An Economic Recovery?

"People are realizing that they cannot make it in the current Wall Street dominated corporate capitalist economy.  It is not designed for most people to make it.  Rather it is designed for a small percentage to profit while everyone else is exploited and economically insecure." - Kevin Zeeze and Margaret Flowers

This week there were some signs of an economic recovery.  There were some impressive numbers from the service sector with the US ISM non-manufacturing index jumping in August to a seven-year high of 58.6.  This points potentially to an improvement in GDP growth in the third quarter.  Looking deeper into the number it appears that most of the demand came from internal orders and not exports so there is hope that the local economy may be on more solid ground than previously thought.  The payroll report today was not great as it appears that the level of growth in payrolls is slowing however there is still growth which is mildly encouraging.

On the European front it appears that certain of the economies are starting to recover and unemployment while still high seems to have stabilized.  So with both of these economies appearing to be in recovery mode it must now be time for the Federal Reserve to exit the market, right?  The issue is that as I have mentioned repeatedly, the recovery is very tentative and any sign that the safety net that is the Federal Reserve will be removed will have dire consequences on the stock and bond markets.  The question is will a spike in bond yields combined with a sudden drop in the stock market unnerve the Federal Reserve and send them back to the printing presses?  My guess is that it will as it has in the past and therefore there is no reason to believe that this time will be any different.

Beneath the surface of this recovery is a very tepid technology sector, weak growth in the small business market, slow growth in employment and increased expenditure coming in the form of Obamacare.  Furthermore stock prices are exceptionally elevated and have baked in a far more robust recovery.  Removing the stimulus will take away the fuel and the fire will die.  As an example of stocks at ridiculous levels take a look at the stock of the year Tesla.  Now I have seen their cars and have been told they are fantastic to drive but the stock is trading at a market capitalization of over $21 billion on earnings of negative $112 million.  Sure they did report a profit this last quarter but please, the headwinds against this company are still enormous and to command such a lofty market capitalization you need to be selling cars into the mass market and not just to the rich and famous in California.  At the current vehicle sticker price that is not an option.

So it will be very interesting to see at the FOMC meeting later this month whether the Federal Reserve will consider trying to taper again and how the market reacts this time.  Based on previous meetings it is clear that even the Federal Reserve knows that it needs to exit this printing game but the question is how as they have shown that they have no stomach for a stock market crash.  Furthermore if yields on the 10-year bond rise much higher any form of recovery in the housing market will be put to rest right as they are deciding to exit the government owned mortgage finance companies, Fannie Mae and Freddie Mac.  It seems that once again the officials have timed the exit from the housing market to perfection!