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Dangers Lurking on the Macro Front

Bill Fleckenstein

Laissez-Faire for Bull and Bear: Overnight, the world markets went wild on the back of Friday's big up session here. As our casino prepared to open for business, the futures were modestly higher, and that less-than-inspiring strength continued a couple hours into the day. Other than the SOX's lickety-split gain of 1.5%, I saw nothing else worth mentioning about the early action. That uneventful theme carried through all day, with a few minor lurches in both directions and only SOX stocks being chased. Had the market closed after two hours, it would have looked about the same as it did after the full session. In essence, nothing happened.

Away from stocks, the dollar was up 0.5% against the yen, flat vs. the euro, and up small vs. the Canadian dollar. Fixed income was under pressure once again, with the long bond down over a dollar all day, before closing down about 1 3/8 points. The precious metals were the scene of a good deal of activity. In the early going, silver was up about 15 cents to $5.22, before closing at $5.20, up 2% plus. Gold was up about $5 before closing up $2.10 at $364.90.

Dateline: Deficit City: Given as how we're mostly through earnings season, and there's not much to reprise on that front, I thought a review of the current macro environment might be worthwhile. Two stories on the front page of today's New York Times offer a less-than-pleasant look at where we are -- "Red Ink in States Beginning to Hurt Economic Recovery" and "New Rules Urged to Avert Looming Pension Crisis." As I have noted frequently, the widespread financial troubles that plague our state and local municipalities are a function of the bubble's aftermath, and the cleanup continues to be a serious problem. Similarly, our country's pension plans continue to deal with postbubble pain.

ECB Queasy Over GSEs?: Also in today's news, Bloomberg carried a story called "ECB Sheds Holdings of U.S. Agency Debt." In brief, "The European Central Bank is selling all the bonds it owns in Freddie Mac(FRE Quote) and Fannie Mae(FNM Quote) and recommended that its national central banks do the same, according to a person who has seen the ECB's recommendation." This is a story that hasn't received much play yet (perhaps due to the fact that the source of the information was not named), but if true will cause serious indigestion for our fixed-income market. That will of course put more pressure on mortgages, and thereby housing.

Given very high debt levels generically, all that news looks rather unfriendly for the economy and, by extension, the stock market. (Granted, this month the economy has shown a few signs of brisker activity at the margin, but in the big scheme of things, that doesn't mean a whole heck of a lot. After all, a $10 trillion economy inhales and exhales, and one has to be careful when extrapolating from minor data points.) The news only worsens when one considers the signals away from stocks -- the bond market under a great deal of pressure, the dollar under pressure, and the metals moving up.

Deck Stacked to the Downside: Now, I am mindful of the argument about things always looking darkest before the dawn, and news always looking the worst at the bottom. (People who appear to have never experienced real financial turmoil are often quickest to throw out such platitudes.) But when I look across a broad spectrum of what's going on, and add in the fact that corporations are not only not hiring but laying people off, I continue to be very, very suspect of an economic recovery, or that the stock market can continue up dramatically higher.

That speculation and stock prices continue to ratchet higher only increases the risk of an even more severe dislocation, should something go wrong. Based on what the outside markets and the macro picture are telling us, it's very difficult to conclude anything but that the rally and the economy are on borrowed time, even if that borrowed time is measured in groups of weeks, rather than groups of hours.

Meanwhile, as bullishness swaggers in the face of reality, I have not gotten aggressively short yet. (The few small stabs I've taken have not worked out very well, so I've kept my exposure light.) But I think that folks who got long in February/March and have big profits ought to either exit the market or figure out some way to protect those profits, because it seems to me that the backdrop is getting dicier by the day.

Housekeeping note: In tomorrow's Rap, I will share more of our reader's email about the state of IT spending.