Global Giddiness at a Cyclical Peak?

The financial system’s interminable endgame continued last week with a hiccup in global markets that was attributed to liquidity problems at a Portuguese bank. Some might have hoped Europe’s problems were behind us, especially with the spate of ginned-up stories concerning Spain’s miraculous economic recovery – if not in statistical fact, then speculatively in the shrinking spread between yields on Spanish paper and the debt of countries whose economies remain a few more steps distant from eclipse. Most of us, however, recognizing that any country with 30%+ unemployment among college graduates cannot in fact be recovering, view the news from Spain as patently false. Europe’s ongoing economic implosion has merely been masked by yet another, increasingly faint, upswing in the mood of investors with memories so short they evidently cannot recall the Great Financial Crash of 2007-08.

In the U.S., a different kind of story, just as false, has sustained the upward trajectory of the stock market. The economy has been creating more than 250,000 new McJobs jobs per month lately, supposedly recouping all of the positions lost in the 2007-08 crash. With unemployment now running at a dubious 6.1%, the Fed is finding it easier to pretend that the recovery is sufficiently robust to stand on its own. To drive home this point, which no one actually believes, and to further “manage” our “expectations,” quantitative easing is scheduled to be phased out in November.

Fed Pretends to Dither

We read furthermore that the Fed has been dithering more intensely than ever over the question of when it should tighten. I remain quite certain that this will never occur, at least not deliberately, since subjecting a quadrillion-dollar derivatives bubble to even a small turn of the screw could trigger the collapse of the  entire shoddy edifice.  How many of us believe the recovery story even now?  Certainly not those on the lower-to-middle rungs of the economic ladder. Working-class Americans appear to have dropped off the ladder entirely with reports of a spiraling collapse in sales at Walmart, Target and Kohl’s. By contrast, Rolls Royce is having its best year ever, and $10,000 wrist watches are practically flying off the shelves. Will the erosion of spending power that has laid waste to much of the middle class eventually trickle up to the super-rich?  Probably not to any significant degree. Regardless, as someone pointed out in the Rick’s Picks forum last week, the uppermost 0.1% cannot sustain the broad U.S. economy for long, let alone forever. This fact holds particular significance for the residential real estate market, where sales and prices remain buoyant only in the  $1 million-and-above category — which is to say, in the category in which buyers pay cash, much of it drawn on margin from their brokerage accounts.

Regarding the stock market,  although most investors recognize by now that the spectacular rise of shares has been driven by money from trees, the question grows as to how long this can continue.  Bulls can be forgiven for tuning out those of us who have been shrilly predicting the Mother of All Tops for, um, years.  At the risk of making yet one more errant  prediction, we’ll state for the record that an epic top appears imminent, and that the subsequent crash will come with such speed as to leave permabulls and bears alike gaping in awe. Before you dismiss this forecast out-of-hand, check out  the chart above from ZeroHedge, which never tires of pointing out that the Emperor is wearing no clothes. It shows an S&P 500 Index priced for perfection and still rising, even as GDP estimates continue to fall sharply. Keep in mind as well that actual GDP growth for the last quarter was minus 2.9%, and that no number even remotely that bad has ever been reported when the U.S. was not in recession. Look for a feeble bounce in Q2 earnings, and for the resumption of a Great Recession that for most Americans never ended.