You Ain't Seen Nuttin' Yet

I will be the first to note that the markets will likely calm down in the short term and recover a bit. But it is going to be very interesting for the rest of this year, and perhaps for a few years to come. Let's consider what keeps me, and the markets, awake at night:

• It is clear the U.S. economy is slowing down to near a dead stop. GDP numbers are not good at all. The question is, what will bring them back? I am asking as I do not know.



• There are a host of reports I have seen this past week on U.S. companies laying off thousands of employees. Some are moving them overseas and some simply cutting back, especially large banks.



• One salvation in this past recession was continued growth in China. China is pulling back to avoid a real estate bubble of its own (and related bubbles) and with major export destinations being stressed is facing great difficulty going forward. Don't believe me, look at the Hang Seng for the past three months, it is not doing well. And that is just the start. China also has horrific demographics. Lots of old people there (as in more old people there than the U.S. population) and the one child policy, whether wise or not, has led to a total male/female imbalance. It also has horrific environmental problems. China definitely has its challenges going forward. Challenges aside, as they slow down the economic train to avoid a bubble bursting they will not be the driver out of the next recession. I am looking to India to perhaps be the engineer on that train, if there is one.



• Housing is still in the doldrums. Still a lot of houses on the market and a lot of shadow inventory. I like that banks, the FHA and others are doing a lot to clear out the old stuff including donating it to charity and paying to have it demolished. Still, millions of houses will take a long while to clean off the slate and we are not there yet.



• Did I mention unemployment? As noted above, there are a lot of recent announcements on cut backs and I think the unemployment numbers will suck wind for many months to come.

Okay, you say, enough. Yet I say, I have not even touched the main headwinds that we face, which are:

• We have a major deficit problem that we need to deal with now. Reducing deficit is not something that sits well with economic growth. The just approved budget, which I still need to study more, is only the beginning. We will be pulling back on spending for at least the next decade and pulling back on spending is not good for GDP. If we add tax increases, which I believe we must, that too is a GDP damper. Can the U.S. economy thrive through this, cut backs in China, Japan's issues and what I talk about next - EU, I have my doubts?;



• Then there is the EU. I will not linger here too much as I have written about it a lot. The 10 year spread between Italy and Germany and Spain and Germany are at new highs as we speak. "Hogs get slaughtered and PIIGS get fed" only works for so long. Eventually, PIIGS get slaughtered too. The technical "default" in Greece will be followed next year by real defaults, if not sooner.

That is what keeps me awake at night. It appears the markets are starting to realize there are not enough engines of growth in the world right now to support those out of gas.

On a final note, I attach an article in the WSJ related to what is said above. Can't say I disagree with anything said in it.

http://wallstreetpit.com/80719-the-problem-is-too-much-debt

Disclosures: None.