There’s no hotter debate right now than stimulus vs. austerity, as folks like Paul Krugman and even Barack Obama call for more spending to fix the economy.
Michael “MISH” Shedlock is not having any of it, arguing that the financial pump has failed, and that the only way to get the economy back on track is to pursue a policy of less government, and less spending, with a special focus on reforming pensions, public sector unions, and other institutions that drain the government of its resources.
As evidence: Japan. The country has now seen multiple decades of recession despite massive pumping on both the fiscal and the monetary side.
But at least Japan hasn’t had a debt crisis yet, right? The key word there, says Mish is “YET.” The fiscal situation in Japan is getting more and more tenuous, and it’s no sure thing that the market will retain its confidence in the Japanese government’s ability to finance its debt. And of course the same thing could happen here.
But for now in the US the big risk is deflation, which you can see in housing and other economic categories. Spending won’t solve this problem; actual economic adjustment is what’s needed to start growing again.
The bulls have pushed aside the bears on Wall Street — for now. Signs of optimism following three consecutive winning days in the stock market have replaced the doom and gloom mood so prevalent in the two prior weeks.
Having already heard the bullish case from Doug Kass and James Paulsen earlier this week, Tech Ticker decided to invite Mike “Mish” Shedlock, author of Mish’s Global Economic Trend Analysis, back on the show to hear the other side of the argument.
Is he bearish? You bet!
“The optimism out there is rather insane,” he says. There’s only a 15-20% chance of the market rallying, Mish tells guest host and Business Insider deputy editor Joseph Weisenthal. “It’s more likely we go down there and test the March lows, and there’s a decent chance actually that we break those lows,” he says.
Mish says “it is nuts to be net long” stocks right now in the face of all these headwinds:
— Slowdown in Europe as austerity measures take hold.
— Slowdown in U.S. as stimulus fades, housing remains weak, state and local governments cutback
— China looks to cool its economy in the face of growing housing bubble
Until Mish sees signs of sustainable job growth, he’ll be firm in his bearish stance. “Without a driver for jobs I don’t know how someone could be bullish on the stock market.”
If not stocks, then what?
Mish is sticking with what’s worked this year: Treasuries and gold. Treasury yields are still near record lows, but he think with the macroeconomy the way it is, it’s very possible, “the bull market in Treasuries is not over.” As for gold, he’d buy on the dips.
On Thursday, a slew of retailers posted monthly same-store sales. They were described best as a “mixed bag.” There was no obvious trend in terms of up or down, even within specific categories of retailers. But bulls on the economy should be disappointed.
For one thing, notes Mike “MISH” Shedlock author of Mish’s Global Economic Trend Analysis, the same-store sales gainers benefited by the general reduction in store locations. Essentially, survivorship bias is skewing the numbers. If somehow you could take into account all the locations that had been shuttered, you’d see that things were much worse.
And there’s evidence for this, notes Mish. State sales tax collections remain depressed, with no indication of a rebound. That, more than the corporate numbers, is the key thing to pay attention to.
And with states thirsting for cash, this is a crucial problem that will play out in terms of further budget cuts, and a further drag on the economy.
Ultimately it’s all about jobs. Without a jobs recovery, there will be no consumer recovery, and without a consumer recovery, there’s little reason to be excited about the market or the economy.