It ain’t over until we say it’s over.
10 reasons the crisis isn’t over
Commentary: There may be a lot more bad news to come
By Brett Arends, MarketWatch
BOSTON (MarketWatch) — Boom!
Stock markets around the world soared yesterday. The Dow jumped more than 300 points.
News out of Europe says they’re working on a fix to resolve the crisis there. Reports here say the holiday season may be off to a strong start. Sales on “Black Friday” may have hit a record.
So, is that it? Is the crisis over? Is it time to ramp up your equity exposure, take on more risk?
Heavens. Anything can happen. And, OK, there are stocks out there that look pretty decent value.
But here are ten reasons to be skeptical. This so looks like a dead cat bounce.
1. The market was due a rally. The Standard & Poor’s 500 index (SNC:SPX) had fallen seven days in a row. But equity markets never fall in a straight line. After a long run of down days, people who’ve been betting against stocks by selling short get tempted to lock in some of their profits by buying stocks back. Others who want to buy stocks see sharp falls and get tempted to “bargain hunt.” This inevitably produces quick, sharp rallies. This one may last a day, a week, a month or more. That doesn’t mean a thing about long-term trends.
3. The reports from northern Europe are absurd. Markets are excited by reports that Germany, France and Brussels are working on a new “bailout” plan. But look at the details! Under the proposals, the European Union will help insure the debts of countries in crisis, but in return it will be given veto powers over the budgets of the countries in question. This idea can’t survive 10 seconds of serious thought. The Greeks are rioting over budget cuts proposed by their own governments. What possible chance is there that they — or the Italians, or the Spanish — would accept austerity measures imposed by Brussels?
4. Are the Germans suddenly reflationists? The only politically feasible way out of the European crisis is to turn on the printing presses. That either means letting the European Central Bank print more euros, or letting countries like Greece drop out of the euro, so they can print their own currencies. But so far neither is on the agenda. Germany won’t let the ECB print. And countries aren’t ready to drop out of the single currency. Until one of these happens, there will be no resolution to the crisis.
5. Italy is still in trouble. Gross government debts are 120% of gross domestic product, and even net of intra-government liabilities they are 100%. Ken Rogoff and Carmen Reinhart, in their sweeping history of financial crises, This Time Is Different, found that 100% was the “tipping point” for serious trouble. No wonder investors are demanding 7.5% annual interest to lend money to Italy for five years — compared to just 1.3% for Germany. And they’re demanding more than 6% to lend to Spain.
7. The U.S. consumer is still broke. Among the more baffling reasons for cheering yesterday was a report saying that “Black Friday” Christmas sales jumped sharply from 2010, hitting a new record. Investors saw the chaotic — and nationally embarrassing — scenes over the weekend, fistfights, pepper sprays and the like. Bloomberg reported on a woman 12 weeks pregnant camping out in the freezing cold to get a deal on a flat screen TV. If anything, this should make rational people more gloomy. Have we learned nothing? The numbers are not heartening. Despite the lies you read and hear, telling you that American consumers “are repairing their balance sheets,” the truth is total household debts in this country have fallen by a mere 4.5% from the record peak at the height of the bubble a few years ago. They are still 20% higher than they were as recently as 2005, and twice what they were in 1999. According to the Federal Reserve, consumer credit levels are rising. And according to the Commerce Department, households are saving less than 4% of their disposable incomes — a fraction of the levels seen decades ago, and well down even from 6% or more seen in 2008-9. Read “Black Friday sales hit record, giving season hope.”
8. Millions here are still out of work. The unemployment situation is far, far worse than the government is telling you. Forget the official jobless rate, 9%. It’s meaningless. Even the so-called “underemployment” rate doesn’t tell the full story. Consider this: According to the Labor Department, the number of men age 25 to 54 who are out of work is officially 4.2 million. The reality? Deep in the footnotes the Labor Department says there are 61.6 million men in America age 25 to 54, while just 46.7 million are in full-time work. That leaves 14.9 million left over. Another 3.7 million work part-time. Seven million aren’t accounted for at all.
