Goldman Gets It, and the Outlook is Bleak

As expected, the S&P500 bounced up from an oversold level; it rose 5.4% last week.  But volume did NOT confirm the price rise; last week’s volume was among the lowest of the year.  The VIX (or fear) index did improve, suggesting that investors became far more tolerant of risk over the last four trading days.  

Very little economic news was announced during the holiday shortened week.  The ISM services index disappointed by rising less than expected.  Initial claims fell slightly, but they still remain at stubbornly high levels that normally occur during recessions.  Also, continuing claims plunged, NOT because people suddenly found jobs, but because they lost their unemployment benefits.  Over 2 million people are expected to lose benefits in the month of July alone.  Consumer credit stunned economists.  Not only did it fall almost five times more than expected, but the previous month’s slight gain was revised to a whopping $15 billion drop.  Consumers, who make up 70% of the US economy, are severely cutting back their spending.

Technically, the S&P is still in a downtrend from both the daily and weekly perspectives.  The daily charts suggest that last week’s big bounce–although it might have some more to go next week–will be ripe for a pullback soon.  The S&P, on the weekly charts, is starting to form a downward channel, where previous week’s low (around 1,010) touches the bottom line of the channel and a rise to 1,110 would touch the top line.  We’ll see if this channel holds over the next two weeks.

One of Goldman Sachs’ leading economists, Jan Hatzius, recently analyzed the simple, yet unalterable, realities of the US economic calculus. 

As reported in ZeroHedge, Hatzius reminds us that with imports continuing to exceed exports by 3% of GDP, and with the private sector (households and firms) saving 7% of GDP, the public sector (federal, state and local governments) must run a deficit (dissavings) of 10% of GDP to neutralize the negative effects of trade and the private sector.

But Hatzius points out that there is NO political support for the US public sector to run such massive (10% of GDP) deficits much longer.  The US will soon start pulling back from its monstrous (10% of GDP) deficits.  So that means that total demand will fall short of total supply in the US economy. 

The result?  The economy WILL take a turn for the worse–again.

But if the US can’t fire the fiscal stimulus gun much longer, what about monetary stimulus?  Can’t the Fed do more?  Well, rates can’t be lowered much more; they’re virtually at zero percent already.  And printing more money to buy more Treasuries and Agency securities would also not be sufficiently effective to counter the soaring savings in the private sector.

Hatzius concludes by implying that there’s pretty much nothing that can be done to avert another downturn.   Austerity, here and around the world, will almost guarantee that the Great Recession has much more pain in store for us.

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