Current Market Dichotomy: Deja Vu

As I was sifting through the latest news and commentary, I came across two articles that couldn't be any more at odds with respect to the near-term outlook.

In the optimistic corner is a Forbes column by economists Brian S. Wesbury and Robert Stein, entitled "The Recession Is Over":

Indicators point to a fast-approaching end date: May 2009.

If you want a bone to pick--or an economic argument to have--it should be about when the current recession actually began. The National Bureau of Economic Research, the U.S.'s semi-official recession arbiter, says it started in December 2007. But real gross domestic product grew at a 1% annual rate from then through August 2008. That doesn't look like a recession to us.

Nonetheless, when Lehman Brothers (LEHMQ.PK) collapsed and the $700-billion TARP plan was proposed, a very rare "panic" ensued. Monetary velocity collapsed. From September 2008 through March 2009, the economy shrank at a rate of 5.5%. That's why we think the recession started in September 2008, not in December 2007.

... When the NBER eventually gets around to declaring the recession end date, we think it will be May 2009.

New claims for unemployment insurance are probably the very best single indicator of the end of a recession. The monthly average for claims normally peaks one or two months before the economy bottoms--and it appears to have peaked in March, at 658,000, versus April's 635,000.

Also, given that the September recession was marked by consumer spending falling off a cliff, we look at this measure to signal a rebound. Consumer spending grew at a 2.2% annual rate in the first quarter, and it looks set to rise again in the second quarter. Meanwhile, both major measures of consumer confidence (from The Conference Board and University of Michigan) shot upward in April.

The housing market is also showing nascent signs of life... In all likelihood, a bottom has been reached for both home sales and housing starts.

Other signs of a rebound in monetary velocity can be found in prices. Consumer prices fell at a 12.4% annual rate in the last three months of 2008, the fastest decline since the Great Depression. In the first three months of 2009, however, prices are up at a 2.2% annual rate.

...

The end of the recession does not mean we won't lose more jobs; employment is always a lagging indicator. And there will be more defaults, foreclosures and financial market problems too. But none of these are leading indicators.

In our view, there are no more shoes to drop.

In the other corner is a Reuters report detailing the results of a recent opinion poll, entitled "Worst of Crisis Not Over: 52% of Americans":

US in 'retail deep freeze,' survey shows.

The majority of U.S. consumers do not think the worst of the U.S. economic crisis is behind them and plans to spend on luxury items remain low, a new survey showed Tuesday.

...

Only 34.3% of consumers surveyed by America's Research Group said they think the worst of the crisis has passed, while 52% said they did not think the worst was over yet.

Retail 'deep freeze'

When it comes to buying food, 74.2% said price is a bigger factor when making a purchase than a year ago.

Meanwhile, only 24.2% of consumers said they feel they have extra cash in their paychecks due to the U.S. government stimulus package, while 73.7 % said they did not.

The stimulus package includes a tax credit that will be paid to many workers in the form of less withholding tax taken out of paychecks, though at $400 annually for single workers, that amounts to only $7.69 a week.

The survey was conducted May 1 through May 3.

All of a sudden, I had a flash of recognition. I remembered that I had in the fall of 2007 written the following post, "Bipolar Disorder?" about a similar clash of perspectives, when economists' optimism (and U.S. share prices) had also been strong in the face of a popular mood to the contrary:

While there is a chicken-and-egg debate about which comes first, historically there has been a strong relationship between economic conditions and the national psyche. In other words, when Main Street is in trouble, people feel troubled and vice versa. That is one reason why, for example, forecasters pay close attention to consumer sentiment. If Americans are uncertain and unsettled, they are inclined to save for a rainy day and less keen to splash out on anything other than the bare necessities.

But in many respects, this relationship has gone awry. For instance, polls clearly show that growing numbers of Americans are worried about the threat of recession, the deteriorating health of their personal finances, and the direction the country seems to be headed in. Just yesterday, in fact, a Gallup survey noted

that trust in the federal government, on nearly all issues, had hit a record low. Yet many individuals continue to spend freely, despite low savings, stagnant earnings, and high levels of debt.

At the same time, the stock market, a traditional barometer of the national mood, is trading not far off its record levels. Oil, grains, precious metals, and other commodity markets are roaring amid rampant speculation. Bankers are still keen to do deals, expand balance sheets, and lend money at an aggressive pace despite all the recent turmoil in credit markets. As far as Wall Street is concerned, few seem worried in the least about warning signs that suggest the good times are nearing an end.

What accounts for this current anomaly, a kind of bipolar disorder? Some might argue that it’s the inevitable byproduct of decades of manipulation and distortion of the money supply, interest rates, financial markets, the social contract, the legal system, societal mores, public opinion and more. Others might say it represents a fleeting lapse in the national consciousness, like a daydream in the middle of the afternoon. Some might wonder if it reflects a collective last-gasp panic to stay afloat before the economic tide rushes out.

Whatever the reasons, the pattern of the past suggests that current circumstances won’t remain as they are. Either the dour social mood will catch up with developments in the financial realm or economic and market conditions will stage an abrupt and dramatic reversal to the downside. Given the serious structural imbalances that exist nowadays and such unpleasant realities as the interest compounding effect, which will turn already large piles of borrowed money into towering infernos of unpayable debts, odds are that it won't be the former.

About a month later, I wrote another post, "Eventually, the Pain Will Be Shared More Equitably," that again highlighted the curious disconnect between Main Street and Wall Street.

It's that time again: another poll that says for many Americans, the world they live in is not the place that equity traders and permabull pundits think it is. Indeed, it almost seems that the more upbeat they are on Wall Street, the more downbeat they are on Main Street.

Admittedly, the continuing disconnect is hard to explain: some might say it has something to do with the fact that income inequality in America has reached long-term extremes. Regardless, company by company and sector by sector, the malaise continues to spread, and eventually the pain will be shared more equitably.

In "Americans Turn Negative on Economy, Expect Recession, Poll Says," Bloomberg gives us the latest read on what Americans are thinking

In light of this, I guess you could say the current dichotomy is all too familiar.

Comments

[damienhaas:]

Actually Cetin just want to have attention, he has got it as seen so many negative response to his comments.....

May 07 08:06 PM