9. Meanwhile equities still aren’t cheap. This shouldn’t be overstated: There are reasonable deals out there, especially among some of the blue chips here and overseas. But U.S. stocks overall trade on 21 times their average earnings of the past 10 years, according to data compiled by Yale economics professor Robert Shiller. This, the so-called “cyclically adjusted price/earnings ratio,” has proven historically to be a reasonable yardstick. The average since the 1880s has been about 16 times.
10. The economic outlook is gloomy. Western governments have spent the last few years borrowing heavily from the future to try to stimulate growth today. According to the IMF, in the past three years the gross debts of the advanced economies have risen in aggregate from 80% to 100% of their entire GDP. We are likely to see them tighten their belts next. This was the agenda of the budget “supercommittee” here and of austerity plans in Europe. No wonder the OECD warns that it expects world economic growth to slow next.
Sure, you can overdo the gloom. The economic fundamentals always look terrible — they call it “the dismal science” for good reason. Maybe events will turn out better than feared. Let’s hope so. But it’s still a little early to break out the Champagne.
TeresaE says:
When 2008 started imploding, I told people that we would eventually look back on the horror of 2008 and remember that as one of the better times.
I don’t even think we are truly in the eye of the storm yet. More like 2008 and was the leading band, we are currently in between storm bands and have a long way to get to the other side and its horrific destruction.
Of course sales are “up.” Inflation is up, population growth is up, freight is up, taxes are up and the evil banks are (again) offering 0% teaser rates.
Just like the revisions to unemployment, CPI and GDP are about 80% of the time changed to the negative, so is the advanced sales number concerning Black Friday.
In between bands, just waiting to see what the hell hits next.
Happy Holidays, Third Millennium/Fourth Turning Style!
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29th November 2011 at 9:36 am
Welshman says:
It is OVER, life as we knew it. Adjust and learn to exist to a new starndard of living. Go LOCAL as much as you can and afford too. I won’t break out the Champagne until Ron or Rand Paul is in the Oval Office.
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29th November 2011 at 9:39 am
matt says:
You have to wonder what the real end-game will be like. There is no possible way of extending this mirage much longer. Inflation, debt, unemployment, fucked housing market, global political chaos….I have really tried hard the last few years to uncouple from debt and unnecesary materialistic items. I feel good about that, but it’s hard to stay focused when your neighbors are driving new Escalades and spending Thanksgiving in Hawaii. There is no reward in being frugal, no one brags about how cheap they are.
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29th November 2011 at 10:30 am
Muck About says:
No news here, friend! Move along to the next checkout lane and be sure and use your “XYZ” credit card – only 36% interest! Bargains everywhere you look…
Barf..
MA
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29th November 2011 at 10:37 am
cv51 says:
Matt: “There is no reward in being frugal, no one brags about how cheap they are.”
The reward will come in spades. You will have piece of mind knowing that your family is taken care of. Your neighbor on the other hand will be a zombie.
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29th November 2011 at 11:03 am
AKAnon says:
Matt-I do.
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29th November 2011 at 11:06 am
matt says:
Thanks guys,
But won’t the frugal savers just end up bailing out the wreckless spenders in the long run?
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29th November 2011 at 11:18 am
Maddie's Mom says:
“…but it’s hard to stay focused when your neighbors are driving new Escalades and spending Thanksgiving in Hawaii.”
matt,
But are they _happier_ than you?
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29th November 2011 at 11:19 am
AWD says:
So much optimism, where to start? Of course nothing has changed. You can’t change debt except by either paying it off, forgiving it, or writing it off. Debt is the global problem. Politicians decided to borrow their way into popularity, and people got awfully lazy warming desks in endless government jobs gotten from relatives and insiders. There is more debt than can ever be paid back, from the high school kid with a credit card to our $15.1 trillion dollars. Bottom line, nothing has changed. The government is going to grab all your money and guns sooner or later, for your protection, to pay themselves and the military, which will be the last thing to go. People in third-world countries are going to be the beneficiaries, as the developed world goes into anarchy and war. Pick out an acceptable third-world country, visit and shop for property, and plan to get out of here for there in the near future. Your as good as dead if you stay in the U.S.
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29th November 2011 at 12:26 pm
Stucky says:
Go to drudgereport.com Left hand column. Lots of fear about the Eurozone collapsing. Perhaps within days.
