Markets rally. Don't get too excited.
Stocks up 339 points on the Dow! Gold at $1,747! Oil over $90!
Forget all of our worries about another big swing down in asset prices鈥bout a Japan-like slump that could last a generation鈥bout gold at $1,200 and the Dow at 6,000鈥�
鈥e were wrong, wrong, wrong!
At least, that鈥檚 how it looks today. Stocks are on course for their best month since 1987鈥r 1974鈥epending on which report you read.
Gold has shaken off the blues鈥t鈥檚 rockin鈥� and rollin鈥� again鈥nd seems to be headed back toward $2,000 by the end of the year.
And oil, too. The slippery goo 鈥� the lifeblood of the modern economy 鈥� seems to be going back to $100.
Go figure.
What set off yesterday鈥檚 big blitz to the upside? Two things鈥�
鈥irst, the Europeans seemed to be getting their act together. There鈥檚 a big headline in today鈥檚 Financial Times:
鈥�China set to aid Europe 产补颈濒-辞耻迟.鈥�
The Chinese are looking at an investment of up to $100 billion in Europe鈥檚 stabilization fund. Details to follow鈥�
The Greeks are to get another $130 billion of bailout funds. Details to follow鈥�
Bondholders are going to go along with a 50% haircut. Details to follow鈥�
And the EFSF (the stabilization fund) is to increase to $1 trillion or more. Details to follow鈥�
The marching band set the pace yesterday. But in the parade of details to follow we wouldn鈥檛 be at all surprised to find a few sour notes. And we wouldn鈥檛 be at all surprised to find that investors sell their stocks when they hear them.
In resume, the Greeks can鈥檛 pay their bills because they don鈥檛 have enough money鈥hich causes the Greek economy to go flat鈥educes revenues to the government and makes it even harder for them to pay their bills. This problem will be overcome by borrowing from other Europeans, who can barely pay their bills either. And, thank the mischievous gods, China has come to the rescue too. China has real money鈥hich it makes by selling products to the people who can鈥檛 pay their bills.
But investors are ready to believe anything. First, they thought they could borrow and spend their way to prosperity. Now, they think they can avoid the consequences of too much borrowing, by borrowing from each other.
We鈥檒l keep an eye on it, dear reader, and let you know how it works out.
The other big news that set off yesterday鈥檚 rush to buy stocks came from the USA, where it was reported that the recession is off. That鈥檚 right, according to the feds the US economy grew at a 2.5% rate in the last quarter. Details to follow.
Says The Financial Times鈥he growth was 鈥渓ed by an encouraging jump in consumption.鈥�
What is encouraging about that?
The report tells us that 鈥渃onsumption rose 2.4% at an annualized rate, adding 1.7 percentage points to growth.鈥�
We also learn that 鈥減ersonal disposable income fell by 1.7%, annualized.鈥�
How were people able to spend more when their disposable income and wealth were both going down? Good question. The answer is in the report too. The savings rate went down from 5.1% to 4.1%.
Now, let鈥檚 see鈥� Households lost $800 billion of housing value over the last 12 months 鈥� or about $8,000 per family. Their incomes fell too. And the largest group of them is facing retirement sometime in the next 15 years, totally unprepared, financially.
So鈥ou tell me that the economy is picking up speed thanks to their increased spending? And you tell me too that consumer sentiment 鈥� how consumers see their own situation 鈥� is at its lowest point in 40 years.
Our forecast: recession ahead鈥f not in 2011, in 2012.
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