Hot money keeps illusory economic recovery alive


Is this economic recovery for real? According to how far the Dow Jones Industrial Average has risen since the financial crisis of 2008-2009, as well as the questionable statistics published by the United States Labor Bureau, the answer would be, “yes.” However, with a little digging, you could spot this economic recovery appears to be a grand illusion.




A leading indicator remains in a death spiral. It is trading at multi-year lows. If the economic recovery were real; copper would be trending upwards.


Baltic Dry Index


Another leading indicator appears to be locked in a race to the bottom with copper; this is another index that should be trending upwards, not at multi-year lows.


Unemployment figures


Data from the BLS (Bureau of Labor Statistics) does not give you a real picture. According to the BLS (Bureau of Labor Statistics), the unemployment rate is roughly 5%. But according to shadow statistics, however as of Dec 2015, the unemployment rate stands at 22.9%


Wage stagnation


Real wages have been declining since 2000. $22.41 today has the same purchasing power of an hourly salary of $4.03 in 1973.


Student debt


Student debt is a time bomb, standing at $1.3 trillion and is growing roughly at a rate of $US2,800 every second.  As of June 2015, 11.5% of the debt was delinquent for at least 90 days according to Bloomberg. 


40 million Americans are carrying some form of student loans. 70% of college students graduate with debt, and there is no guarantee of landing a job upon graduation.  The department of education has stated that the by 2025 this debt is set to surge to almost $US2.5 trillion.


A massive default here will make the financial crisis of 2008 appear to be a walk in the park in comparison. 


Creating new debt at mind-boggling rates


US debt will soon hit the $US19 trillion mark with no end in sight. The U.S cannot repay it back. And should interest rates move higher that would make it even harder to repay the debt. Even if rates remain low, at some point debt payments would start to hurt.  Our debt has soared from below $US1 trillion in the 80’s to almost $19 trillion now, it is projected to soar to over $US30 trillion by 2026.


Currency wars intensify as BOJ surprised markets 


The BOJ (Bank of Japan) realizes that this economic recovery is nonexistent as they lowered rates into negative territory.  Currency wars are raging, and the race to the bottom is gathering momentum.


One nation after another is debasing its currency to gain a competitive edge. But it only buys a little extra time.   The markets can continue trending higher even though economic conditions are far from optimal, since the main driver is hot money. 


Everyone witnessed the massive rally the markets experienced after the BOJ lowered rates.  While many will state the US Federal Reserve has run out of ammunition, it can still create money out of thin air and use that to prop markets up. 


Central bankers worldwide have embraced the strategy. The masses are nowhere near revolting so that this game could continue on for a long time.   In the “devalue or die era”, most nations have no choice but to follow the leader.  Yet at some point, there will be a divergence, but on the same token, you might not be around to see that day.  


The Fed is already back-pedaling from the strong stance they took last year. It is hot money that saved this market by creating an illusion of stability, and it's only hot money that can maintain the illusion. 


The Fed has two options, propel companies to assume more debt and use it to purchase larger amounts of their shares. This artificially boosts the EPS (earnings-price-share) and helps drive the market as the funds corporations are allocating to share buybacks is huge.

It is poised to surge to over $US1 trillion in 2016; a sum that is larger than the GDP (gross domestic product) of many nations.  The second option is to take an even more aggressive stance and come out with another stimulus program.


Game Plan


Despite the gloom and doom, very strong pullbacks should be viewed as buying opportunities.   A host of stocks have held up very well during the current pullback, and their prices would gather even more momentum when the markets start to trend up again. Here are some examples, (Stock Symbols) MCD, COST, RTN, HRL, HAS, ESLT, OA, TSN, ATVI, etc.

It appears that Gold is making a valiant attempt to bottom out. It will take a monthly close at above $US1200 to indicate that the worst is behind and that Gold is ready to trend upwards. Until then, Gold is likely to be tied in a trading range, but it could still trade down to $US1000. 


Accordingly, it makes sense to put some money into bullion, but we would abstain from jumping into gold stocks as the sector still has not confirmed that a bottom is in place.


( The opinions expressed here do not necessarily reflect the opinions of Panview or )