Monday, June 29, 2009

Silver Bullet For The U.S Economics Outlook

Two more days left of second quarter. Big institutions usually manipulate market in end of quarters. Indices have been rallied in past 3 months base on speculation of recovery,but there is a limit to how far speculators can push the market higher, if this rally wants to continue we should get some good news soon, so far all we got was less bad news. Spring is ended but there is no sign of "green shoots" yet.

The number of U.S. workers filing new claims for jobless benefits unexpectedly rose last week and the number staying on the rolls after collecting an initial week of aid also edged higher, government data on Thursday June 25th showed.
Initial claims for state unemployment insurance increased by 15,000 to a greater-than-expected seasonally adjusted 627,000 from a revised 612,000 the week before, the Labor Department said. Analysts polled by Reuters had forecast claims to drop to 600,000 from a previously reported 608,000. so there is not much "green shoots" in job market.

The 0% Fed Funds and T-bill rates have helped create a Treasury yield curve that, in this case, is misleading ; as it has sometimes been in the past. Towards the end of 2001, the U.S. also had a steep yield curve, similar to the current environment. In swift fashion, the Fed had taken the overnight Fed Funds target from 6.5% at the beginning of 2001 to 1.75% by year’s end to combat a potential recession. On December 31, 2001, the 10-year T-note closed at 5.03%, which meant that a steep yield curve was in effect. Even though a steep curve existed, the S&P 500 did n’t bottom until 10 months later in October 2002, and it had another 31% to decline. So, the steepness of the yield curve couldn't’t prevent another leg of a bear market during most of 2002.

This example shows yet again that the tools that policy makers use are at the mercy of mass psychology. Social mood, currently suggests that we should prepare for an even more glaring example of the steep yield curve’s inability to come to the economy’s rescue.

A grand super cycle decline in U.S. equities accompanies a massive supply of T-bonds coming to market. In the market forecasting business, I try to look around corners before reaching them. In this case, I'm suggesting that the U.S. is going to see an equity and bond decline, with a further steepening of the yield curve, because the demand for US T-bills will continue to be high. As such, many market watchers will incorrectly suggest that markets are ready to bottom due to something that “should” allow an economy to function properly: a steep yield curve. In this instance, though, the steeper the curve, the larger the problems are likely to be. If mortgage rate keeps increasing it would harm the housing market, because it make the houses less affordable and refinancing less favorable, and this is what we need to avoid, if housing market won't recover this severe recession is going to become the great depression II. So there is not much "green shoots" in here either.

Treasury Yield Curve Rates Table:

Treasury Yield Curve Rates Chart:

Many in Wall street hope that China comes to the rescue the world, but China is not capable to do so. I need to mentioned that only 30% of Chinese GDP comes from consumer consumption vs 70.9% U.S. GDP comes from consumer consumption . If you are familiar with Chinese culture you knew Chinese people are more of the savers not spenders and this is in their blood, and it won't change overnight.

I need to remind my readers while the Shanghai composite index is up 70% since November, Chinese imports are down 25% from a year ago. China is still draining real stimulus from the global economy. They are the makers not the consumers period.
If the world's biggest surplus state $400bn is too structurally deformed to help offset the demand shock as Western debtors retrench, we are trapped in a long deflation slump which is in absolute contradicts with what Bernanke says. So there is not much "green shoots" in China either.

In the end 2Q earnings would be the silver bullet that could potentially clear the U.S economics outlook. We need to see revenue growth not cost cutting, obviously companies fired many employees and closed factories that would help them to save money, but cost cutting can't continue for ever. They need to make money. If by 3rd quarter we don't see revenue growth this rally will fall apart. With in the next couple weeks we will find out if there is any "green shoots" out there or Bernanke was hallucinating when he said "I saw the green shoots of economics revivals".

Bernanke in an interview on 60 Minutes said that he does “see green shoots of economic revival"!