Chris Lau - Seeking Alpha

Wednesday, August 05, 2009

The Three Little Pigs and the Fox (1890)

We can only sit back and marvel at how the U.S. government has managed to put the economy back together, but it’s the same problem as the first little pig had in fending off the big bad wolf. Straw will only hold up for so long.

This was how David Rosenberg, former Merrill Lynch chief Economist, began his newsletter today.

It is surprising but not unexpected to marvel at the way the stock market has recovered since March of this year, but I am still on the camp that this is a bear market rally.

It is a belief that this is the mother of all head-fakes of our time. My reasons remain unchanged for why caution is required and why money should not be deployed aggressively on long positions:
  1. "Cash for Clunkers" - this was the difference between keeping an old car replacing it with a new one...getting a government-sponsored $4,500 discount and taking on more debt to finance a new car. No more tax credit, no more sales.
  2. Selling mountains of government-issued debt via U.S. Treasuries, at the expense of a lower U.S. dollar (The U.S. dollar peaked in March at 89.62 and is now 77.80). Will foreigners react to a weaker U.S. dollar?
  3. Home sales improved, reducing inventory. Fair enough. People are taking advantage of low mortgage rates, bat at what terms? 1-year? 5-year? What happens when rates rise and mortgage rates reset to the higher ones? Will government be constrained in raising rates? Will government be forced to maintain low borrowing rates? The housing market "bottom" is inconclusive.
  4. Even when the recession is soon to be declared over (when all import, inventory, and other variables are factored in, GDP figures will necessarily be calculated to be higher than in previous quarters), unemployment will still be over 9.5%. Fewer jobs, less consumption. Source.
  5. U.S. savings rates are rising permanently. Conversely, U.S. consumption is necessarily declining permanently. Sustained unemployment moving into 2010 will be more than likely. The "Recoveryless" recovery is appearing like a likely scenario.
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