The S&P500 slipped ever so slightly (0.2%) last week on light volume. The VIX (or fear) index also slipped for the week. Volume was light. Now, more than ever over the last seven months, the market is stalling in the face of doubts about the strength of the economic recovery.
The economic data were mostly weaker than expected. While retail sales were stronger than projected, retail sales ex-autos were much weaker than expected. The Empire State Mfg survey came in well below expectations. Industrial production also disappointed; it rose only 0.1%, not the 0.4% economists had projected. PPI and CPI did not raise any red flags. PPI (producer prices) were weaker at the monthly core level and the and the annual headline level. Housing starts and permits were a huge miss. Starts, for example, were projected to rise to 600,000. Instead, the fell to 529,000. Also in housing, the Mortgage Bankers Association announced that 14% of all mortgages (Q309) were either in delinquency or foreclosure, the highest level of distress ever recorded by this group. Initial claims were still above 500,000, and the leading indicators rose, but less than expected.
The technicals, on a daily basis, are suggesting that the S&P is struggling to move higher. The 1,100 level has provided strong resistance on several occasions over the last two months. The weekly charts are also very toppy and pointing to a pullback. The probability of a pullback seems very high; the magnitude of such a pullback is less clear. The monthly charts are still confirming a long-term downtrend, the two-year old bear market that began on late 2007.
The Bank of International Settlements (BIS), located in Switzerland, is often called the central bank for central banks. A leading economist from the BIS commented, in a piece written in the Telegraph, on the causes of a major financial crisis.
And no, the BIS did not blame the sub-prime crisis in the U.S. Instead, the BIS pointed the finger to the US Federal Reserve for allowing massive credit bubbles to be blown. For example, “How could such a huge shadow banking system emerge without provoking clear statements of official concern?” Also, “The fundamental cause of today’s emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low.” And, “Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.”
Finally, “To deny this through the use of gimmicks and palliatives will only make things worse in the end.”
When was this article published? June 2008, well before the global equity and credit markets crashed.
Not only was this warning highly accurate in forecasting a crisis, but it suggests that the U.S. Federal Reserve–today–is pursuing the wrong strategy to fix the problem.
What’s the Fed and our government doing instead? Propping up asset prices with new bubbles; changing accounting rules to allow big banks to hid bad debts; encouraging consumers and business to increase spending and borrowing (think Cash for Clunkers and New Home Buyer Tax Credits).
It hasn’t worked in Japan for the last fifteen years. It won’t work in the U.S. today.