Why the Rally Can't be Sustained

WHY THE RALLY CAN’T BE SUSTAINED

Courtesy of The Pragmatic Capitalist 

By Comstock Partners:

In our view the strong rally off last year’s March low is a contra-cyclical move within a secular bear market that started in March 2000.  We have been undergoing a major credit crisis, followed by severe decline in income, a collapse in asset prices and record debt.  A number of detailed studies have shown that economic recoveries following such events are of short duration and extremely weak at best.  Despite massive efforts at stimulation, we see no reason why the outcome this time will be any different, and the evidence so far supports this view.   The economy is going through a process of deleveraging debt that is creating strong headwinds against a self-sustaining recovery.

The major drivers of previous economic recoveries in the post-war period have been housing and consumer spending that was spurred by easy credit conditions.  Those drivers are just not working this time around.  Despite the herculean efforts of the Fed and the White House, credit still remains tight.  Bank loans are down 27% from a year earlier while consumer credit is down 4%, the most since World War II.  Although the monetary base has soared over the last 15 months, M2 money supply is down 0.3% and MZM money supply is down 4.2% annualized over the last three months.  The strong growth of GDP in the 4th quarter was mostly due to a return to more normal inventory levels while real final sales remained weak.  Consumer spending has picked up a bit, but only in comparison to the extremely low level of a year earlier.  In the period ahead consumers will continue to be restricted by high unemployment, tight credit conditions, sub-par wage increases, lower net worth and the need to raise savings rates and pay off debt.

A number of factors that helped growth in the past year will no longer be operative in the year ahead.  The cash for clunkers program temporarily spurred auto sales, which have reverted back to sluggish sales levels.  The housing credit for first-time home buyers goosed housing demand for a while, but the extension of the program does not seem to be having the same effect, and, in any event, ends on April 30th. Furthermore the Fed’s $1.25 trillion program to purchase mortgages ends on March 31st.   As we pointed out in our comment two weeks ago economic momentum already seems to have peaked in the 4th quarter…

Read the original story at Phil’s Stock World