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Is the Summer of 2011 Repeating Itself?


Global manufacturing is weakening and unemployment is on the rise. A global recession appears imminent.

MINYANVILLE ORIGINAL From a contrarian perspective, a bearish scenario is taking the stage, since the only hope for the markets is now a very crowded "buy the Fed" trade. But is that perspective inhibiting many from recognizing that fundamentals suggest a 1982 market rally may lead us into the year's home stretch? This is most likely not the case -- and here's why.

China and eurozone woes have landed on our shores. As the year unfolds, eurozone unemployment rates are rising -- and manufacturing readings contracting -- at levels not seen since the inception of the EU. The EU unemployment rate rose to a record 11.1% in May. It is widely believed that economic growth is needed in order to resuscitate job growth, which is a large task when you consider manufacturing contracted for the eleventh consecutive month in June.

The devil in these details is that the slide is no longer attributed to the PIGS nations. Germany's "new orders," the leading indicator when deciphering the underlining health of a country's economy, fell at the fastest pace in five months.

Let's shift to far east China, Europe's largest provider of consumption based goods. Currently, net exports sit at their lowest levels in three years, and have lagged on employment levels for the fourth straight month ending in June. China managed to outdo the EU as its own manufacturing levels contracted for the eighth straight month (Read: Not not bullish). This has pushed manufacturing in the world's second largest economy to levels not seen since the first quarter of 2009.

I suppose the contrarian indicator here would be: Can it get much worse? Global manufacturing is weakening and global unemployment is on the rise. How do we avoid a global recession?

The only answer is stimulus, which equates to accommodative measures and money printing. This has become a run on sentence over the previous three years.

We're starting to see that the market is not buying into the thesis that funny money will fix it. Going forward, markets will be more likely to "sell the news" as they did on the recent ECB, BOE, and BOC rate cuts. Markets sold that on an admission by central banks that the lack of economic growth requires more intervention. In many markets, the European Summit rally witnessed in equity markets has been largely given back. The eurodollar is at fresh lows while gold, silver, and copper are very close to significant inflection points of failure.

Furthermore, the general assumption is that monetary intervention will consistently save the day and prevent any serious slide in asset prices -- even though most equity markets worldwide and commodities are already in clear bear markets in spite of massive intervention.

Stateside the recent national Institute for Supply Management number, which is a gauge of the nation's manufacturing "robustness", contracted for the first time since July 2009. Like any broad based domestic gauge, this can provide a view of future growth trends. Let's hope for this to be a one-off number. But judging by the significant decline of 12.3% in June, it seems that we are walking on the edge of the cliff.

The reaction to the news was directly attributed to slowdowns present in China and Europe, as it should have been. A global economic slowdown is a vicious circle and our shores are not immune since we are globally interconnected. Once the US consumer stops spending -- and he or she will -- the math says consumption dollars will eventually get steam rolled.

Digging into June's stellar jobs report, a net 80,000 new jobs were created, of which 25,000 were temporary and 9,000 were wholesale trade. This means that over 40% of new jobs created were low paying.

Moreover, during the first quarter, the US produced an average 225,000 jobs vs. the second quarter, which stood at 75,000. This can be a cause for concern if you are bullish -- and it is downright scary when you consider the fact that 87 million Americans were not included in this job report. They were not missing; they were just not included. This is the second highest reading ever for individuals not counted within the labor force.

We have a stock market, much like our economy, propped up on life support through rising government debt and money printing with no real structural improvement. The bear market rally in stocks that began in March of 2009 is also on life support: It only trades higher on rumors and news of fiscal intervention, while trading lower on poor economic news. We are treading water.

Throw me a life preserver as the stage is set for a repeat of a market meltdown in the late summer months and into the fall election, which will set the stage for a market low that will not be revisited.
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