For the first time in months, the foundation of the 50% rally is being called into question. There is no doubt that the March bottom in the stock market was largely driven by government intervention. What the government was relying on with this plan, however, was that they could buy enough time to get the consumer back on their feet. Recent data, however, is beginning to show signs that the consumer is just as weak as they’ve ever been and showing little to no signs of recovery.
As we’ve been quick to point out, the real underlying components of this recovery have been questionable at best. Rail data continues to come in incredibly weak, retail sales have shown almost no signs of recovery and corporate earnings have shown no signs of organic growth (i.e., the no revenue recovery). Governments around the world are running short on time as global stimulus plans begin to lose their gusto heading into Q3 & Q4 of 2009.
The most alarming government intervention has not been in the U.S., however. China, one of the primary drivers of the global recovery, could be building a recovery on quicksand. Deloitte is out with a recent report detailing this intervention and the potential unsustainability of the government induced recovery:
Though the economy is forecast to grow above 8 percent in 2009 — it is likely to happen — there are significant vulnerabilities in the system. Much of the growth is being driven by the state and very little by consumers. For any sustained recovery, and because external markets still remain weak, domestic consumers must eventually become center stage in the recovery process, something yet to happen. Though car sales are up significantly, the high number is because of the base effect as well as government subsidies — it means car sales will falter sooner or later. Large swathes of migrant workers lost their jobs (they don’t show up in official unemployment statistics) and haven’t found new ones; the retail sector is at risk once subsidies on appliances are withdrawn.
As I type, Asian stock markets are all down 3%+. U.S. stock futures are down 1%. The so called “recovery” has been powerful thus far, but will almost certainly sink beneath the sand if the consumer does not find their footing. Thus far, there are little to no signs of this occurring.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.