NEWPORT BEACH, Calif. (MarketWatch) — The evidence of a double-dipping housing market and economy are becoming undeniable, even to those who cling perilously to the notion that government intervention has been a salve instead of a poison.
The main evidence presented on the part of the “permabulls” of a healing economy is that corporate earnings have been good. However, S&P 500 earnings from multinational corporations have been significantly boosted by a U.S. dollar DXY -0.03% that has lost nearly 15% of its value in the past 12 months. So earnings look great, but they don’t buy you very much, while small-cap domestic businesses suffer under the scourges of inflation and slow growth.
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But markets have the final say as to where the economy is headed, and investors would do well to listen. The 10-year note’s yield UST10Y +2.09% has moved down to 3.19% from 3.72% three months ago, and the 1-year T-bill is now just yielding just 0.17%. In confirmation of the slowing economy, oil prices CLM11 -0.82% have dropped $8 a barrel in a week, while copper prices HGN11 +0.16% have plummeted from $4.47 to $4.01 a pound in a month.
Recent economic data confirm the move lower in industrial commodities. Wednesday, we saw the ISM’s service-sector index drop to 52.8 from 57.3 in March. New orders plunged to 52.7, the lowest reading since December 2009, from 64.1 in the prior month. And the employment index dropped to 51.9 from 53.7 a month earlier. First-time jobless claims surged by 43,000 to 474,000 in the week ending April 30th, which was the highest reading since August. And the four-week moving average rose to 431,250 from 409,000. Read MarketWatch’s stories on the ISM index and on jobless claims.
Euro Pacific Capital
But perhaps most importantly, more evidence of an official double dip in home prices was found in a report from Clear Capital. The report stated that its monthly index is now below the prior all-time low set in March 2009. Two highlights (or lowlights) from the report:
¦ Year-over-year national home prices are down 5%.
¦ Home prices have dropped 11.5% in the last nine months, a rate of decline not seen since 2008.
The saddest news of all is the fact that over 25% of all homes with a mortgage are underwater on that loan. Home prices that continue to fall will bring that number higher and create the vicious cycle of a greater percentage of mortgage holders with negative equity, which causes more inventories, which leads to falling prices.
What’s a Fed head to do?
Deficit deal in the works
David Wessel reports that President Obama and GOP leaders like Rep. Paul Ryan of Wisconsin have been discussing deficit targets along with spending cuts in efforts to line up Republican votes.
The truth is that a double-dip recession was temporarily held in abeyance through a massive government effort to boost consumption. But that intervention in free markets was destined to fail from the beginning. Quantitative counterfeiting Part 2 hasn’t even ended yet, and this ersatz economy that is based on borrowing and printing is already starting to falter. Read the latest from MarketWatch on the Fed.
What does all this mean for the Fed?
A slowing economy with rising unemployment and falling home prices will, unfortunately, keep the Fed in the shipbuilding business — as in “QEIII” — for quite some time. That means when the Fed, Treasury and administration finally acquiesce to allowing market forces to reconcile the imbalances, i.e., allow the deleveraging process and asset-price declines to consummate, the pain will be much worse.
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