By Profit Confidential
As of March of this year, 47.7 million Americans are now on some form of food stamps. Between 2000 and 2012, the number of Americans resorting to food stamps increased more than 171%. In 2000, there were just 17.1 million Americans on food stamps. (Source: U.S. Department of Agriculture, June 7, 2013.)
There are more individuals on food stamps in the U.S. economy than the entire population of Spain—46.17 million. (Source: World Bank web site, last accessed June 21, 2013.)
That costs the government money. The expenditure for food stamps in 2012 was $74.6 billion, almost 116% higher than what it paid in 2008. That’s a cost that could pick up even more speed if, as all indicators show, inflation begins to rise.
The key stock indices in the U.S. economy have skyrocketed since the Great Recession, due in large part to money printing, but the average American Joe hasn’t seen his living conditions improve—in fact, they have actually deteriorated.
Instead, the rich appear to be getting richer and the poor are facing more challenges, while the middle class is disintegrating. According to a Pew Research report, the bottom 93% of households in the U.S. economy witnessed their net worth drop by four percent between 2009 and 2011. The richest seven percent of U.S. households saw their wealth increase by 28% in the same period. (Source: Associated Press, April 23, 2013.)
The misery for the middle class doesn’t end here; the Census Bureau reported in the first-quarter that home ownership in the U.S. economy dropped to its lowest level in 18 years. Just 65% of Americans owned their homes in the first quarter, as compared to 65.4% in the same period a year ago. (Source: Bloomberg, April 30, 2013.)
I have said this before: economic growth occurs when a country’s citizens are able to find work to make money, spend, and save. But then the U.S. economy is still far from that.
Unfortunately, there might be more troubles ahead as the Federal Reserve moves towards slowing its printing presses.
I’ve been writing in Profit Confidential for months now that the Federal Reserve created a stock market bubble with its monthly printing program. With the news last week that the Fed would pull back on printing paper money, we had a mini-crash in stock prices—this confirms my long-term belief that some of the massive amounts of money the Fed was creating was somehow making its way back to the stock market and pushing stock prices higher. Bernanke put the brakes on the stock market rally last week.
Since the announcement from the Federal Reserve about tapering off quantitative easing, the key stock indices have been showing increased selling pressures. Just take a look at the chart of the S&P 500 below.
Chart courtesy of www.StockCharts.com
The S&P 500 started 2013 with momentum to the upside. Investors bought in hopes that the index would continue to go higher, and by no surprise, it did reach its all-time high. As expected, after the Federal Reserve announcement, sellers took hold of the S&P 500, and it broke below its 50-day moving average for the first time this year (indicated by the black circle in the chart above)—a bearish indicator, according to technical analysts.
The last time the S&P 500 reached this far below its 50-day moving average was in October 2012. When that happened, the S&P 500 declined six percent, and it didn’t recover until December (as noted by the green circle in the above chart).
Note: other key stock indices like the Dow Jones Industrial Average and the NASDAQ Composite Index have also fallen below their 50-day moving averages.
Looking at this, I have to ask: is the bear market rally that lured investors into buying over?
The decline in the key stock indices has certainly proved my theory: money printing was a major factor in their flight to their all-time highs. Now, when we have hints that the Federal Reserve will be pulling back on its quantitative easing, the key stock indices are sliding lower.
Corporate earnings, one of the main reasons for the rise in the key stock indices, aren’t improving as expected either. As a matter of fact, 86 companies on the S&P 500 have issued negative guidance for their second-quarter corporate earnings. The expectation for earnings growth has been continuously declining.
At the end of March, analysts expected the corporate earnings of the S&P 500 companies to grow 4.4% in the second quarter, but unfortunately, their estimates came down to 1.3% at the end of May. (Source: FactSet, May 31, 2013.)
On the global macro level, the Chinese economy is sending threats to the key stock indices. Not only is the country expected to grow at a very slow pace compared to its historical average, but the amount of credit has also amassed in the Chinese economy since the financial crisis of 2008 and 2009. Recently, the country experienced a slight cash crunch when the rate banks charge each other rose significantly. (Source: The Globe and Mail, June 21, 2013.)
Dear reader, be careful. When I look at all this, the best investment strategy seems to be capital preservation. The risks of the key stock indices like the S&P 500 sliding even lower are piling up.
What He Said:
“The U.S. lowered interest rates in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of lowering interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Michael Lombardi in Profit Confidential, July 21, 2005. Long before anyone was thinking of a banking crisis, Michael was warning that the coming real estate bust would wreak havoc with the banking system.
Article by profitconfidential.com
