Green Retirement

Take it from someone who predicted the global economic collapse, and the stock market and housing bottoms, the recent stock market rally is not an indication of economic recovery.  The economy is not recovering, it has simply stopped crashing, and the stock market rally is nothing more than a return to equilibrium after an over-correction.  The long-term trend for the U.S. economy and stock market is still negative.

The combination of the Federal Reserve cutting interest rates to zero,  massive taxpayer funded stimulus spending, continued foreign and domestic purchases of U.S. Treasuries, and confidence in President Obama’s  leadership, all led to a halt of the economic collapse.  The stock market reacted to these developments, taking advantage of undervalued stock prices, to create an impressive four month stock market rally.

However, the factors listed above that led to the stock market rally can not continue indefinitely, and at some point will breakdown and lead to another stock market correction.  In fact, the breakdown has already begun, the factors that led to a halt of the economic collapse are now all in reverse.  U.S. Treasury Bond yields have nearly doubled, the effect of the stimulus is wearing off, foreign purchases of U.S. Treasuries are down, and President Obama’s approval ratings are slipping.

The U.S. stock market is behaving as a lagging indicator instead of a future economic predictor.  It should be remembered, that the Dow Jones went on to reach a record high, several months after the credit crisis began when Bear Stearns collapsed in August 2007.

The most recent stock market rally, the July rally that has everyone so excited, comes from better than expected second quarter corporate earnings reports.   However, a not so close examination of the vast majority of these company reports, reveals that their better than expected earnings are also based on factors that will not last.

First, corporations are beating overly pessimistic stock market analyst predictions, that were made during the stock market collapse of the first quarter, and before government intervention halted the collapse.   Second, most of the improved corporate earnings do not come from increased revenues, but instead from cost-cutting and laying off employees.

As unemployment continues to rise from corporate layoffs, and consumption continues to decline, corporate revenues will also continue to fall.  As corporate revenues fall, corporations will not be able to beat improved analyst expectations, without further cost cutting or asset sales.  A flurry of mergers and layoffs will occur in an effort to keep earnings growing.  This may allow the stock market rally to continue for another quarter or two, but at some point, higher unemployment, and reduced consumer confidence and spending,  will cause the stock market rally to end and another crash to occur.

Massive federal government stimulus spending, which replaced lower consumption and helped contribute to the stock market rally, and which may also produce an improved GDP in the fourth quarter 2009 and first quarter 2010, can not continue without negatively affecting the economy.   The impact of the first stimulus has already been priced into the stock market, and a second stimulus in 2010, proposed by many liberal economists, will only increase interest rates, devalue the dollar, produce higher inflation,  and send the economy back into another recession, which will further hurt consumers and corporate earnings.

In any case, foreign purchasers of U.S. Treasuries, worried about the value of U.S. Government assets that they already own, have warned the Obama administration to reel in spending to protect the dollar and their investments.  Forced to cut spending, hundreds of billions of dollars will be removed from the U.S. economy, resulting in a recession and another stock market crash.  In effect, the Obama administration is damned if they do, and damned if they don’t, either increased spending or decreased spending will both result in a recession and a lower stock market.

Consumer spending which accounts for 70% of the U.S. economy, is tied to consumer confidence, which is tied to confidence in President Obama.  The future of the U.S. economy depends on the popularity of one man.  President Obama’s approval ratings have slipped recently, as unemployment continues to rise, and as he struggles to get his health reform package passed in congress.   The American people are beginning to question his leadership abilities.   As confidence in Obama declines, consumer confidence will decline, which will result in reduced consumer spending.  Which of course will result in lower corporate revenues, increased layoffs, yada yada on and on.

In essence, the U.S. economy is caught in a downward spiral, a negative feedback loop.  The factors which created the stock market rally no longer exist.  Eventually the stock market will catch up to economic reality, and when it does, the rally will turn into a bust.  Precisely when the stock market rally will end, and the bust will occur,  I cannot tell you at this time.

The reason I am writing about the stock market rally and the economic recovery, is to suggest that if you have been delaying your retirement, in the hope that you will fully recover the net worth you have lost because of the economic collapse.  You may not want to any longer, you may want to take advantage of the recent stock market rally and retire, a bird in the hand is better than two in the bush.