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TMFPostOfTheDay (< 20)

U.S. Stable, Europe Stalling



August 20, 2014 – Comments (0)

Board: Macro Economics

Author: WendyBG

As I posted last week, the economic news in the U.S. is stable and trending in a mildly positive direction.

Europe, on the other hand, appears to be stalling.

Euro-Zone Economy Stalls in Second Quarter as German GDP Slips
Weak Quarter Raises Fears Europe's Recovery Has Faltered as Tensions With Russia Add New Challenges

Brian Blackstone and
Marcus Walker, Wall Street Journal, Updated Aug. 14, 2014

The euro-zone economy stalled in the second quarter, raising the ugly prospect that the region's meager recovery has lost momentum just as it faces fresh headwinds from Russia and Ukraine. ...

The gloomy numbers out of the euro zone—whose roughly $13 trillion economy accounts for 17% of the world's gross domestic product—join a litany of similarly sour reports this week from Asia, all pointing to signs of sudden weakness among many major economies. ...

Geopolitical and trade frictions between the EU and Russia could hurt euro-zone business sentiment; and the slowdown in global trade and emerging-market growth could hit European exports.... [end quote]

Despite the reasonably cheerful news, the U.S. markets have been risk-off for the past few weeks. The Fear & Greed Index is still in Extreme Fear.

The yield curve flattened slightly. Of course, the Federal Reserve has the short end pegged at zero, so it is still steep. In the past, lower long-term Treasury yields dropped when investors anticipated a slower economy and/or lower inflation -- or were so worried that they shifted from stocks to Treasuries to reduce risk.

Investors have plenty of legitimate worries that have been building for a long time.

Nobel prize winner Robert J. Shiller says that stock prices are lofty and bonds are expensive, but he doesn't put his finger on a definitive cause....except possibly irrational exuberance.

If the stock market continues its multi-decade upward trend, investors should just plunge in. However, that assumes that this trend will continue and that you won't need your capital in a shorter period of time than the market rebounds from drops.

The Control Panel shows the stock and bond markets recovering from the drop of the past few weeks, which was well inside the normal trend lines and represented noise, not a trend change. The trade was slightly risk-off, as stocks and junk bonds rose less than Treasuries.

Several stock market internals look weaker than usual, but this is to be expected since the markets have been weak for weeks. The absolute levels are not outside the noise bands.

The money supply, including calculated M3, is still rising. The Federal Reserve is still pumping, as shown by their rising Reserve Bank Credit.

The European markets are either showing a dead cat bounce, or are a great buying opportunity at these somewhat depressed levels. Asian markets are either frothy or fairly priced for a virtuous growth cycle, depending on your perspective.

The "mungofitch 99-day rule" is still bullish and the "mungofitch Lagged MA" is still above the MA line and bouncing back.

The METAR for next week is mostly sunny. What, me worry? The market has swung like a pendulum between fear and greed for the past 3 years. The swing is already upward. Chances are good that the bounce will continue and the trends will follow their established channels.


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