboard – wherever!

So maybe now you’re asking yourself, “Aren’t the unemployment numbers getting better?”

Well, let’s see…

Verizon – 8,000 jobs cut
Motorola – 7,000
Microsoft – 5,000
Untied Technologies – 8,000
HSBC – 6,100
Anglo American – 19,000
Avon – 2,500
Goodyear Tire – 5,000
GM – 10,000
Nissan Motors – 20,000
Panasonic – 15,000
PNC Bank – 5,800

Many of these will be released in the third and fourth quarters. No doubt there are plenty more we haven’t heard from yet. Frankly, I couldn’t list the thousands of companies and millions of jobs lost in this write-up. That’s just a sampling. But let’s get to some hard and fast figures.

According to Seeking Alpha, 13 million Americans will lose their benefits by years’ end. So if unemployment claims are falling, people must be getting back to work. Right?

WRONG!

They are exhausting their benefits. There are 30 million people in the United States on food stamps. There are only 200 million working-age Americans (age 15-64). Is there any wonder why the Administration is NOW saying they will have to raise taxes on the middle class to fund their programs?

Unemployment has been estimated by many good economists as being around 20%. Unfortunately for these people, their nanny-government lifeboats are slowly running out of air.

Those 3 million people who lost their jobs in the second half of last year? Once you factor in their dependants, that equals 10 million people who have no income and no savings.

And how about the other 4 million others who lost their jobs in the first half of this year? They will be next. The numbers get so depressing, I hate to even count them up.

As I have said before, unemployed people don’t spend money. They don’t buy technologies, or durables, or even pay their mortgage. Bankruptcies are up 600% in this recent downturn. And that includes the time after Congress affected new rules to make bankruptcy harder.

So who is going to pay for anything when they are struggling to buy groceries?

If the equity averages are already rallying on the back of these horrible stats, there is nowhere to go but down when the real truth sets in.

And we have seen this corollary frequently in recent months. When stocks and risk assets fall, so do the currencies, and the dollar rises. We are a long way from being out of the woods on this retracement.

So why do I cite all this doom and gloom about the United States? Believe me, there’s plenty more to go around. Because the fact of the matter is this: When these chickens do come home to roost, we will see another gut-wrenching breathtaking sell-off in equities, which will be followed by currencies. We have not seen the end of this yet.

While some are talking of a recovery, others are talking about a possible double-dip recession – and I’m reasonably sure we are in for a “multi-dip.” It is hard to be bullish on the dollar for any reason, but if the market drops again, which I believe it will, funds will rush right back to the dollar (and the yen).

So far, we have seen range-bound trading in the recent months as currencies search for direction. This week the big news was the US GDP. Risk currencies rallied on the back of it, but for 24 hours they have remained flat as there were no buyers to move it higher.

Also, the market got awfully jittery on the release of the consumer spending news yesterday. The manufacturing euphoria expended itself, and now we find out that personal income has dropped 1.4%, the biggest fall in four years. Inflation-adjusted spending fell 0.1%. The real dark spots in the economy have started showing back up. The stimulus has worked its way and done its best, but its effects are now negligible. Even though there are signs of a “recovery,” it isn’t going to be one without the consumer. If he’s exhausted his means of spending, or is just afraid to put out any money, the recovery trade will be doomed. And that means dollar strength once again.

But for now, we will have to trade with what we have. It is hard to argue with the markets, even with the most compelling of reasons. A person may as well try to stop an ocean wave from breaking onshore.

And as we look ahead, we must always be mindful of what may be. As numerous talking heads were saying on Tuesday of this week, “We have turned the corner… things are going to get better – if they don’t get worse!”

Regards,

Bill Jenkins
for The Daily Reckoning