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U.S. Economy Stalling as Easy Money Effect Wears Off!

Economics / US Economy Jun 04, 2010 - 07:49 AM GMT

By: Mike_Larson

Economics

Best Financial Markets Analysis ArticleThe evidence is coming fast and furious — and it all points in the same direction! Washington’s “bought and paid for” economic recovery is stalling out as the easy money effect wears off.

Just consider what we’ve learned in the past several days …


• Building permits for single and multifamily homes tanked 11.5 percent in April. That left permits at a seasonally adjusted annual rate of 606,000, the lowest since last October.

Builders pull permits before they begin projects. So this leading indicator of construction activity is pointing to a renewed slump in the coming months.

• Initial jobless claims stopped declining in February. After hitting 439,000; they’ve begun a gradual upward climb again.

• Almost 4.7 million Americans are now stuck on the jobless rolls, with little prospect of finding gainful employment. That’s roughly two million above average.

• Durable goods orders outside of the volatile transportation sector fell 1 percent in April. A key indicator of business investment in the report slumped 2.4 percent.

• First-quarter Gross Domestic Product growth fell to 3 percent from 5.6 percent at the end of 2009.

• Personal spending growth? Same story. It dropped from 0.6 percent in March to nil in April.

• To top it all off, a benchmark gauge of manufacturing activity lost steam in May, while purchase mortgage applications just fell to the lowest level in more than 13 years.

Jobless claims are on the rise again.
Jobless claims are on the rise again.

Our REAL Problem? The Economy Can’t Get Off the Dole!

If you’re seeing a pattern here, congratulations! Manufacturing, retail sales, construction activity, and employment are all softening again. As a result, the economic reports we’ll be getting in the coming months will likely look worse than what we’ve been seeing in the past year.

Why is that so troubling?

All the massive borrowing and spending in Congress … and all the easy money spewing forth from the Federal Reserve … had a simple purpose. It was supposed to prime the pump for sustainable, self-feeding growth — to bridge the gap from recession to recovery.

Instead, it looks like the handoff isn’t working.

Policymakers are creating temporary “sugar high” moves in certain sectors. A key example is the home buyer tax credit. It helped push new home sales to the highest level in two years in April, while giving us three consecutive, large gains in pending sales of used homes.

But whenever the government steps back, or the Fed tries to ease off the gas pedal, we end up right back in the soup. That forces policymakers to jump back in again and renege on promises to get spending and emergency life support measures under control.

For example …

  • Those currency swap lines the Fed once had with foreign central banks … the ones it terminated with much fanfare a while back? They’ve been reactivated.
  • The $787 billion economic stimulus package that was supposed to start winding down? Now the Obama administration is pushing a “son of stimulus” package, with up to $200 billion in new spending and aid measures.
  • Those near-zero percent interest rates from the Bernanke Fed? The more than $1 trillion in mortgage assets the Fed bought, then hinted it might try to sell? Not going away anytime soon!

Bottom line: The economy can’t get off the dole!

$13 trillion in easy money hasn't cured the underlying problem.
$13 trillion in easy money hasn’t cured the underlying problem.

Your Portfolio Prescription …

I’ve already told you how banks are still buried under huge bad loans and debts, and how bank failures continue to mount.

I’ve warned you that key technical indicators — ones that presaged the 2007-2009 market crash — are flashing red again.

And I’ve shown how the sovereign debt crisis is spreading from smaller economies like Greece’s to larger ones like Spain’s.

Now, on top of all that, you have a U.S. recovery that’s running out of gas. Policymakers are flailing around in a desperate attempt to head off a renewed slump.

But let me ask you this:

If $13 trillion in bailouts, backstops, and other forms of aid didn’t work over the long term, why should we expect some half-baked batch of additional measures to work?

I’d rather gird myself for the possibility of a renewed market slump. That means dumping vulnerable positions and getting back into inverse ETFs.

I’m sharing my best advice in this month’s Safe Money Report, set for release in just a few hours. If you haven’t already taken advantage of my offer to join up for just 27 cents a day, don’t wait any longer! All you have to do is click here.

Until next time,

Mike

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


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