Markets futures are pointing to a positive open for stocks of about 4%. This strength is the reaction to last night’s announcement by the European Central Bank and the International Monetary Fund to provide as much as a trillion dollars to support the weakening balance sheets of several European countries. The expected surge in share prices this morning is accompanied by sighs of relief and breathless anticipation of new highs.
THIS IS NOT RESILIENCE!
This is the effect of a trillion dollar injection. It represents new debt and commitments to support governments that have not lived within their means. UPDATE: Stocks Rocket Higher After Emergency Bailout.
John Hussman, Phd wrote at the end of 2009 that, “It is truly mind-numbing that a moment after a temporary surge of trillions of dollars, borrowed and tossed out of a helicopter (though to specific corporations and private beneficiaries), analysts would hail a subsequent improvement in corporate results as evidence of “resilience.” Make no mistake, markets will surge on this news, and there will be a real and positive short-term benefit to this infusion. It may even last. It may be that the downward spiral will be sufficiently stemmed and local economies will be sufficiently stimulated that an organic recovery can grow.
But, we don’t think so.
Consumers in the US and in the EU are laden with debt and are dependent on government support. A report last week indicated that 20% of household income in the US is now a result of transfer payments (social security, welfare, food stamps, Medicare, etc.). Greek citizens are rioting in the streets and setting cars on fire to protest any deferral of the national retirement age (and government pension) past age 50.
While short-term pain has been soundly avoided once again both in the US and in the EU, the long-term consequences are apparently much too unpleasant to consider. So let’s not consider them, right? Let’s enjoy the Bacchanalian fete! Carpe diem.
Laissez les bons temps rouler!