June 11, 2009
New York

Some say “Green shoots”; others say “Brown shoots”. What I am referring to is the status of the current economic conditions (aka recovery). Is the economy really improving or is it all smokes and mirrors? U.S Debt continues to pile up. Housing market is still trying to find a meaningful bottom (if there is one). Retail sales continues to look awful. Number of people claiming unemployment is still at an elevated level. Durable goods order hovers near 13 year low. We learned today that Americans saw trillions of their net worth wiped out in the first months of the year.

But despite all these bad news, the stock market still managed to put up an impressive rally in the last 3 months. What is really moving the markets higher lately? There are a few reasons. The main one being the fact Fed and PPT are buying S&P futures to help stabilize the market to avoid another plunge. Banks are using TARP money to inflate stock prices to execute their stock offering (for repaying TARP debt). We are also seeing a concerted effort from media and our government spinning all bad news into a “better than expected” news. This is meant to somehow make average “Joe” feel better about the economy and start spending money? Some money managers and investors are buying this story and jumping into the foray. Market didn’t have any meaningful correction since it started making its move upward in mid March. This 35% rally is not sustainable. It reminds me of the sharp rally that we saw back in 2001 and during the Great Depression.

Why am I skeptical? Because, we still haven’t addressed the fundamental source of the problem: Over leveraging of credit. The current approach taken by Fed and Treasury is take more debt to get out of the existing debt. Dumb idea, I must say! Late last year, Helicopter Ben and Treasury started the campaign of printing more money and buying long dated Treasury notes and bonds to contain the meltdown in the Financial system. They were hoping to prevent further deterioration in the housing market by creating an artificial bottom. But as we have seen from recent Treasury auctions, rates for the 10 year notes and 30 Year treasury bonds spiked higher as there were lack of buyers. In recent auctions, it was the Fed who had to chip in and buy their own Treasury notes and bonds. This is a major concern for anyone hoping for economic recovery.

Russia and China have started expressing by either dumping or staying away from buying our debt. Russia just recently announced that it will dump US Dollar as the reserve currency. Fed is stuck between a rock and a hard place. Just how long will they continue this charade? As always, government is looking for an easy way out of this mess. History says our politicians are short term thinkers and we have seen this movie played out over and over again. These voter pandering, lobbyist controlled parties are adept at resolving impending problems (finding short term solutions) at the cost of long term consequences. To summarize, our government is just buying time, hoping this massive debt will go away or left to future generations to deal with. But eventually it will come back to bite us.

Current Credit to Debt ratio

You can find our public debt here.

Traders note:

Markets seem to be in its last breath. I doubt major indices will be able to break 200 ema (currently S&P is at 960), as they were turned down a few times from that level. I also think Oil trade is over. It has gone up too much too fast like the rest of the commodity shares.

Some Interesting Charts

1. Case Shiller Index (March 2009)

2. U.S Federal Budget Deficit

3. U.S Civilian Unemployment Rate

Posted: 06|11|09 at 9:44 pm. Filed under: Economy. Pinging is currently disabled.