-- Posted Monday, 10 January 2005 | Digg This Article
Last year went out with a whimper and 2005 came in with a bang. Unfortunately for the bulls, the bang was to the downside. Those who believe that the first five days of January have some mystical bearing upon the rest of the years have good reason to take 2005 off and do some sailing. Or seek solace in the tendency of years ending in “5” to have been quite profitable historically.
For those of us who believe that the first five days of January are just the first five days of January and that a number on a calendar has little bearing upon stock market direction, our work has just begun. What will 2005 bring?
The general mainstream consensus is much the same as every year: everything will do a little bit better and nothing bad will happen. The economy will continue to grow a bit, stocks will go a bit higher, the dollar will rally a bit. Nice, neat, safe and tidy, the same annual forecast touted year after year. Everything good about last year will get a little better this year and so too will everything that was bad about 2004.
In some respects I agree. But whereas most see 2005 as “a little better as always”, I see it as “the calm before the storm.”
Four years after the stock market bubble burst, most everyone is doing just fine and crisis was clearly averted. Or so goes the general consensus. But that “something didn’t happen” isn’t always a solid indication that it never will. In reality the efforts to avert crisis and grave economic slowdown served only to generate still larger imbalances. Jim Puplava sums it up beautifully:
“These imbalances get larger each year with every Fed interest rate cycle. The markets and the economy are no longer allowed to cleanse themselves of excesses and heal themselves. Instead intervention is constantly pursued with the goal of altering economic outcomes. Recessions and bear markets are no longer tolerated. At the first sign of trouble, easy money is applied to remedy any downturn either in the markets or the economy. The result is that debt imbalances get larger, asset markets get inflated, and the real economy weakens and is hollowed out. The 1991 and 2001 recessions were followed by the weakest job growth on record. The financial economy keeps growing, while the real economy weakens.”
“The financial economy keeps growing while the real economy weakens.” Truer economic words have yet to be spoken. This is the essence of where we stand today. In the real economy, job growth has been minimal and income growth has been trivial. In the real economy manufacturing jobs are moving to China. Meanwhile financial companies thrive by collecting a fee for throwing the U.S. consumer more deeply into debt, profiting by increasing the imbalance. Mortgages are bought and sold, debt is traded and passed down the line, the “carry trade” keeps racking up profits and the numbers continue being shuffled to demonstrate that everything is A-OK. But where are the benefits to the real economy?
At the heart of it, imbalance is the foundation upon which the game is built. The stressors that have been with us since the implosion of the stock market bubble haven’t gone away. They’ve only been ignored. Savings are virtually non-existent. The dollar has traded at historical lows. The costs of raw goods have surged, impacting bottom lines across the board. Billions are being spent in Iraq while the budget and trade deficits continue to swell.
None of the factors seem to have hurt us much. In a growing economy, negatives can often be ignored. But what happens when the inevitable downturn occurs?
Since WW2, cycles of Fed tightening amounting to at least 2% have resulted in recessions ¾ of the time. Combine that with the fact that oil shocks have resulted in recessions 100% of the time and we have a recipe for an inevitable slowdown, perhaps beginning in 2006.
With what shall we battle this downturn, when the imbalanced chickens released in the last one come home to roost? Will the American consumer dip into his 0.2% savings, his $80 a year to ride out the storm? Will oil prices dip back down to $20 and unleash wheelbarrows full of spending money? Forget about deficit spending with the budget deficit already at a record. What’s going to save us this time?
In 2005 the markets and the economy will step back to digest the imbalances engendered by the easy money policies of the early 21st century. The stock market will ask itself how long it can continue to climb driven primarily by speculation on low interest rates, keeping a lid on the gains. Jaws will drop as the realization the cheap oil is a thing of the past hits home, that sub-$35 oil has been relegated to the history books and that the bull market in crude oil won’t be going away anytime soon. The dollar will enjoy a break from its precipitous plunge, but only as a consolidation ahead of the next leg lower beginning some time later in the year.
2005 will go down as the year when everything that didn’t seem to matter finally begins to matter and the markets prepare themselves for a much larger slowdown beginning in 2006. The end of the financial world as we know it? Probably not. But a bigger challenge than the Fed’s simple tricks can wish away. It’ll be a boring year (barring any major geopolitical surprises), a time for us to rest up ahead for a fascinating 2006.
-- Posted Monday, 10 January 2005 | Digg This Article
