Tags: Dow | Recession | stocks | economy

Dow Closes Above 13,000 Despite Mounting Recession Fears

Monday, 27 February 2012 03:07 PM

The Dow Jones Industrial Average closed above 13,000 much to the cheer of stock-market investors, although experts point out that the economy remains closer than ever to falling back into the abyss of recession.

The Dow's previous high-mark close was 14,164.53 on Oct. 9, 2007.

But don't get your hopes up for more lasting overall economic recovery, experts say.

The Dow shoots up and also tanks on economic indicators, everything from nationwide unemployment data each month to less noteworthy indicators such as pending home sales.

When stocks shoot up and down on indicators in a volatile manner, it often suggests hedge funds and speculative traders are the only ones in the market while the more cautious funds and retail investors remain on the sidelines.

Furthermore, the Federal Reserve over the past couple of years has pumped $2.3 trillion into the economy via two rounds of asset purchases from banks, policies known as quantitative easing, often referred to as QE1 and QE2.

Quantitative easing aims to steer an economy away from crippling deflation and recession by flooding the financial system with liquidity and send stock prices climbing to encourage investment and hiring.

Stocks have climbed, but fundamentally, the economy is nowhere close to robust.

Unemployment rates currently stand at 8.3 percent, in some cases over twice as high than their pre-recession levels.

Overall economic output is on the mend albeit far from before the recession struck, and some Federal Reserve officials say they can't rule out a third round of quantitative easing, which would suggest monetary policy authorities remain worried over the health of the economy.

Furthermore, most economic indicators are lagging indicators, meaning they look backwards and tend to move in wake of other indicators.

Unemployment rates, for example, often move in response to consumer spending numbers, which are growing at a slower pace these days.

Translation: the U.S. cannot avoid dipping back into a recession as gains in the labor market have not been enough to prevent industrial and overall economic growth from flatlining before turning downward anew, says Lakshman Achuthan, co-founder of the Economic Cycle Research Institute.
Expect the downturn to hit by late summer.

"Now that we have several months of definitive hard data, this is not a forecast," Achuthan says, according to CNNMoney. "Basically, growth has flatlined."

While industrial output, incomes and spending have been growing since the last recession, the pace of that growth is slowing, which makes a downturn unavoidable due to a lack of support, Achuthan adds.

More worrying is the fact that the Economic Cycle Research Institute has never been wrong when forecasting that a recession would start, or failed to predict a recession well before it was widely accepted, CNNMoney adds.

Achuthan's forecast stands even without factoring in a messy default in the eurozone or a spike in already sky-high gasoline prices.

Oil factor

U.S. West Texas Intermediate crude prices have pushed close to $110 a barrel while Brent oil, the European blend most affected by ongoing tensions between the West and Iran, has broken well past $120 a barrel.

"The West's determination to prevent Iran acquiring nuclear weapons is coming at a price — a price that might include a second global recession triggered by an oil shock," says David Hufton from the oil brokerage PVM, according to Reuters.

Europe has said it will cut off imports of Iranian crude starting in July, while Iran has gone ahead and shut off shipments to France and the U.K. as part of a preemptive move.

Iran has repeatedly threatened to close off the vital Strait of Hormuz waterway to protest sanctions from the West.

The Strait of Hormuz connects the oil-rich Persian Gulf with the rest of the World.

The West accuses Iran of developing a nuclear weapons program, a charge Iran denies.

With the U.S. summer driving season right around the corner, record-high gas prices seem unavoidable thanks to ongoing Middle East tensions.

The average U.S. price of gasoline jumped 18 cents a gallon to $3.69 in the past two weeks alone, according to the nationwide Lundberg Survey, Reuters reports.

"If these (Mideast) fears become more fervent, on either a real or a perceived basis, then crude oil prices could jump again," and bring gasoline prices up with them, survey editor Trilby Lundberg tells Reuters.

Ian Taylor, head of the world's biggest oil trading house Vitol, says oil could hit as high as $150 a barrel if Iran's arch-enemy Israel launched a strike at its nuclear facilities — an option Israel says it won't rule out.

"I used to think this would never happen," Taylor says, according to Reuters.

"But everyone you speak to says the Israelis will have a go at striking at Iranian nuclear sites. The day that happens, you have to believe the Iranians throw a few mines in the Strait of Hormuz and, for a few hours at least or maybe more, I cannot see a scenario where prices would not be at that sort of level ($150)."

Oil prices hovering around $150 a barrel would serve as the threshold to nationwide gasoline prices averaging close to $5 a gallon, although the good news in the U.S. is that consumers balk and buy less gas, which prevents fuel prices from staying too high for too long.

"I think crude is going to have to reach at least $150 or $160-$170 a barrel in order to see $5 a gallon gasoline," Rayola Dougher, a senior economic adviser for the American Petroleum Institute, tells Moneynews.

Look for $4 a gallon to serve as the tipping point at which consumers forgo buying gasoline and rely on carpooling and public transportation, which would bring prices down.

Even stocks, the beneficiary of loose monetary, may be in for a cooling themselves.

Jeffrey Gundlach, chief executive officer and chief investment officer of the $28 billion DoubleLine Capital, says the European debt crisis and Middle East unrest may mean the end of today's equities rally.

"It's an awfully easy decision right now to not be making further investments in risk assets," Gundlach says, according to Reuters

"The pricing of the market has returned to the levels prior to the scales falling from investors' eyes regarding the global financial crisis, and I really don't think that's appropriate."

Editor's Note: Meltdown on Main Street Coming, Prepare Now

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Monday, 27 February 2012 03:07 PM
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