Wednesday, June 8, 2011
So what is next?
In my Blog of Sunday night April 30 I warned about the possibility of a correction in the commodity, stock and bond markets. From that time to the close of business today, June 7th the S&P 500 is off just under six percent. Crude oil is down from about $115 per barrel to under $100, gold is up $3 to $1,530, and silver is down from $49.56 to $37.00. Housing in many sections of the country had prices fall to 2002 levels in the first quarter, almost all of this happened in just less than 7 weeks.
Last Friday the new jobs report came in, subject to later adjustment of course, at about 54,000 new jobs created and the unemployment rate went up to 9.1%. One side note about the 54,000 jobs; Morgan Stanley reported after the closing bell on Friday that they believe McDonalds created close to 30,000 of those new jobs. Not the best set of numbers for a president running for re-election, but more importantly not very good for the country.
While we added 54,000 jobs, the number of people looking for work increased and all those unemployment extensions will start to expire in late summer to early fall which could swell the ranks of the unemployed and drive up the unemployment rate. I think it will be hard to get support in Congress for further extension of unemployment benefits to those who have had three years of benefits. I have said to you in the past that the economy needs to create 250,000 jobs a month to hold the unemployment rate steady. Given that we have not seen the level of 250,000 for any period of time I have to believe that the unemployment rate will continue its upward direction throughout the balance of the year if we continue to see jobs reports like last Friday.
So, the big question is, “where do we go from here?” I got the initial down turn call correct--can I call the next move correctly? The one thing I believe will have the most impact on all the markets and the US economy will be the outcome of the increase in the Federal Debt ceiling. If we raise the debt limit with no meaningful budget reductions we are in real trouble. The credit rating agencies will downgrade US Government Debt quality and interest rates on our government debt will have to increase. The government will crowd corporations, state and local governments out of the bond market. If we lose our AAA credit rating, look for the dollar to fall substantially to record lows against all major currencies. We could see selling pressure by foreign investors in both the dollar and US Government bonds.
If that isn’t scary enough then think about this concept; some US Congressmen and Senators want the government to default on its obligations. It is important to them to punish the US. They believe that we must raise the debt limit and not cut the budget. In fact they want to spend more and they think by taxing the rich they will find the money to spend. I do not believe the well is deep enough for the rich to cover the current shortfall much less any increases. In order to try and convince the American people that we should raise the debt limit and spend more we will experience an onslaught of fear mongering to get the people to tell their elected officials to raise the debt and not cut the budget or benefits.
I’m afraid that if we don’t stand firm and cut the budget by a meaningful amount and seriously address the debt for our children and grandchildren we will not have the money to pay social benefits at any level. Speaker of the House, Boehner, said recently regarding the debt limit and the deficit, “we can’t kick the can down the road to the someone else to solve the problem.” If we fail on this issue then the scary feeling we went through on September 15, 2008 will be magnified many times over. This is such an import issue that if we let the genie out of the bottle we will never get him back and America will forever be changed for the worse.