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Catching a Falling Financial Knife

As the Stimulus Fades U.S. Economy and Stock Market Loses Steam

Economics / US Economy Jun 16, 2010 - 09:10 AM GMT

By: Claus_Vogt

Economics

Best Financial Markets Analysis ArticleOver the past two years, we’ve seen the largest stimulus policies the world has ever produced.

As a result, sovereign debt and central banks’ balance sheet holdings have gone through the roof!


A glance at the monetary base chart below shows how extraordinary these policy measures have been in the U.S.

Board of Governers Chart

When a government and its central bank throw hundreds of billions in taxpayers’ dollars at the financial markets and the economy you’ll definitely see …

Desired and Undesired Consequences …

The official desired short-term consequences include the huge stock market rally off the March 2009 lows and the economic rebound since mid-2009.

On the other hand, the undesired, longer-term consequences will often be swept under the rug by short-sighted politicians and central banks.

So today I want to focus on two of those undesired consequences, ones Washington wants you to ignore:

Undesired Consequence #1— The Unstable Economy

The stock market rally since March 2009 has indeed been impressive. But according to many measures the economic rebound has been extremely weak …

The easiest way to understand how weak this recovery has been is to look at the work of the National Bureau of Economic Research (NBER).

Founded in 1920, the NBER is the nation’s leading nonprofit, economic research organization dedicated to promoting a greater understanding of how the economy works. And it is the official arbiter of recessions in the U.S. — giving notice when their researchers determine a recession has begun and when it has finally ended.

The number of jobs in the U.S. hasn't increased in 10 years.
The number of jobs in the U.S. hasn’t increased in 10 years.

And as recently as yesterday, the NBER has NOT declared an end to the recession that started in December 2007.

Especially troubling is the labor market …

According to the Federal Reserve, the number of working Americans isn’t any higher today than it was 10 years ago! Since Census figures show the U.S. population is growing by 2 to 3 million every year, this stagnation in job growth is a giant roadblock for an economy struggling to dig out of a recession.

Undesired Consequence #2— Weakening Financial Indicators

At the same time some important leading economic indicators have begun to roll over again. The most obvious is the stock market, which has declined more than what is considered a normal 10 percent correction since its April high.

This has to be rated as an ominous sign.

Then the Conference Board’s Index of Leading Economic Indicators (LEI) started to turn down in April. The year-over-year percentage change declined to 10.2 percent from 11.5 percent.

This reading is still far from a recession warning. But it may very well be the turning point for this cycle. And history shows the LEI can decline very quickly after the turnaround is in.

Finally, there is the Economic Cycle Research Institute’s (ECRI) Weekly Leading Index, another major leading indicator. It has just fallen to minus 3.5 percent — the lowest level in the last 10 months.

I’ve marked this level with a red horizontal line in the following chart. If it keeps falling, even by a little bit in the coming weeks, its message will be loud and clear: Double dip recession ahead!

Index GPOChart

As the Stimulus Fades the Economy Loses Steam

I’ve just given you some of the early, but usually reliable, signs of a deteriorating economy. But you shouldn’t be surprised about this sad development. The fact is, no matter how much money is thrown at the problem, the economy isn’t getting any traction. Nor has it entered a self-sustaining recovery.

The economic rebound we’ve seen in the past months is just the short-term reaction to the unprecedented stimulus programs. And as the stimulus money fades away, so does the economic recovery — and so does the stock market rally.

Best wishes,

Claus

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


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Catching a Falling Financial Knife