Oblivion is Bliss

Oblivion is Bliss

August 15 – After strong rallies of over 2% on the first trading day of

August, major stock indices have managed to retain their gains, riding

through the miserable July payroll reports, and turning the S&P 500 from a

loss into a gain of 0.5% year-to-date. Yet, the labor statistics again

highlighted the bleak employment outlook and continuing lack of jobs for

the rising ranks of the unemployed. Overall, the nation lost 131,000

non-farm jobs in July, with 202,000 cut in government payroll. The loss of

48 thousand jobs in state and local governments surprised economists.

The gains in private sector jobs of 71 thousand were pitiful, just a bit over

half of what is needed to keep pace with population growth; to reduce

unemployment, the U.S. needs to gain at least 200,000 jobs a month

consistently. 

Fear, however, has come back to the stock market the last few days.

Bullish sentiment and optimism came to face with the economic reality

American consumers and the unemployed have felt in their lives and their

guts for many months: This is not the economic recovery and strong

growth which market pundits have been broadcasting.

On Wednesday, the Dow lost 265 points, after dropping one-half percent

the previous day; and losses kept up through the week after weak

attempts to rally. Now the S&P 500 looked at a loss of over 3%

year-to-date.

Unpalatable news –not that they were surprises. What else could be

expected? – suddenly converged and drew attention to what “is going to

be a long slog,” as phrased by David H. Resler, chief U.S. economist of

Nomura Securities International. After giving signals of its sagging

confidence in a robust recovery earlier this year --“The pace of recovery in

output and employment has slowed in recent months…” – the Fed showed

“a feeling of panic”, as an economist put it, in its announcement that the

proceeds from its huge portfolio of mortgage bonds will be used to buy

long-term Treasury bonds. With interest rates at virtually zero, the Fed

now has little leeway to stimulate the economy; the only resort is printing

money, or putting more politely, quantitative easing. 

Now that the most authoritative forecaster of economic growth –and

guardian of the economy-- has said it, Wall Street began to once again pay

attention to the stream of bad economic news coming from Washington

and abroad. They were not disappointed, from faltering American exports

to retail sales. In June, the trade deficit jumped 18.8% from May, rising to

$49.9 billion, with exports slipping and imports increasing. Retail sales

looked better on the surface, gaining 0.4% in July; but excluding autos and

gasoline, retail sales went down 0.1%, disappointing economists who had

predicted 0.5% overall gains and 0.2% rise, excluding gasoline and autos.

Abroad, China is showing signs of slowing down after growing 11.1% in

the first half. Although Chinese growth is forecasted to continue strong,

signs of slackening are showing in retail sales, imports, and fixed asset

investments. Bank lending also has begun to taper off, being reduced to

Rmb533 billion ($79billion) last month, from Rmb603 billion ($89 billion) in

June. Growth of money supply has also declined, to 17.6% year-on-year,

from 18.5% in June. At the same time, the Bank of England marked down

its forecast of 2010 growth to 3% from 3.5% only a couple of months

earlier. Citing softening business and consumer sentiment, the Bank’s

governor hinted at expanding the economic stimulus package to support

the British economy. Elsewhere

So, in lock steps with the S&P 500’s loss of 2.8% on Wednesday, the

Eurotoxx blue chip index gave up 2.6%.

The Japanese Nikkei dropped 2.7%, raising the year-to-date loss to more

than 12%. After a two-decade decline, it looks like Japanese stocks are

facing another wasted year.

A ray of hope in this gloomy outlook is Bernanke’s policies of aggressive

monetary easing, promising to apply all measures available to pump

liquidity into the system. Unfortunately, fiscal imbalances at local, state and

federal levels continue to show unrelenting strains, not only robbing the

economy of stimulus funds, but also dragging it down. 

Tran Quang Vinh

CTKD1