Yesterday, Dan promised to write more about lead and the deflationary prophecies of John Exter. I've muscled in on today's Daily Reckoning, and will be here tomorrow too, so make sure you read the weekend edition for Dan's follow up from yesterday.
For now...hello greed! It's been a while, but it feels like 2007 again, without the innocence. Only in this late, degenerate stage of a crumbling financial architecture would global stock markets rally so strongly on the news that the US has no intention of cutting its deficit...the fiscal cliff threat was a mirage all along.
Actually, we can hardly believe that anyone would have thought the US ever intended to be fiscally responsible in the first place. This is an economy addicted to debt. Cutting deficits by increasing taxes and reducing spending would put the US economy in a deep hole.
Ever since the 'recovery' from the GFC, the US has run $1 trillion plus annual deficits to prop up a badly maladjusted economic structure. That level of spending will continue for years to come. In fact, for the first three months of the US fiscal year, US government debt grew by $366 billion ($1.46 trillion annualised).
The government has now come up against its debt ceiling...again. With the fiscal cliff circus just ending, we'll be treated to another one in a few months' time as negotiations on increasing the debt ceiling begin. But it won't really matter. It's already a done deal. There is no political will for fiscal responsibility in US, or anywhere for that matter.
Which explains the surge in equity markets. The Dow Jones industrial index had its best day in more than a year, jumping over 300 points. According to the Wall Street Journal, all 30 Dow stocks rose and 94% of S&P500 stocks finished higher on the first day of trading for the year.
That's a powerful rally. It indicates there's probably more to come as the greed effect takes hold. Money is moving from bonds into equities not because of any economic recovery, but because governments are crazy and will spend their way into oblivion. How that eventually impacts the equity market is anyone's guess. But right now no one really cares. They're moving into risk assets...dancing while the music is playing, to use an ill-fated phrase from 2007.
They're clearly not buying because the economy is healthy, although an incurably optimistic Keynesian would argue that all this government largesse will lead to economic improvements down the track. Recent manufacturing data shows the global economy continues to tread water. The following chart is a global manufacturing index. It rose to 50.2 in December, up slightly from 49.6 in November. So the global manufacturing sector is barely in expansion territory (as denoted by a reading above 50).
JP Morgan Global Manufacturing PMI
Source: Markit Economics
In Australia, the manufacturing sector declined for the 10th straight month in December, with a reading of 44.3, unchanged from November. The only sub-component in expansion mode is wages. But a strong dollar and high wages doesn't make for a competitive manufacturing sector.
for The Daily Reckoning Australia