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29th November 2011 at 12:37 pm
matt says:
Maddie’s Mom,
I hope they are happier than me, they appear to be. I know some friends with 25k-35k credit card bills on top of huge mortgages and car payments, they don’t think twice about it. Am I missing something? Why not buy everything you want on credit and not worry about tomorrow, because when the music stops everyone is going to suffer. Whether you have debt or not, the NWO won’t care. AWD is right, the government will take your shit if you have any so what’s the point?
3rd world countries, has anyone given any thought about Mexico? It’s close and I think you could probably hide out down there for awhile.
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29th November 2011 at 12:42 pm
Appalachian Trail Deblazer says:
Frugal – when I go to motels I take my burned out curly lights and exchange them for the ones in their fixtures. Forget swapping towels, there’s are like sand paper and won’t soke up water.
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29th November 2011 at 12:55 pm
PARIS HILTON says:
A T D:
You cheap bastard!
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29th November 2011 at 1:25 pm
Pirate Jo says:
My best friend’s parents are the perfect examples of Boomer spendthrifts.
They live in a middle class house built in the 1970s. It has been refinanced and used as an ATM so many times it will never be paid off. They will always have car payments, financed out as long as they can stretch them, and as much credit card debt as they can possibly make the minimum payments on.
They’ve been on more than fifty cruises.
I’m completely different. To me, the whole point behind getting a house as opposed to renting was that I could get it paid off and not have to bother with house payments anymore. So I bought half of what I could afford and paid it off in half the time. I drive a 13-year-old car that’s getting a little janky around the edges, but it’s like an old tube of toothpaste – I can probably squeeze a little more out of it. And then I’ll buy another used car and pay cash for it, too. No credit card debt. No student loans. I worked two jobs until all that was paid off.
But I’ve never been on a cruise. So who’s right?
Well, that all depends on what people want. I care about freedom. I want to be able to leave a job that sucks or a boss who’s a jerk. I like to give money to charities I care about. And I could take a cruise any time I wanted, but it doesn’t sound like that much fun to me. I don’t want to go on a scripted trip where I’m packed on a boat with a bunch of people. I’d rather ride my touring bicycle across Iowa. I don’t need money to do that, I need time.
Based on what my friend’s parents like doing and what they want, they are doing everything right. Based on what I like doing and what I want, I am doing everything right. Even though we’re doing two completely different things. I don’t judge them – they are happy. But I wouldn’t be happy doing the same thing.
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29th November 2011 at 1:33 pm
FRED FLINTSTONE says:
PIRATE JO:
I often think similar thoughts about being thrifty. I wonder how bad it would suck if I worked like a dog and saved, and then died before I reached “the finish line”.
I worry about having paid off my house (smaller than I could easily afford) when others may get their debt eradicated.
I decided to enjoy the hell out of my life, provide for my kids, have a wealth of memories and experiences, and still live reasonably within my means. If I want to splurge and break bread on something I do. I don’t know (economically) what tomorrow will bring, but the peace of mind of not being indebted is reassuring, I guess balance is the key
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29th November 2011 at 2:03 pm
ron says:
Should be a big show when people start to lose theyre homes after paying for them for years,more than whats going on now.I told this to someone and they said the banks wouldnt take peoples homes.
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29th November 2011 at 2:43 pm
Pirate Jo says:
Fred, it’s probably my analytical nature, but if I broke out my expenses and saw that 30% of what went out the door was just interest on past spending, that would really irritate me.
I think it comes back to doing what makes you happy. I am so used to working hard and saving, it doesn’t seem like a burden. And I value the freedom of not being in debt more than I value the things the debt would buy. But there is no reason for people to feel like they’re working and slaving away for no reward if they don’t have the same values I do.
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29th November 2011 at 2:47 pm
ron says:
Should be a big show when people start to lose theyre homes after paying for them for years,more than whats going on now.I told this to someone and they said the banks wouldnt take peoples homes.I told him not to count on the generosity and warmth of the banks.
I recommend a paid for place out of the citys,even if its a small piece of dirt with a shack your better off then being in a city with people loseing their minds.
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29th November 2011 at 2:51 pm
Novista says:
Christmas, the Last Hurrah! And then comes 12/20/2012 …
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29th November 2011 at 9:34 pm