Look at the S&P500 in the past few months and you could possibly think that all of our problems are getting fixed. The market has increased 25% or so since hitting 1074.77 in October. Sure, you could argue that the relationship between the economy and the markets is not perfect but let’s take a closer look at some of the issues that we were discussing 4 months ago and how much things have improved since then.
#1-Greece – The most important country dealing with a default possibility since Argentina continues to struggle and live through day-by-day negotiations. The Greek government is still trying to secure a 130 billion Euro package. No, this package would not help Greece avoid default but simply delay it a bit longer. Why is that critical? To give foreign banks (especially European ones) time to adjust and get better prepared for what is a certainty; that the EU will face its first sovereign default.
#2-Europe – As Europe eventually goes down, attention will start going towards Ireland, Iceland, Portugal. And slowly but surely, Italy and Spain will start to look increasingly vulnerable. Already, Italy is paying near 7% on its new debt issues which is clearly unsustainable for a country that already has a rocket high debt ratio.
And in the US????
#1-Jobs – Surely things are looking better right? The unemployment numbers are looking good on the surface at 8.3%, especially when you consider that in October 2009 that rate was at 10%. There is a less optimistic view though. What that rate does not show however is all of those that have given up and stopped looking for a job. Why? Because those individuals are not considered in the unemployment rate. Here is a chart that gives you a much more accurate image of what’s going on… doesn’t look so great anymore does it?
#2 -Real Estate – The housing crash has been a huge part of the problem in recent years and unfortunately, even on the surface, there is nothing positive to report. While it’s not true in the entire country, the overall house pricing index has started to decline again with house prices down 4% compared to last year. The bigger problem is that few if any expect prices to rebound anytime soon. The more optimistic predict that prices will stay at the same levels while many others predict that prices will go much lower.
#3-Deleveraging – Consumers and businesses had been spending much more than they were supposed to which got them into a lot of trouble because of their debts.. That includes some financial institutions but also a lot of common people. The result? Businesses are building up cash reserves, while workers are beginning to save more of their hard earned money. On an individual level that is a great thing and it’s probably good in the long term for the health of the economy. But that will make the recovery a lot more challenging in the short to medium term.
#4-Government Spending – We all know about the US government deficits and the debt explosion. The bad part though is that if things are this bad after all of this government spending, what will happen when the government starts putting the break on some of that spending? It will happen sooner rather than later and that will put pressure on the recovery, especially with many of us trusting the government less and less.
#5-Uncertainty – With the US government preparing for a presidential election in November, it’s unlikely that we will see much action from the government to help things because the already conflicting houses will be even less motivated to help each other out on the eve of an election…
Any Good News?
Well the market has been rising… corporate profits are fairly good… but is that enough? Maybe you should start looking at how to invest when your country is going bankrupt….