The Pressure Mounts

The S&P500 slipped 1.7% last week despite widely held expectations that the equity markets would rally after the death of Osama bin Laden.  Volume edged higher, adding validity to the sell-off.  And volatility also spiked almost 25%.

What overcame the buoyant expectations was the gloomy economic data.  Specifically, there were growing signs that the US economy is headed for a serious slowdown……as predicted here for a long time.  In a manner resembling the mid-year slowdown in 2010, the economic numbers are suddenly crumbling.  For example, the ISM services index collapsed from 57.3 to 52.8.  Also, initial claims rocketed up to 474,000…..much closer to 500,000 (bad recession territory) than 400,000 (minor recession territory) where they’ve been for several months.  Although the government payrolls report showed that over 200,000 jobs were created in April, the household survey showed that almost 200,000 jobs were LOST.  The headline unemployment rate jumped back up to 9.0%; the broadest (and more meaningful) measure [U-6] jumped up to 15.9%.  Average hourly earnings disappointed, and the average workweek stagnated.  Also grim were the broad measures:  the employment-to-population ratio FELL to 58.4%, and the labor force participation rate stagnated at 64.2%—both measures are near 30 year lows.

Technically, the S&P has returned to a bearish phase on the daily charts, but possibly only for the very short-term.  As of yet, this is not a very strong signal.  But on both the daily and the weekly perspectives, the S&P remains extremely overbought and looking like it’s pinned near its highs by some supernatural force.  In fact, this force is nothing but the Federal Reserve’s money pumping, pumping that is firmly scheduled to end next month.

Several additional pressure points are building and possibly getting closer to breaking.

The global credit markets are pricing Greek government bonds at prices that imply a default is imminent.  The 2 year government bond, for example, is offered at about 50 cents on the dollar, to yield about 25% annually.

Rumors are starting to circulate that Greece is close to throwing in the towel:  admitting that it can’t credibly service its massive debt load and default.  There were rumors that Greece was even preparing to dump the Euro and re-issue its own currency, obviously at a severely lower value relative to the Euro.

Also, Japan’s post-earthquake economic data have begun to roll in and the results are horrible.  Industrial production dropped 15% in March.  Retail sales dropped 8%.  Barron’s is estimating that first quarter GDP will drop by up to 3% (from the previous quarter).  What’s worse is that production has continued plunging in April and May.  Barron’s estimates that total production will fall 25% by summer, which will be 35% below levels seen in 2008 (before Lehman failed).  GDP could drop 10% before the 2008 peak.

Yikes!  Japan is putting up Depression-style numbers, as its fiscal debt woes keep growing—gross government debt is now about 220% of GDP.  Double yikes!

Either one of these time bombs could set off another Lehman-style global financial crisis.  And they both seem to be on short fuses.

Meanwhile, the Fed is about to shut down the QE free money party and Europe’s central bank is already tightening.

Things are about to get very interesting, very soon.

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