I want to suggest that the recovery is over.
How’s that for unwise? Nevertheless I think it is. Today it ended. Here is a possible scenario if I am right.
I think the recovery ended for two reasons. The first I wrote about in the last post – the consensus among those directing our current ‘save the banks’ policy has fractured and broken apart. The second reason is that the ‘recovery’ people simply have no more potentially good news to point to, to say, ‘signs of our success are just ahead’. They are simply out of time and bullets.
Don’t underestimate how seriously bad the fracturing of the consensus is. Up till now the various partners have held the line. The Stock market, Bond Market, Fed and Big Banks have all, more or less, shared one goal – and been seen to share one goal – save the big banks = save the system. That has ended. The strains of the non-recovery in consumer spending, employment and the ever rising government debts have taken their toll. The hugely negative PR value of their consensus being seen to fall apart is enough to prompt a double dip all on its own. Once we see theearstwhile partners in public looting, turn on each other, as I think they will over the coming weeks, it will just make the whole thing uglier still.
I think we will see the unanimity of the FED fracture into public arguments. I think the tensions between the needs of the Bond Market, the Stock Market and the FED to get buyers – for stocks, bonds and debt issue will become public and shrill. So far they have been taking turns at the artery. But each is now nervious verging on unwilling, to wait for their turn, in case the blood flow stops.
Then there is the fact that there is just no potentially good news they can say is going to arrive, like the fabled cavalry. Unemployment has definitively NOT improved. Even the chip munching morons are aware of this now. As they are aware that housing also has not improved. It has become too clear that the small increases in house sales were the result of tax breaks and stimulus which have ended. The wave of Commerical Real estate carnage is now undenaible. As are the losses on Helocs and second lien loans. The first IS crippling and closing 4-5 regional banks a week. The second amounts to well over a hundred to two hundred billion more write downs for the big 5 banks. Enough to push their heads under the rising quicksand.
Which brings me the last point I want to make – Who will be forced to open an artery for another massive government bail out first?
Everyone has done one at least. The EU being the last. Who will be the first to admit they have to do it again? I think this is the question every government has been staring at, in a cold sweat, for a month or more. I think they all know whoever is forced to do it will die. Those who can wait it out will survive because the sacrifice will have been made. Or so they think. Actually, I think they are wrong and they will just survive a little longer. But surviving a little longer has its appeal, so they will fight to to the death to make sure they aren’t the first one to go.
This is mainly a fight between the US and the EU. Between Berlin and Washington. If the EU has to admit its silly shlock and puke effort has failed, and it has to look for more, then the Euro is finished as a currency. Money will flood back to the Dollar and dollar bonds and the US will think it is saved.
If the EU resists and takes whatever pain various defaults inflict upon its banks and its growth, then the waiting game of smiles and false friends will continue towards the US’s own crisis moment. That comes in two places. First in the up-coming elections. Those could seriously destabilise market faith in the US being able to cut deficits and protect its banks and its currency. Then there is the looming round of State bankruptcies. These have been rumbling for a while and will rumble and swell like a volcanoe about to blow. The new school year in September will be the flash point. At that point the scale of cuts, closures and State deficits, will not be able to be put off or hidden any more.
Public service cuts, State employee lay-offs, inability to pay unemployment benefits and pensions will all back up like magma in the chamber. The States are bust. They will come to the Treasury just like Greece and Portugal have come ot the ECB. Will the Federal government tell them to sod off? Not after they have subsidised the banks with hundreds of billions of mis-spent tax dollars. And not with the slaughter that would ensue in the market that insures municipal and state debt. So they wil have to go for yet another and even bigger Treasury and debt busting stimulus. At which point the dollar itself will be seen to rock on its foundations.
We entered the weeked with the Dow 300 points, 3% down and without a ramp job in sight. Everything was being sold: Financials, energy, insurance, retail (largest sell-off in a year) – a broad sell off. The Euro fell and fell as did European markets – which will tumble again on Monday.
This is Europe versus the US now. He who blinks dies.
Isn't it in the interests of the dudes on the bond markets to avoid global meltdown and continual bailouts? What is the benefit to them of perpetuating this cycle through their annoying lack of confidence?
At first everyone wanted the bail outs. Bill Gorss of Pimco nearly crapped himself when he thought TARP wasn't going to be passed. He was one of the 'end of the world' unless you pass it people.
He wanted the banks and some of his investments made whole. But now he and the ereast of teh Bond market are getting worries that the continuous bailouts will undermine the value of the currencey's in which their bonds are valued.
The banks still want more bail outs. The bond market are no longer so sure. Ideally they would bpoth like more bail outs IF savage enough cuts can be forced on people to compensate. But the more countries look like they may default on what they owe the Bond market then the more the Bond buyers get nervous.
The immediate worries of abnks and bond markets are no longer identical.