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Global Economies Sluggish Again!

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    November 23, 2013

    Manufacturing in China slowed in November according to the HSBC PMI Index, which declined from 50.9 in October to 50.4 in November. It remained above 50, the dividing line between expansion and recessionary contraction, but not by much. Weak export orders from its trading partners seemed to be the problem.

    Meanwhile, business activity also slowed in the euro-zone in November. The Markit PMI fell from 51.9 in October to 51.5 in November. Economists expected an improvement to 52.0. The report comes just a week after the 3rd quarter GDP report showed the euro zone’s recovery from its recession losing its momentum, down sharply from the 2nd quarter when economists began hoping the euro zone’s economic problems were finally improving.

    Deflationary concerns are rising in Europe. It was reported last month that inflation in the euro-zone was running at just 0.7% in October, well below the ECB’s target of 2%. (The ECB reacted by cutting its key interest rate from 0.5% to 0.25%, a record low). Economists worry that the declining prices for goods are hurting business profits and weighing on hiring and business profits.

    Low interest rates traditionally create inflation, but as has been shown in the U.S. over the last ten years, that has not been happening in this cycle. ECB President Mario Draghi said the ECB discussed the possibility of setting interest rates at a negative rate (less than 0%) at its monthly meeting, an indication of the concern about deflation. Pressure is apparently growing for the ECB to either move to negative deposit rates or adopt a quantitative easing plan of asset purchases similar to the U.S. Fed’s QE.

    And here we thought we were approaching the end of hearing about QE.

    The Fed has a problem and knows It’s serious.

    It was previously reported that Pending Home Sales fell 5.6% in September, so yesterday’s  report that existing home sales fell 3.2% in October was not a big surprise. But neither was it a positive for the important housing industry.

    It was previously reported that Consumer Confidence plunged from 80.2 in September to 71.2 in October, which might have indicated retail sales would be in trouble. But it was reported yesterday that Retail Sales were up 0.4% in October after declining in September.

    In this odd Fed-driven bull market, the economic reports are not important for what they indicate about the strength of the economy, and therefore corporate earnings, the normal driving forces of the market, but for what they indicate as far as the Fed continuing its stimulus, or increasing it as it has several times, or beginning to taper it back, as it has been hinting at on and off since May.

    So it is immaterial to point out that by most methods of measuring, the market is overvalued. Or that the continuing bull market this year has been almost all due to expansion of the P/E ratio and not to rising earnings. Or that investor sentiment has reversed from the extreme levels of pessimism and fear five years ago, to high levels of optimism and confidence usually seen near market tops. Or that . . . well you get the picture.

    All that matters is the Fed.

    It does seem clear that when the Fed does begin to taper it will likely be ugly for the market.

    We’ve seen how even the Fed’s hints since May that it has begun to think about tapering, and wants to taper, have sent the market tumbling each time, until the Fed rushed back in to say that markets had misunderstood, that it wasn’t going to do it right away.


    It looks very much like those were trial balloons to see how markets might react when it actually does begin to taper. And yesterday’s release of the minutes from its last FOMC meeting make it clear the Fed is worried that the trial balloons indicated that markets are not likely to hold up against actual tapering unless it can pull off some magic.

    That shouldn’t be a surprise and probably isn’t to the Fed.

    After all, if the fuel of unprecedented massive QE stimulus has been the major, some would say only, driving force in the anemic economic recovery yet powerful bull market, how could its reversal be seen as a positive?

    The QE-type stimulus was an untried new tool. Ben Bernanke testified almost from the beginning that it was “an experiment”, and begun only because its historic tool, cutting interest rates, did not work, even though they were cut to near zero.

    Since the beginning, the worry has been that eventually the stimulus will obviously have to end. And even more than its launching (and increases each year) being experimental, reversing it may be even more experimental in the other direction.

    Obviously the Fed is worried and experimenting, as could seen by how it rushed in to the rescue each time after floating a suggestion that tapering was near, setting up to try to communicate it differently the next time, only to have the next attempt to prepare markets have the same result each time.

    And it’s just as clear that it doesn’t know yet how it will be able to go about it.

    Its approaches so far have been to provide various forms of assurances that even when it does begin to taper back the bond-buying stimulus, it will still keep interest rates at their current record low. Janet Yellen, the next Fed chair pushed that assurance in her confirmation testimony. Tuesday night Ben Bernanke said it even more emphatically, that even after the stimulus is completely gone, interest rates will be held at current levels for several years.

    But cutting interest rates to near zero (the Fed Funds rate) didn’t work to get the recovery going. And with this summer’s hints about tapering the market immediately began selling off each time, even though the promise was included to keep interest rates low afterwards. Low interest rates are apparently not enough. Markets want the stimulus to continue.

    The minutes of the last FOMC meeting seem to indicate the Fed believes it must begin to taper soon, but is worried and trying to figure out a way to communicate it to markets in a manner, or with enough promises, to prevent a market collapse.

    Much of the meeting seemed to center around debates about language or new promises that could be made, while worrying that “communicating them could present challenges”.

    Among the thoughts; that “It might well be appropriate to offset the effects of reduced purchases by undertaking alternative actions to provide accommodation at the same time.” Or that it could change its current guidance that it will keep interest rates near zero until unemployment falls to 6.5%, to a promise to do so until joblessness reaches an even lower level.

    Clearly the Fed has a problem and knows it.

    Could it consider dropping the Fed Funds rate to a negative interest rate, as the ECB apparently is considering, as an accompaniment to announcing the beginning of tapering?

    Regardless of the eventual outcome, hopefully it will find enough excuses in the economic reports, or on concerns about how Congress will handle its next chance to reach agreement on a budget and the debt ceiling (before the new deadline of January and February), to keep the stimulus in place and markets positive through year-end and until April or May. 


    To read my weekend newspaper column click here: Why It’s Still Only A Cyclical Bull Market Within The Long-Term Secular Bear

    Subscribers to Street Smart Report: In addition to the charts and commentary in the secure area of today’s blog, there is an in-depth mid-week Markets update from yesterday in yoursecure area of Street Smart Report.com 

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more.