This is serious; what cures are there for pathetically small job creation and the suffocating weakness in real home prices? Dr. Bernanke has no magic potions. Congress and the White House are bewildered. The big Wall Street houses are just plain wrong on their prognostications. The risk trade in equities and many commodities are under selling pressure. There's not much help coming from rest of the world, where Japan is crippled, China in the midst of a directed slowing, Europe in a debt crisis.
The lousy job figures have cleaned the clocks of the equity market and been a boon to the bond market, driving rates down below 3% on the 10 year note and driving up bond prices. Last week's auctions of the 2 year, 5 year and 7 year treasuries were oversubscribed. In this lousy economic climate we might not even need Chinese buying of governments.
Here's a dispiriting rule of thumb to consider. Self-reinforcing trends are fine when the economic cycle is in the up phase; but they are disastrous when the downturn starts gaining momentum. Plug that notion into your portfolio strategy. The economic cycle looks to have peaked, and recovery looks to be slowing down.
Housing prices have fallen over 30% and are supposed to rebound in a recovery. But, instead they have continued to lose another 7.1% in value during the past 2 years of a stock market climb of 80%. And there are estimates of many millions more homes where the mortgages are larger than the homes are worth. Home prices might take years to truly bottom out and come back.
"The abysmal jobs report in the U.S. crowns a two-week period of shockingly weak data for virtually every sector of the economy" writes Sherry Cooper in The Bottom Line: U.S. Pothole -- from the Bank of Montreal. "Housing and jobs are crucial to a sustainable rebound in confidence and growth. And both are contingent upon confidence in the longer-term outlook."
As austerity is the mood of the federal government, it is doubtful another massive stimulus program is coming. Perhaps the scariest notion is that QE2 didn't work and the recognition that monetary policy cannot control the progress of economic recovery as well as it was hoped. This upsetting point is the focus of Robert Smith, CEO of Smith Capital's credit note this week. Smith is the astute analyst of the current patch to predict that inflation was not in the offing- and predict that interest rates were headed lower -- not higher. Give Smith credit for understanding that the Fed has no oversight of the shadow banking system -- which is now twice the size of commercial banking.
What's happening here is a liquidity trap -- where there is ample money, but its not going into job creation, home building or consumer spending. It's time to raise some cash.