The Cyclical Recovery is Fading–Fast

The S&P stumbled again last week, falling 2.3% with most of the damage occurring on Friday after the US jobs report was released.  The volume was heavy when it mattered–on Friday during the violent sell-off.  The VIX (or fear) index jumped up 10%, but not violently as it did during the flash crash.  The equity markets were reasonably calm as stock owners focused on one thing:  to sell. 

Most of the economic data were weak.  ISM manufacturing met expectations; ISM services did not.  Pending home sales rose, but this was all because of the US tax credit, which has expired.  Mortgage applications for home purchases plummeted to levels last seen in 1997; this is another ominous sign that the US housing market is about to keel over–again.  Initial jobless claims also disappointed.  Factory orders came in below expectations, and retail sales were not as strong as expected. 

The big story was jobs.  Nonfarm payrolls showed 431,000 jobs created in May, not the 540,000 predicted.  What’s worse,  411,000 of these were temporary government jobs (most of which will disappear over the next six months).  That leaves only private 20,000 jobs created in May.  But when the Birth/Death model’s magically created 215,000 jobs are subtracted, 195,000 true jobs were actually LOST in May.  Not good.

Technically, the downtrend that began in April is strongly in place.  In fact, on a daily basis, prices have fallen so much and so fast that they’re due for some sort of pullback to the downtrend line, the 200 day moving average, or even the 50 day moving average.  This means that the S&P could rebound back up to 1,100 or even 1,150 without breaking the downtrend.  On the weekly charts, the S&P is still not oversold (to get there, it would have to break down below 1,000).  This means that there is a lot more room for further declines if the S&P fails to rebound over the next two weeks. 

The jobs report shocked most market analysts because it forced them to question the widely held belief that the US economy is in a “nascent recovery”.  By now–over two and a half years after the recession began (December 2007)–most other recoveries after the Great Depression were generating far more jobs.  And GDP growth is usually far more robust than 3.0%. 

So what’s happening?

To start, we must separate cyclical trends from secular trends.  The business cycle HAS bounced back somewhat from its 2008-2009 implosion.  But this rebound is not strong and not long-lasting.  Recent GDP and jobs data suggest that it’s already fading.

The reason is that the US economy is in a secular decline, which started after the dot-com collapse in 2000.  This downtrend has never changed–it is still in effect and has many more years to run.

Why?  Simple.  Total credit market debt to GDP, at 375%, is so far out of balance that it will take ten years to bring it back to a sustainable level of about 175%.

The US economy is overindebted–at the household level, at the corporate (financial) level, and at the government level.   And don’t think that removing 200% of GDP of debt will be painless; that’s almost $30 trillion that must be paid down, defaulted on or inflated away.

At best, we fact a decade of austerity.  At worst, we face economic (and possibly social and political) collapse.

The so-called recovery is now history.  Harsh reality has now returned.

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