While signs of an economic recovery are indeed real (http://markostake.blogspot.com/2010/01/what-economic.html), what's important to us here at Marko's Take is the future. Sure, we appear to be in a bona-fide recovery, but for how long?
Corporate earnings, which are streaming in for the Fourth Quarter, are hardly a blowout once the "improvement" in financial companies is stripped out. Last year's period demonstrated record losses among the financial sector and this year the sector has returned to slight profitability... or so we're told. The problem is that the accounting of financial companies is incomprehensible to virtually anyone - making it impossible to understand exactly what is going on.
Among financial companies reporting so far, Goldman Sachs turned in the best performance. In part this was attributable to the firm's decision to greatly restrain bonuses - proving that even the world's most powerful firm can live without for at least a year. Other companies were mixed: JPMorganChase and Wells Fargo turned in solid performances, while Bank of America, Citigroup and Morgan Stanley lost a combined $5 billion.
But, the real problem which brings up the high probability of a short-lived recovery, is that the policymakers have continued the same low interest rate practices that got us into trouble in the first place. And, given the country's $12 TRILLION National Debt, any rise in rates will do nothing but exascerbate the deficit, which is already at mind-numbing levels. For every 1% increase in rates, the addition to the deficit will be $120 billion! Imagine if rates were allowed to float to say 5%. That would raise the deficit by $600 billion, or, as some of us would call it, "real money".
I've used a "drug dealer" to "drug addict" analogy in describing the situation in conversation, but here it is in print. Imagine the Federal Reserve as the drug dealer, dispensing its 0% interest rate policy as the drug of choice. This policy has led to asset bubble after asset bubble, finally culminating in the near wipeout of the world financial system in late 2008.
So, now that the economy is "hooked" on low rates, what do our friends at the FED do? They give us more of the same "drug" that caused us to crash in the first place! However, as occurs with all "addicts", the economy has built up a tolerance to the drug - making its efficacy vastly reduced.
That's what appears to be happening now. Yes, unprecented stimulus and low rates helped re-start the economy's heart like a couple of electrified paddles, but the "high" was even more temporary than before and the inevitable crash will be LARGER than the one preceding it!
Even the ever optimistic FED isn't exactly overjoyed with the spotty recovery so far. According to the most recent "beige book", a release of anecdotal activity around the various FED districts, policymakers remain concerned about continued high unemployment, low factory utilization, weakness in credit activity and commercial real estate.
So, while the temporary "bounce" in the economy has slowed the rate of deterioration in the quality of many people's lives, the sad reality is that it won't be long before the downturn resumes with a greater vengeance. The only question is - when?
The stock market may be providing an answer. Yesterday, it broke 213 points lower and could be on the verge of a nasty correction, or perhaps a resumption of the bear market that began in late 2007.
If the break was indeed the beginning of a serious move lower, that would suggest an economic downturn is no later than 6 months away. However, it's WAY too early to draw conclusive evidence from the last few days of trading.
At this point, given all this evidence, I WOULD HIGHLY RECOMMEND INVESTORS CONSIDER GETTING MORE DEFENSIVE. I realize that I have predicted that the stock market would rise in 2010, but for the moment, it is acting like it wants to go much lower and in a hurry.
The same may apply for Gold. Yesterday, the break of $1,100 occurred and was sustained. At the very least, assuming that TODAY does not show otherwise, I would become more defensive there, too.
While my longer term prediction for Gold remains the same, we are on the verge of the point where I would be careful not to get crossed up by a sharper correction than need be.
As I've stated many times before, the market does what it wants and WHEN it wants to, whether or not it has read Marko's Take!
Today is a critical day. I'll have more over the weekend on U.S. stocks and Gold so that by the time trading resumes on Monday, I'll have proposed a plan.
Agree? Disagree? TAKE ME ON!