STIMULUS

It would appear that there's a growing chorus of voices warning that the stimulus spending by governments around the world is merely glue holding a rather shaky model together. Inevitable stresses beyond the conclusion of the spending will conspire to doom the earth's financial system and the recovery will take a familiar leg lower, satisfying anyone who called for either a so-called 'V-shaped' recovery or outright depression.

We first heard these voices musing about the Chinese market where government orchestration to build roads and bridges was backed by colossal lending provision through state-run banks. Domestic reports point to how this lending has turned up in the stock markets while the real estate recovery is allegedly another bubble in the making.

Australia's central bank this week changed its tune somewhat and blatantly stated that without banks' balance sheets being strengthened, there was little need to start raising interest rates because in so doing the significant signs of recovery would merely be snuffed out.

The chorus of voices at the conclusion of the Jackson Hole central bank summit suggests that even central bankers sense this really will be a rocky-road to recovery.

But now legendary trader and hedge fund manager, Paul Tudor Jones has made his opinion pretty clear by saying that both Goldman Sachs and Morgan Stanley are premature in announcing a recovery. Their growth estimates are way too optimistic. Tudor Jones has positioned his macro funds to benefit from a rise in the dollar, a decline in bond yields and a fall in stock prices. In 2008 his funds outpaced those of peers.

The manager at one of those macro funds noted that it was only the government stimulus creating the boost in economic activity, which he described as a ski-jump recovery - after the ramp up will come the bigger drop off. One month ago the funds communicated to clients that the market was under going a bear market rally and that once the stimulus spending wore off to expect a further deterioration in the investment climate.

Behind the thought process is a look at labor market weakness. Tudor Jones says that you have to look behind the official 9.4% rate of unemployment and focus instead on the number of unemployed discouraged from seeking work. That reading, according to government statistics is closer to 16%.

Housing data is a far-cry from the rosy picture painted by recent home sale statistics according to the investor. With around one-third of the sold homes stemming from foreclosure, it's a pyrrhic victory to claim that the housing market has run its course. Meanwhile MBA data shows that the number of homeowners late on payments recently grew to 9.24%, an all-time high.

This view coincides neatly with Tuesday's 2% slide in the S&P 500 index and supports the decline in bond yields to a near two-month low. But it's curious to note that the slide was led by financial issues as investors hunkered down for what might yet turn out to be a second-wave of financial sector pessimism. It's curious too because it was for this reason that Tudor Jones alleges the economy isn't on the mend. Government stimulus spending failed to address the root cause of the problem, which is the number of sour loans sitting on the balance sheets at these institutions. Saddled with this concern, credit growth ain't gonna happen, says Mr. Jones.

We guess it won't take many more percentage points off the stock markets' value before investors rekindle their observation that more government stimulus is needed.

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