HAPPY HALLOWEEN!! Is the clock getting ready to strike twelve? Is it time to get home? Is the magical ball that has enchanted many market participants about to end? How so? As quantitative easing programs around the world end and global governments start to increase interest rates, will we experience a double dip in the global economy?
Or, are the Uncle Sam economy and numerous global economies blazing new trails and redefining the economic landscape?
As with most things economic and market related, the answers are never ‘crystal’ clear nor do they fit like a ’slipper,’ but let’s do our best to read the October market moves and project our way forward.
The U.S. economy came out of recession in the 3rd quarter with a positive 3.5% print. While that number surprised to the upside, please review my post “Grossly Distorted Product” or “Christmas in July” to get a pulse on just how weak the American consumer remains. Further confirmation of a subdued American consumer is reflected in the decidedly weak Consumer Confidence report highlighted in my post, “Jobs + Housing = Consumer Confidence.”
Around the globe, non-Japan Asia is generating some real growth. To wit, we have already seen Australia raise interest rates to stem fears of inflation. Who next raised rates? Norway. The U.K remains mired in a recession. Eastern Europe is struggling while Germany is leading the EU. If we know anything about Germany, they have little interest in any hints of inflation.
While there are pockets of strength around the globe, many economies – including the U.S. – remain challenged. What will continue to happen? International trade tensions as weak countries try to generate greater exports via weak currencies.
Let’s review market returns.
The U.S. Dollar Index spent the better part of the month below 76 and even broke below 75 for a short bit. That said, it closed strong over the last few trading days of the month. Given the weakness in the U.S. economy and a Fed which will likely remain on the sidelines at least until mid-2010, many speculators and traders look for the dollar to remain weak.
Will a further selloff in the equity markets force a wave of dollar short covering? I believe that phenomena occurred on the last day of the month and may spill over into November, as well. Please review “Nouriel Roubini Agrees With Jeff Gundlach” on the prospects for dollar strength due to deflationary pressures.
A combination of factors drove a stellar month for commodities. What happened?
- A weak dollar throughout the month kept a solid bid to commodities as a haven from potential inflation. This dynamic supported all commodities and especially gold and oil.
- The supply of certain crops is expected to be curtailed by weather-related issues. This expectation of lessened supply kept a bid in those commodities.
- Oil was supported by discussion of having it no longer traded in dollars.
The first down month since February. It has not been about value in the overall market for a long time, but rather the cheap funding provided by Uncle Sam which has flushed the system with liquidity. The general lack of consumer demand for liquidity is only outstripped by the disinterest from banks in providing it. Where has the money gone? Into an array of market segments including equities. I still have a very difficult time recommending people put money in the market in the face of the consumer, commercial, and industrial problems.
As of today, the Fed will no longer purchase U.S. Treasury notes and bonds via its quantitative easing program. People should not discount the importance of this development. As other global governments also begin to wind down quantitative easing programs, the demand for funds by these governments may begin to push global interest rates higher while also crowding out other borrowers. What may support the bond market? Deflationary pressures in the labor and real estate markets.
The economy continues to try to adapt to the lack of any real shadow banking system. Consumer demand has been pulled forward via government programs. The deficit is mounting. How will that be handled? Increased taxes and fiscal discipline. Can our economy take either of those shots across the bow right now? I think not.