When I start hearing stocks are moving higher because the economy must be getting better, I really question those who say it; including the media. Granted, stocks and the economy are two totally separate entities and stocks can perform well for a period of time without the economy doing better, but that can prevail for only so long. In my opinion, the most recent rally we have seen is all Fed driven; pumping more and more money into the system. The Fed is hoping the stock market creates a wealth effect, which in turn could spur spending and create jobs. The key word being could. The higher stocks go for the wrong reason(s), the more and more cautious I will become over time.
The reality is we have many crises in the economy to overcome…
Mortgage Debt Crisis: It would appear that most people think the worst is behind us on this but is it? The reality is, it’s getting worse and will continue to for the foreseeable future. Nearly 14% of U.S. mortgage loans are now in delinquent status. These are very big numbers considering Washington DC spent trillions on housing bailouts.
Bank Failures Crisis: Many think because we don’t hear anything in the news about banks, everything is going great. A closer look tells us bank failures are at their highest level since the 1980’s. There are still plenty of large banks that are in trouble, you just don’t hear about them anymore.
Sovereign Debt Crisis: Believe it or not, back in November of 2009, World Dubai was just the start of it. Since then, we have seen Greece and Ireland need bailouts and it has had severe impacts on Belgium. Who’s next? Portugal, Spain, Italy, Germany or France? Let’s hope none, but it would not surprise me if Spain becomes the Lehman Brothers of Europe. Scary times ahead as far as I am concerned.
State and Municipal Debt Crisis: This is a subject I talked about in my editorial from October 4, 2010, State Budgets, Next Major Credit Crisis? Here is a quote from a recent article from the New York Times, “Some of the same people who warned of the looming subprime crisis two years ago are ringing alarm bells again.” Their message is not just small towns or dying Rust Belt cities are at risk but also large states like Illinois and California. Are you willing to look the other way when you hear this? I’m not!
How safe are muni bonds these days? Good question. One thing I can tell you is, in past years municipal bond players would rely on municipal bond insurers to insulate them from an all out default. These days there is really not anywhere to turn to since some of the big players are no longer there, Ambac is now bankrupt and MBIA is currently marred in litigation and writing no more policies. The only real player left is Assured Guaranty but they are a small player and have lost their top ratings which in reality make them pretty useless.
Interest Rates On The Rise But Why?
Many on Wall Street believe interest rates are on the rise because they point to some recent positive economic numbers. They also believe the new fiscal stimulus will spur economic growth. In my opinion, there is no meaningful growth and rates are on the rise because bond vigilantes are showing their disgust with the extension of the Bush tax cuts and Washington DC in general. It sure does not look like they are doing anything to be fiscally responsible.
Let’s not forget higher interest rates mean higher rates on mortgages, car payments and other loans.
Higher interest rates will also have a negative impact on the federal deficits, accruing more and more interest. However, one positive we can take away from this is those who save money will get a tad bit more interest on their savings.
Looking longer term, U.S. Treasury Securities and key Eurozone securities could be facing serious troubles as it could become increasingly tougher to fund these unpayable debts i.e, higher interest rates.
Conclusion:
Don’t get lulled into thinking everything is a bed of roses just because stocks are moving up into the end of the year. When something looks too good to be true, it probably is. I still believe there are plenty of issues to pay attention as mentioned above that could derail any recovery attempts including China who is trying to engineer a soft landing in their economy.
Continued complex economic and stock market environments will continue for the foreseeable, be very careful and play on the side of caution.
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