Outlook: 2010 Q3 update

Well now it is getting sporty.  I guess that is what one says when things liven up, or well maybe I am just making up the phrase.  Anyway, the slow grind that has been underway now for 9 months continues, however the stock market has started to grow a bit concerned.  Most of the concern still centers on the PIIGS, with Greece being bailed out, and now Spain is falling over the side of the cliff also. 

Unemployment. Seems to be trending down. Huh, things must be improving.  Yeah, right.  Funny how you make predictions, get them wrong, and have to admit it.  So the factor here is that the chart below is based on the U3 number, which is a massaged number that uses quirky formulas to decide who is unemployed and who desires to be unemployed. So in this chart we have retreated from the high of 10.1% (Oct 09) down to 9.5%.  If I look at the percentage of people employed (must less doctoring of that number) it has increased 0.1% since Oct 09 (higher for that is better, means more folks found a job).  My bad was using the headline number to base predictions on, and it is pretty hard to account for the 652,000 people that apparently left the job market (apparently they walked out?).  Anyway, the job situation has not improved, nor will it. 

It is interesting to me now when people talk in the media about inflation, as it seems that everyone has done a complete about face on this subject.  First if you mentioned the term "deflation" a few years ago people either had no idea, laughed, or said it was impossible.  Nowadays, printing money as fast as possible is considered a good thing, boosting prices (like cars [cash for clunkers], real estate, and banks) is completely acceptable, and I watch an analyst recently say it was a good thing.  History will tell you otherwise.  Anyway, this is still a non-factor although the latest figures are a bit ominous. A couple more months and we may be back in negative territory.

As for the market, I will be by to collect from all of you that doubted my Q2 report where I stated "Do not get lulled into this rally.  Nothing about this is healthy or normal.  The turn down starts before I publish the Q3 update. I will put money on that."  That was at 11,018.  Friday it closed at 10,097.90.  Watch out for this thing to pick up speed on the way down.  The slope of the line was not chosen at random.  It might not be perfect, but it should be close.  There is a chance I have this wrong, and that retrace to say 8,500 and then head back up over 11,000, but the odds are really remote.  Much more likely is you will see panic (true panic) set in, likely 6-18 months away, but it is coming. 

Gold just continues up.  Not sure still how or why.  I am still convinced it will fall, but who knows when rational thought will come back to this market.  Boy do I wish I had bought into it early, oh well.  Cannot win them all.  This is on a lunar trajectory, at some point it will run out of fuel...

National debt continues to remain on track, I am off by $200 billion which ain't so bad.  Europe has started to impose austerity measures, which should and I emphasize the "should" halt the upward trends of their debts, but the USA has elected to spend spend spend.  I should however qualify the US position, the federal government is spending, the state and local governments are cutting cutting cutting.  It is just a matter of time before the federal guys step in line, but like I depict, not until the end of 2011 at least.

I will include this graph over the coming months as it is so important to realize what is taking place in other countries.  It is from the Federal Reserve Bank of Atlanta and you can see what good the EU policy response did for Greece.  Looks like it will buy them about 3 months... not a lot of time for $145 billion dollars from the IMF to be burned through, but rest assured... there is another $636 billion available from the EU (but not only for Greece).  In case you cannot tell, Ireland and Portugal are the two below Greece.

People continue to pay off debts and that outweighs the creation of debt considerably.  Call it deflation, call it a slow down in the velocity of money, or whatever else you want, but this is deflationary. 

Like I said last time, the spike for home sales seems to be in on schedule in April, and now that government stimulus has expired, sales should plummet easily blowing throw the recent low from 7 months ago.  Also interesting to note the number of houses entering the market.   

Prices are on drugs, but the drugs are all gone (for now at least), and so the prices should start in earnest downward over the next 6 months, setting new lows pretty quickly (we do not have data for June yet, so one more month of upward prices possibly).  Probably be the end of the year first half of next before the prices re-align with my prediction.  

Quick footnote, the FDIC continues to shutter banks, report was 50 so far, but now we are up to 96.

Other than gold, everything else remains mostly on track.   I suspect we will start to hear of some folks not getting their debt refinanced soon, say 3-6 months away, either a country or a state, but someone is about to start the parade that should get pretty big.  As always, keep you money safe and hang on to your job!

Patrick