Global Stimulus Fading Fast

The S&P500 moved up another 1.4% in a continuation of the bounce from the mid March sell off.   Volume fell even further, again implying that there’s very little conviction behind the buying.   Volatility fell, but only slightly.

The macro data were mixed.  Personal income was lower than expected; spending was higher.  So folks are saving less, which is not good in the long-term.  The Case Shiller home price index pretty much confirmed that a double dip in housing is underway.  Consumer confidence is dropping.  Initial jobless claims are still hovering around levels tied to recessions:  400,000.  Factory orders fell, when they were expected to rise.  Construction spending plunged.  Nonfarm payrolls met expectations.  The unemployment rate fell slightly to 8.8%.  But average hourly earnings growth, at 0.0%, were far below expectations. The labor force participation rate remained at 25 year lows.  And the percentage of the population that’s employed also hovered near 25 year lows.  Worst of all, about two-thirds of last months job gains were low quality–part time jobs, low-end service jobs, etc.  The bottom line:  people are taking survival jobs, but their incomes are not growing, and often their take home pay is dropping.  They are struggling to get by.

Technically, the downtrend starting from the February 18th peak has been broken, to the upside–on the daily charts.  But the technical damage on the weekly charts is still in effect. The weekly charts do not say go long now.

Again, it’s important to remember that technical analysis is far less important at a time when the Federal Reserve is hell-bent on printing money to prop up stock prices.  So many of the signals, that in normal times would point to impending downside moves, lose much of their validity because of the Fed’s—admitted—manipulation of stock markets and prices.

And as we all know, the Fed’s latest round of money printing, QE2, will be winding down in less than 60 days.

But what else could be affecting the economies and markets of the world?  Specifically, what are the other large states doing with their monetary or fiscal measures–measures that also propped up the GDP’s and equity markets in the aftermath of the global financial crisis?

Unfortunately, the answers are not good.

China–whose stimulus package as a percentage of GDP was much greater than that of the US–is hitting the brakes.  After raising reserve requirements and lending rates several times in late 2010, China is poised to do the same in 2011.  China will most definitely not provide the same stimulative boost going forward as it did in 2009 and 2010.

Europe is also hitting the brakes.  Fiscally, the PIIGS and the UK are adopting a harsh policy of austerity.  Government expenses are being slashed; new taxes are being imposed.  While Germany is still doing well because of its exports, it will still be vulnerable to diminished demand within Europe.  And monetary policy is about to reverse–the ECB is strongly hinting at a rate increase in the next several weeks.   Europe will clearly not be the engine of growth for the world.

Japan, sadly, is still reeling from the effects of the earthquake, the tsunami and the nuclear meltdown.  When combined with the most precarious fiscal position in the world (government debt exceeds 200% of GDP), Japan will be very hard pressed to rescue itself, much less anyone else in the world.  Japan’s exports—its only economic strong point— are falling and the government has almost no room left to spend and borrow more.

The other major areas of strength are at risk of being pulled down too.  As China’s growth slows, the major economies that exported materials to China to support its growth will also slow.  These include Australia, Canada, Brazil and Russia.

There you have it.

The US is about to lose most of its monetary stimulus.  Much of its fiscal stimulus will wind down at year-end.

Meanwhile, the rest of the world’s stimulus is fading, and in many cases, going into reverse, and deliberately slowing down the affected economies.

How this will translate into strong corporate sales and profit growth is a mystery.  But apparently not to the Wall Street salespeople who–by being bullish on the stock market–are expecting just that:  boom times to continue, with no end in sight.

We’ll know if they’re right in short order–in one quarter, or two at the most.

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