Archive

Economic Calendar       Archives        About

Inside the Market

12/05/2011

So was last week’s action in the US Equity markets a positive for the global economy or was it actually a major red flag that the system remains close to breaking down.

You saw the action in the major US Stock Indexes last week, which started with a one day rally of more than 5% and ended the week with prices surging more than 7%.  This move, in conjunction with some positive economic data (ISM Index, Consumer Confidence, the continued hype about the pace of Black Friday sales and the almost unbelievable drop in unemployment to 8.6%) has the positive spinners going wild.  OK, some of those data releases were a bit better than forecasted but we all know what happened with that 8.6% unemployment rate as the labor pool simply shrank; (just take a look at the latest Initial Claims numbers for a reality check on employment).

The bottom line to the exuberant move in Stocks however, is not so much rooted in a few OK economic numbers, but rather was a reaction to the world’s central banks acting in unison to ease the flow of US$s throughout the global financial system by easing SWAP rates.  Why was this necessary you say?  It was necessary as global liquidity was drying up, which raised a massive red flag as to a possible negative domino affect that could have transpired throughout the system (which would have started in places like Greece and Italy).  In other words, the global financial system required a concerted drastic ease in order to avoid chaotic volatility.

US Equities rallied in part due to a massive short squeeze in the market and because the SWAP move was a way of buying more time, or yes, kicking the can a bit farther down the road.  It’s the same old story…kicking the can, buying time by throwing $s (or should we say printing $s) at a massive debt problem which is simply putting a band aid on a gushing laceration.  Yes the markets may try to rally a bit, but unfortunately the problems that are breaking the global financial system are not being addressed and continue to get worse.  The latest global injection of US$s into the system to spark a short term stock rally will simply cause the day of reckoning “down the road” to be that much more intense.