Prieur Perspective: Stimulus Bridge to Nowhere
Government spending frenzy won't solve crisis.
Events during the past few days were dominated by the announcement of US Treasury Secretary Timothy Geithner's financial stability plan and a deal reached by Congress on the economic stimulus bill. However, the much-anticipated bailout bang soon whimpered as investors were disappointed about the lack of "beef."
Meanwhile, markets were also mired in uncertainty on the back of fresh evidence of headwinds facing the global economy - notably in major economies such as the UK, continental Europe and Japan.
Jim Rogers gave the bank rescue plan a big thumbs-down: "(Geithner) ... has been dead wrong about everything for 15 years in a row ... This (the rescue plan) is not going to solve the problem, it's going to make it worse."
Referring to the stimulus bill, Steve Forbes said: "It's just a grab bag of every spending proposal that's been banging around Congress for years."
And Bill King (The King Report) commented as follows:
"A cure should have something to do with the diagnosis. The classic argument for fiscal stimulus presumes that the central cause of our current economic problems is this: We, the people and our government, are not doing nearly enough borrowing and spending on consumer goods. The government must step in to force us all to borrow and spend more. This diagnosis is tragically comic once said aloud."
Stock markets were on the receiving end as risk-averse investors sought out the safe havens of the US dollar (+0.8% in the case of the US Dollar Index), gold (+3.1%) and bonds (with the yields of 10-year Bunds and Gilts down by 21 and 17 basis points, respectively).
The week's movements of the MSCI Global Index (-3.9%, YTD -9.0%) and MSCI Emerging Markets Index (-0.6%, YTD -2.2%) reflect global investors' skepticism about the rescue plans. Strong performances came from China (+6.4%) and Russia (+14.3%), but still left these markets in the red by 61.9% and 63.0% since their respective bull market highs. As mentioned before, the chart pattern of the Chinese Shanghai Composite Index shows arguably one of the most bullish formations of the major stock market indices.
The major US indices suffered their worst weekly losses this year (to record 5 losing weeks out of 6): Dow Jones Industrial Index -5.2% (YTD -10.6%), S&P 500 Index -4.8% (YTD -8.5%), Nasdaq Composite Index -3.6% (YTD -2.7%) and Russell 2000 Index -4.7% (YTD -10.2%).
John Nyaradi (Wall Street Sector Selector) pointed out that among the exchange-traded funds (ETFs), none of the main economic sectors registered positive returns, as summarized in the chart below. Not shown, the KBW Bank Index ETF (KBE) lost 14.3% on the week, and the Dow Jones US Real Estate Index ETF (IYR) 12.0%. The ProShares Short Dow30 ETF (DOG) led the way among inverse funds with a gain of +5.3%.
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