Wall Street was a session for the bear market true believers last night.
The news wasn’t too bad. It turned out that Hungary’s not really broke – the new government is just trying to explain the breaking of its silly election promises; BP seems to be getting on top of the Gulf of Mexico spill; Chinese efforts designed to cool down the property market are working; and the US employment report on Friday, while not great, was no disaster.
Yet the market simply couldn’t get any traction this morning. It opened higher and then just fell away like a dying swan. By the end it looked ugly – again.
Richard Russell, author of the Dow Theory Letters, wrote on Friday: “This is a severely oversold stock market that can’t get off its fanny. You see this kind of brutal action in primary bear markets that have been stalled or held back by upside corrections. Selling pressure is huge here. It’s like an old-fashioned torture chamber where the ceiling slowly but relentlessly closes down crushing the victim.”
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Dave Rosenberg of Gluskin Sheff wrote this morning that volatility is the hallmark of a bear market: “In the past 30 trading days, the difference between the intraday low and high in the Dow has exceeded 200 points in 23 sessions or over three-quarters of the time. That’s insane.”
Our own Adam Carr agrees that the market’s insane, but for a different reason: because it’s ignoring the recovery. “This is a crazy market,” he wrote yesterday. It prefers lies to facts.
Yesterday, the Australian stockmarket fell 2.8% because of lies in Budapest and the weak US employment data, despite a big rise in job ads in this country. The Australian dollar fell 3 cents. It’s crazy all right.
Fear of debt is the problem. Look at the reaction in Europe to the loose words about ‘default’ from Hungary’s new centre-right Fidesz Party government trying to wriggle out of its election promise to cut taxes because, it said, the austerity measures previously agreed with the IMF and the EU were unnecessary.
Now the new Prime Minister, Viktor Orban, is pulling the old ‘things-are-much-worse-than-we-thought’ trick and preparing to announce a tough budget, probably with higher taxes instead of tax cuts.
But the market reaction to this old-fashioned incoming government routine was wild. The euro was crunched to below $US1.20 and it has kept falling this morning to as low as $US1.1879 (currently $US1.1917).
The Greek stockmarket has been sold off 10% in a couple days and yesterday Romania failed to sell $US340 million worth of bonds as yields suddenly got away from it.
In the US, the reaction to the May employment data shows that markets are on high alert for any sign that the private sector won’t be able to pick up the slack from government stimulus. The Dow fell 3.2% on the strength of the fifth straight rise in employment and a solid rise in hours worked.
But on that day, US government debt stood at $US13 trillion, or 88% of the projected 2010 GDP. Research published in the Wall Street Journal this morning suggests that once a country’s sovereign debt hits 90% of GDP, its growth falls by 1%.
The IMF estimates that US government debt will be 110% of GDP by 2015. Like Viktor Orban, Barack Obama is going to have to rein it in.
So, then you look at how much of the growth rebound of the past 12 months has been due to debt-funded stimulus from the government: yep, pretty well all of it.
John Hussman of Hussman Funds says that adjusted for government deficit spending, America’s “year over year growth rate since early 2009 now matches the worst performance of any of 50 years preceding the recent downturn”. (It’s roughly zero).
That’s why the market is so sensitive to any sign that the private sector candle is sputtering.
Last word to the 85-year-old Richard Russell: “The total cost of the Obama-Bernanke plan to halt or reverse this bear market is becoming bizarre or fantastic. I warned that the primary trend of the stock market cannot be halted.
“Now we are seeing some of the fearful results of Obama’s and Bernanke’s ignorance. It shows you what can happen when professors face the real world. Yes, Obama and Bernanke were both professors.”
This article first appeared on Business Spectator.