Bennett Group Financial

Death Spirals and Skinned Knees, by Dawn Bennett


Washington, DC -- (ReleaseWire) -- 08/05/2015 --Last week was once again eventful: "America's Greece," Puerto Rico, defaulted for the first time on debt payments; wage growth and earnings reports continued to disappoint; Canada reported that economic growth had shrunk for four months in a row; and the Federal Open Market Committee issued a nearly unchanged statement that hints at interest rate hikes in the near future. It was a week where the Fed once again tried to reassure investors that they would never fall down and get a booboo, while events and an increasing number of individual and institutional voices recommended stocking up on bandages and antibiotic ointment.

Earlier this summer, Puerto Rico's governor, Garcia Padilla, likened the territory's debt situation to that of Greece, saying that it constituted a "vicious death spiral," and that the debt was simply not payable. He continued to say, "This is not politics, this is simply math." This weekend, the first realization of that occurred as Puerto Rico defaulted for the first time, missing payment on $58 million of their $72 billion dollars of debt. In September, they are on the hook for another $635 million, with a total of $5 billion in bonds coming due over the next twelve months. Things are getting so bad in the Puerto Rican economy that people at all economic strata are fleeing in droves, which of course makes things even worse as the tax base shrinks. President Obama has said that there will be no bailout from the Executive Branch, and I agree with him. Even if some havoc results in the markets, it is time for us to start standing on our own two feet, taking the skinned knees that come with the uncertainty of life, markets and economies.

Puerto Rico is a symptom, of course, of a much larger ailment. The United States is on the edge of a recession, I believe, and it may even be the inside edge. Growth is slowing in China, Brazil is officially in recession, Canada's economic growth has shrunk for four months in a row. Greece, of course, is a basket case, with Italy and Spain not too far behind. Japan is in serious trouble. Governor Padilla may have been talking about Puerto Rico, but "death spiral" seems to apply more generally.

And all the while, the Federal Reserve and the talking heads are making with the same platitudes and assurances that they've been mouthing for five years. Mother Yellen is continuing to pretend that she'll never let us get hurt, when she must know that the bike we're riding down this hill is going to hit the curb someday soon. Despite persistent and pervasive central bank manipulation of economies, the news from the world is so consistently disappointing that we all need to own up that it's time to stop adjusting the markets and let them find their own free-market price discovery levels.

Here's an example. BCA Research, a global macro research house, came out last week with a report concluding that investors should stay defensive. They say that the S&P 500 looks "extremely weak," and that breadth has thinned out considerably, with less than 50% of the S&P 500 industry groups are trading above their 40-week moving average. Their interpretation of this week's relatively unchanged FOMC meeting statement indicates that, unless payroll data seriously disappoints, we should probably expect that a September rate rise. If that happens, it could well break the back of this market, because if US equity prices were to come out unscathed in the run-up to a rate rise, that would definitely buck the historical trend. Additionally, S&P Capital IQ has said that, after all second quarter reports are in, that we'll be looking at falling revenues and earnings for two quarters in a row, with more likely to follow in the third and fourth quarters of this year. Tech stocks continue to soar, despite the fact that their earnings reports are even more disappointing than most.

And then there's last week's report on wage growth, which came in at 0.2%, even lower than the expected 0.5%. As a matter of fact, this is the weakest US wage growth since records began in 1982. This goes a long way towards confirming what we've been saying for the last five years. There has been no wage growth in our economy because we've transformed into a part-time, minimum-wage society. The job growth in the headline numbers is a surge in low-paying jobs, whiile high-paying manufacturing jobs are being crushed.

Many investors have started feeling emboldened by the idiot-proof, propped up markets of the last five years. When you've never skinned your knee, you start to feel invincible. However, when free markets and true price discovery return, these same investors are likely to say, "But they promised!" That promise, was at best unspoken, and false in any case. It may feel like the Fed has made a promise to protect you to the end, but that's not how investing goes, and that's not what a free market should be about.

All data sourced through Bloomberg

Securities offered through Western International Securities, Inc., Member FINRA & SIPC. Bennett Group Financial & Western International Securities, Inc. are separate and unaffiliated companies.

About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting

She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.

She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or