Re-Stagnation

I have long been a student of the markets and economic conditions. I have been speaking in the last year and looking at several economic indicators and I have realized that we may already be in a re-stagnation scenario similar to “The Great Recession” of 1974-1980.

I am seeing more and more economists beginning to use the term stagnation in their writings. I am also seeing a tremendous amount of commentary and opinion in journals such as Business Insider, The Wall Street Journal and Market Watch on their belief that current economic conditions, combined with the three legs of the market conditions, those being the stock market, the housing market and the labor market moving in what may end up as the same direction over the next couple of years.

Let us begin with the labor market; I wrote a paper in 2008 called The Great Depression Déjà Vu?

In that article I mention I believe we will see increasing unemployment through 2013. I am now seeing others write about the same time frame. The stock market is seeing a weakening in dividends and total returns in the S&P 500 Index to the lowest point since the seventies indicating a much lower overall return of about 3% over the next 5-7 years.

The last ten years have produced a dismal -.03%. We have seen a basically flat Dow Jones Industrial Average over the last ten years and I am seeing concern over a possible market correction in late October through the end of the year. In this article I will use several resources to assist you in understanding the economic conditions.

The last leg, the housing market still is experiencing credit problems, a financial crises and a foreclosure rate the highest in history with 102,000 foreclosures in September. We are seeing businesses de-leveraging from the credit market in great rates creating pressure on the private sector downward while government spending is increasing at unprecedented rates assisting in what I determine to be a long-term stagnation.

12 Ominous Signs For World Financial Markets
Michael Snyder, The Economic Collapse
Business Insider, October 7, 2010
Commentary

There is such a rush to gold that shortages are starting to be reported in some areas. Meanwhile some very, very unusual option activity has started to show up. In particular, someone is making incredibly large bets that the S&P 500 is going to absolutely tank during the month of October.

Central Banks around the world have caught a case of ‘loose money fever’ and are apparently hoping that a new flood of paper money will shock the global economy back to life. Meanwhile the furor over the foreclosure procedure abuses of the major U.S. mortgage companies threatens to bring even more turmoil to the U.S. housing industry.

1. Corporate insiders are abandoning the stock market 2 weeks ago it was 1400-1 out last week 2400-1.
2. Bank of Japan just shocked world financial markets by cutting interest rates even closer to zero and creating a 5 trillion yen quantitative easing fund.
3. Fed Presidents Dudley and Evans are urging much more stimulus. Including a new round of quantitative easing, even if it means spurring inflation.
4. Nobel Prize-winning economist Joseph Stiglitz says the loose monetary policies of the Federal Reserve and the European Central Bank are throwing the world into ‘chaos’.
5. At the end of September, federal regulators announced a $30 billion bailout of the U.S. wholesale credit union system.
6. Bank of America, JPMorgan Chase and GMAC Mortgage have all suspended foreclosures due to serious concerns about foreclosure procedures.
7. The leader of the congress and 30 other members of congress are requesting a federal investigation of the foreclosure practices of U.S. mortgage lenders.
8. Goldman’s Chief economist says there are only two scenerios, bad and very bad.
9. Many of the world’s wealthiest people are buying absolutely massive quantities of gold right now.
10. J.P. Morgan is reportedly gobbling up rights to as much physical gold as it can.
11. The U.S. Mint has run out of 1-ounce, 24-karat American Buffalo gold bullion coins and it won’t sell any more in 2010.
12. It is becoming harder to explain the unusually high option volume that we are witnessing right now.

In an article in Market Watch, Signs of accelerating economy not in sight dated 9-26-2010, by Jeffry Bartash say that there is little evidence that the economy is gaining steam. Unemployment rate at 9.6% stands at a 27 year high.

Warren Buffet may have summed it up what many Americans believe. ‘We are still in a recession and we’re not gonna be out of it for awhile’. More than a year after the ‘official’ end of the recession, American are not so confident.

The last reading put GDP at a weak 1.6% and economists surveyed by Market Watch don’t expect any change. This weak the GDP was lowered to 1.2% for the last quarter.

In an interview by Marshall Loeb in Market Watch, 9-27-2010 famed economist Henry Kaufman says the global crisis isn’t over. When asked if there will be a double-dip recession this year, Kaufman said, ‘I believe the odds are still against us. I would say there is a chance of at least one out of three there may be another dip within a couple of years.’

When asked if the global financial crisis over he said, ‘The global crisis is really not completely over’. I found the questions on the state of the banking system and the financial reform bill very interesting and a peek into his throughout about a stagnating economy. He said, the state of the U.S. banking system is in flux. The government passed a new set of regulatory and supervisory requirement that will be put into place over a period of time and require 7-8 years. The legislation encompasses over 2,400 pages. So in one sense it will slow the growth of debt, and in another sense, it will not move us back into a period of reasonable economic growth and stability.

When asked about the recent Obama Administration stimulus proposal regarding the country’s infrastructure and is it enough to kick start the economy? The answer was a quite decisive No, I don’t think it is enough to kick start the economy? On deflation Kaufman doesn’t believe we will see deflation but the inflation will remain quite low.

The most telling comment in my opinion that backs up a re-stagnation of the economy was the question ‘Is the road to financial stability filled with too many potholes to really achieve success ?’ The Answer : The road to financial stability is really not a smooth one. As you say, there are potholes. It’s going to take time. We created a huge debt overload in the United States and it is not easy to reduce that debt overload very quickly. It is the price we pay for the excesses that were committed in the last 15-20 years.