Saturday, April 28, 2012

Austerity blamed for EU slowdown; US stocks rise on earnings

As the recovery continues to limp along, there is more talk about austerity.  Tighten your belts.  Cut government spending.  Balance the budget. Raise taxes.  Pay down the debt. The Eurozone has become the poster child for austerity recently as its attempts to right its sinking fiscal ship has produced mass unemployment and falling living standards through much of its southern tier.  Spain's sky-high unemployment has been blamed on EU austerity measures by those on the left, as has the UK's stubbornly low growth since David Cameron's Conservatives took over in 2011.  Austerity has become politicized as uber-Keynesians such as Paul Krugman insist that austerity is counterproductive. He argues that austerity only damages the economy by worsening poverty and unemployment while keeping the benefits of the wealthy elite intact.  He has also recently suggested that Fed Chair Ben Bernanke was unnecessarily prolonging the current slowdown by not supplying more economic stimulus to kick start the moribund US economy. 

Austerity is often controversial because there is always a choice for policymakers.  They can choose to cut their spending and debt or they can borrow more money and risk inflation and their credit rating down the road.  For some countries this isn't much of a choice as borrowing may not be much of an option since high debt levels means ultimately unsustainably high premiums on debt.  While Spain and Greece may be at the precipice where they have less choice in the matter, countries like the UK and the US aren't quite so limited.  They could choose to borrow more money and commit to more stimulus without an immediate risk of rising interest rates and inflation.  But the key word there is "immediate".  Can borrowed money really solve such structural problems or is it merely delaying the inevitable day of reckoning?  Keynes and his followers suggest somewhat ironically that time is on our side: "in the long run, we are all dead."  Why worry about debt levels and inflation now as long as the status quo is maintained?  Debt is actually economically useful and necessary as long as it doesn't get out of hand.  Just where the tipping point lies is a matter of interpretation, however.

As the debate over austerity continues to rage, it is worth noting how the planets may be reflecting this absence of consensus.  It was all stimulus and growth in early 2012 when Jupiter was dominant.  Its series of aspects with Pluto, Uranus and Saturn coincided with a significant rally in the stock market that was fueled by the Fed's Operation Twist in September and the Dollar-Euro swap announced in December. Since March, Jupiter has been less prominent in the sky as it has separated from its aspects with these other planets.  Not surprisingly, the market has been unable to make significant new highs.  The negative consequences of austerity have now come into focus while growth continues to lag.  Without more Jupiter, the recovery can't seem to move into a higher gear.  At the same time, austerity itself has come under attack perhaps because Saturn is not in the spotlight either.  With neither Jupiter or Saturn taking the reins, we are stuck in the contested middle where there is no clear direction.  Saturn may be more likely to make a reappearance in May and June.   This will occur in time when the EU is likely adjusting to a new anti-austerity French President Hollande following the likely defeat of Nicolas Sarkozy on 6 May.  With a new face as the Elysee Palace, the EU and ECB may have a tougher time coorindating its various financial activities.  Saturn will enter sidereal Virgo in mid-May and then it ends its retrograde cycle at the end of June.  Both events are potentially significant and may well intensify caution and pessimism in financial markets.

Stocks moved mostly higher last week on the strength of positive earnings announcements by market leaders Apple and Amazon.  In New York, the Dow rose almost 2% closing at 13,228 while the S&P 500 finished at 1403.  Markets were more bearish in Mumbai, however, as the Sensex fell to 17,134 while the Nifty ended the week at 5190.  This outcome was largely in keeping with expectations as the early week Sun-Mars-Rahu alignment did produce some significant downside across most markets.  The rebound coincided quite closely with the Moon-Venus-Jupiter pattern that began on Tuesday and continued for much of the rest of the week.

This week may well see more Venusian upside as it maintains its close association with Jupiter and also becomes enmeshed with Mercury.  The positive Mercury influence is perhaps more likely to arrive in the second half of the week.  Mars remains in close aspect with Rahu, however, so there remains some potential for sudden declines, especially early in the week.  As the Sun approaches its conjunction with Jupiter on 13 May, we could see more central bank 'jawboning' about the joys of borrowed stimulus and the evils of austerity.  Jupiter is the CEO of optimism after all, and it likes to keep as many people happy as possible.