The paper markets certainly are "trading" as if they think it is. The more speculative the stock, the more in demand it has become. While the Dow is up less than 10% this year, the more speculative indexes are surging. The High Tech Index is up 36% so far this year, the Biotechs are up 38%, the Telecoms are up 45%, and the Internet stocks are up 51%.
The "fuel" for all these advances is flowing freely. The annualised growth rate on the US M3 money supply measure is up to 14%. The bloodbath on government bond markets has abated this week, with yields falling slightly, but US long-term mortgage rates continue to rise. New corporate debt issuance has subsided from a raging torrent to a rising tide, and lots of the money being raised from these debt issues is going straight into the stock market in an attempt to, amongst other things, fill up the black hole in corporate pension funds.
On the other side of the coin, we have these features:
All of these statistics are bad, but the last one is the worst. It is not enough to say that a bloated government is unproductive. In fact, it is counter-productive. To have an economy in which a lot more people work in government than work in the genuinely productive sector of the economy (manufacturing) is as sure-fire a recipe for economic disaster as could be imagined. Yet this is the situation in the US.
On top of this, we still hear the clarion warnings against "deflation" (translated as falling prices) echoing across the US, while at the same time, the more speculative areas of US stock markets now sport gains of up to and even over 50% in a year which is only just half over. Some deflation! The Fed has been warning about "deflation" ever since last November, and has been pulling out all the stops to "avoid" it ever since. So has the Government and the Congress, both of which have been spending like drunken sailors. Once more into the bubble, dear friends?
Mr Greenspan is warning about the potentially destabilising effects of rising natural gas prices inside the US while at the same time claiming that the Fed will "not interfere". Where have we heard that one before? Stock prices are rising and the more speculative the stock, the bigger the rises. Government charges and imposts of all descriptions, especially at the State level, are soaring. Californians are in imminent danger of being priced right out of their housing markets at the same time as the Californian State government hits defacto bankruptcy.
What we have, in the areas where Americans live and work in the REAL world, is an upsurge in the prices they cannot avoid (government "services") the same time as they are flat out servicing the debt which they are STILL accumulating. The threat of a debt implosion is held at bay only by wishful thinking and a Fed which is churning out "money" at levels which approach the insane.
And as the financial and economic situation goes further and further off the rails, Gold once again recedes further and further into the background. Over the first week of July, Gold gained $US 5.80. Over the second week of July, it has lost $US 6.20. It is running on the spot.
It should be noted well that US stock markets have suffered a SERIOUS correction in the July/August time period in every year since 1997. They are setting themselves up for a lulu this year. And don't forget that the US Dollar only started falling in February 2002 and only confirmed its BEAR market by falling below its post-1995 uptrend in early November 2002.
The US Dollar index set its 2003 low of 92.25 on June 13, just over a month ago. That was also the low point for US government bond yields. So far, these bond yields and the Dollar have been rising together, punctuated on June 25 by a 0.25% Fed Funds cut to 1.00%. As has been the case ever since the Fed's great rate cutting orgy in 2001 - while the Dollar was still rising - it is the perceived wisdom of the currency markets that rate cuts strengthen the currency because they show a "determination" to rekindle economic growth.
For a month, US markets have been busily convincing themselves that economic "growth" is now well underway again. After all, look at the speculative stock indices. In stark contrasting reality, productive jobs continue to be lost, factory utilisation continues to fall, unemployment - ESPECIALLY IN PRODUCTIVE INDUSTRY - continues to rise, the Central Bank continues to churn out liquidity, and the corporate, private, and government sectors alike continue to pile up new debt.
"Service" jobs, whether they involve delivering pizzas or presiding over huge stacks of debt instruments, do NOT contribute to the economic well being of an economy. That is the exclusive realm of manufacturing - the production of real physical economic goods. To repeat what we have said here before, the US is "producing" money, and money is NOT wealth, it is merely the means (the "medium") through which wealth can be most easily and efficiently exchanged.
Once the fact that this rate cut has had no more "productive" effect on the US economy than its predecessors had, the mirage will evaporate. With the US now firmly in the Summer doldrums, that might take a while. But as already stated, every mid/late northern summer since 1997 has seen a bad relapse on US markeets. We are confident that the present complacency won't last until Labor Day.