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Goodbye to Global Economy Fear, Hello to Global Market Greed

Yesterday, Dan promised to write more about lead and the deflationary prophecies of John Exter. I’ve muscled in on today’s Daily Reckoning, and will be here tomorrow too, so make sure you read the weekend edition for Dan’s follow up from yesterday.

For now…hello greed! It’s been a while, but it feels like 2007 again, without the innocence. Only in this late, degenerate stage of a crumbling financial architecture would global stock markets rally so strongly on the news that the US has no intention of cutting its deficit…the fiscal cliff threat was a mirage all along.

Actually, we can hardly believe that anyone would have thought the US ever intended to be fiscally responsible in the first place. This is an economy addicted to debt. Cutting deficits by increasing taxes and reducing spending would put the US economy in a deep hole.

Ever since the ‘recovery’ from the GFC, the US has run $1 trillion plus annual deficits to prop up a badly maladjusted economic structure. That level of spending will continue for years to come. In fact, for the first three months of the US fiscal year, US government debt grew by $366 billion ($1.46 trillion annualised).

The government has now come up against its debt ceiling…again. With the fiscal cliff circus just ending, we’ll be treated to another one in a few months’ time as negotiations on increasing the debt ceiling begin. But it won’t really matter. It’s already a done deal. There is no political will for fiscal responsibility in US, or anywhere for that matter.

Which explains the surge in equity markets. The Dow Jones industrial index had its best day in more than a year, jumping over 300 points. According to the Wall Street Journal, all 30 Dow stocks rose and 94% of S&P500 stocks finished higher on the first day of trading for the year.

That’s a powerful rally. It indicates there’s probably more to come as the greed effect takes hold. Money is moving from bonds into equities not because of any economic recovery, but because governments are crazy and will spend their way into oblivion. How that eventually impacts the equity market is anyone’s guess. But right now no one really cares. They’re moving into risk assets…dancing while the music is playing, to use an ill-fated phrase from 2007.

They’re clearly not buying because the economy is healthy, although an incurably optimistic Keynesian would argue that all this government largesse will lead to economic improvements down the track. Recent manufacturing data shows the global economy continues to tread water. The following chart is a global manufacturing index. It rose to 50.2 in December, up slightly from 49.6 in November. So the global manufacturing sector is barely in expansion territory (as denoted by a reading above 50).

JP Morgan Global Manufacturing PMI
JP Morgan Global Manufacturing PMI
Source: Markit Economics

In Australia, the manufacturing sector declined for the 10th straight month in December, with a reading of 44.3, unchanged from November. The only sub-component in expansion mode is wages. But a strong dollar and high wages doesn’t make for a competitive manufacturing sector.

Regards,

Greg Canavan
for The Daily Reckoning Australia

1 Comment

  1. watcher7 says:

    Triple Bubble for the Corporate, Household and Government Sectors

    “Every movement in the stockmarket, minor, secondary or primary – is ultimately corrected. The “double bubble” that we’ve experienced under the Greenspan Fed is unprecedented in stock market history… [Greenspan] had succeeded in building a bubble in housing, a bubble in consumer debt, and a bubble in bonds and he’s succeeded in resurrecting the bubble in stocks”” (Richard Russell, Markets and Gold, dowtheoryletters.com, September 1, 2003).

    The quote from Richard Russell, occurred during the double bubble, which was inflated by Alan Greenspan, after the stockmarket crash of 2000-02. Now his successor, Ben Bernanke is inflating a triple bubble, after the stockmarket crash of 2007-09. In light of this, Richard Russell’s quote may be re-written for today, if the recovery in the housing and the stockmarket continues:

    The “triple bubble” that we’ve experienced under the Bernanke Fed is unprecedented in stock market history… [Bernanke] had succeeded in building a bubble in housing, a bubble in consumer debt, and a bubble in bonds and he’s succeeded in resurrecting the bubble in stocks.

    The first bubble (shares) peaked in 2000 and the second (shares and housing) in 2007; the third bubble (shares and housing?) peak is yet future.

    “During this period [end 1995 to end 2007], Household Debt swelled 184% to $8.959 TN; Non-farm Corporate Debt 130% to $3.832 TN; and State & Local Government borrowings 109% to $2.192 TN. Federal debt expanded “only” 41% to $5.122 TN” (Doug Noland, A Week of Big Numbers, prudentbear.com, February 27, 2009).

    “The Wall Street/Mortgage Finance Bubble ran to such incredible extremes that its subsequent implosion has created the near ideal backdrop for the explosion of Government Finance (as the tech implosion did for mortgage finance)…” (Doug Noland, The Government Finance Bubble, prudentbear.com, February 6, 2009).

    The Goverment Sector needs to be as vulnerable as the Household and Business Sectors so that when the crisis to end all crises in this economic upwave, that started in 1949, arrives the outcome will be deflation and depression.

    The third bubble is the Global Governments and Global Central Bankers Bailout Bubble (the cause) and rising shares and housing (the effect).

    If the Dow Jones exceeds the 2007 peak, another peak may be added to the graph with the label “Govermnents,” and changing the scale to the Dow Jones. So the first peak – the tech bubble of 2000, using the Dow Jones, instead of the Nasdaq, the latter peaking three months after the Dow, would be 11,722; the second peak – the housing bubble of 2007 would be 14,164.53, and a third peak – the Global Government Debt Bubble, yet to be determined.

    Above from The American Share and Housing Bust -The Second Stage (http://www.members.optusnet.com.au/futurewatch/id63.htm)
    see also The Bail-out Bubble Expansion – And the Next Great Depression (http://www.members.optusnet.com.au/futurewatch/id87.htm)

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