Stocks and economy could be in trouble

Recently I have been commenting that the projected, $4.3 trillion in topline government spending is not going to be sufficient to  keep the economy from achieving anything more than zero growth and actually, we probably had negative growth in the first quarter because when the revision comes in later this month it will take into account the huge trade deficit.

Normally, a $4.3 trillion spending pace would be excellent. Indeed, that would only be the second annual spending increase since 2009 and it would be far larger than the measly $10 billion we saw last year versus FY 2013. (This year projected near a $200 billion increase.)

The size of that increase might already be in trouble, but I'll get to that in a minute; it's not the reason for my worries.

My concerns stem from the fact that we are seeing a serious slowdown in Personal Consumption Expenditures, which is the largest component of GDP and additionally, an actual contraction in State and Local Government spending.

Those two elements of GDP are conspiring to put growth in negative territory and while some say it was just a weather related abberation, I am not so sure. We may get a better sense on Friday when the April jobs figures are released, but if they're weak once again (and the numbers from the Daily Treasury Stateement ARE NOT encouraging), then it seems it could be more than weather at play.

All of this would be bad enough on its own, but I also alluded to the fact that the pace of government spending in the last month has been starting to slow. Early on in April spending for FY 2015 was running about $110 billion above FY 2014, but that number has recently dropped to $94 billion. Still a nice positive, but not on target to hit that $200 billion increase year-over-year.

What's also bad is the following:

1. We are currently operating under a debt ceiling and without a budget agreement out of Congress
2. The debt ceiling has not had an impact yet and Lew has not had to really engage extraordinary m easures to pay bills because tax revenues have been on the high side.
3. However, tax revenues will start to fall off significantly if the economy is indeed in a contraction, which I believe it is.
4. That's when the debt ceiling and all kinds of hell will break loose.

What does this mean for the markets?

1. Stocks are in trouble.
2. The dollar is in trouble (Bill Gross may actually get one right!)
3. The Fed will not raise rates and that whole entire expectation will get blown up.
4. Bonds  likely to rally sharply and Fed could engage in new monetary measures, but only after significant time and disruption. This is not the Bernanke Fed nor is it the Paulson Treasury. These people WILL NOT MOVE  QUICKLY.

In addition, fiscally, it looks like a train wreck because every single policy maker out there, no matter whether they're on the right or the left, thinks we have to balance the budget. So does the public.

What it all means is that this could end up to be a really bad ride.

So, I think here's the way to play it:

1. Sell the dollar.
2. Hedge your stocks or stay in cash and wait for a time to buy aggressively, but it probably won't be for a while.
3. Step aside as the real estate bubble implodes, especially in the high priced bubble areas like NYC. (Manhattan, for sure.)