The stock market continues to be on life-support, depending on the actions of the Fed and other central banks to arouse it from its lethargy. While Bernanke’s statement and testimony before Congress was somewhat disappointing to those hoping fervently for a hint that QE3 was just around the corner, the hope is still alive.
At the same time the market was cheered by the mere statement that Europe was “considering a plan” to help Spain and by a surprise ¼% drop in the benchmark Chinese interest rate. All of this just indicates how weak the economy is without continual booster shots from the central bank.
The ongoing softening of the economy was reinforced by the second consecutive disappointing payroll employment report following a couple of months of mostly below-expectations releases. This is no surprise to us, as the lack of aggregate demand due to the deflationary debt deleveraging that is only in its early stages continues to weigh upon the economy. Consumer spending has held up only by the reduction of the savings rate down to 3.6%, a level that is unsustainable. Wages and salaries are barely rising while government transfer payments are coming down.
With no big demand increase in sight there is no reason for businesses to hire additional workers or to boost capital spending. Add in the uncertainty of Washington gridlock, the well-publicized “fiscal cliff”, the severe sovereign debt problems in Europe and the slowdown in the previously rapidly-growing “BRIC” nations, and we have all the ingredients of an economy in great danger of falling into another recession. In our view we are in a lengthy period of high risk and the potential for nasty shocks.