A Rude Interruption for Markets

Theme d'annee ou theme du jour? The jury remains out. Tuesday's "everything goes up" strategy worked swimmingly until the London market marked its sheets, after which there was a rather rude interruption. First, gold interrupted its Buzz Lightyear-esque trajectory by correcting back below 1000, and then a piece of really quite fugly data was released.

Consumer credit fell by $21.6 billion in July, by far the worst reading on record. While the apogee of "cash for clunkers" stimulus will have occurred in August, it nevertheless underscore the belief, widely held in macro circles, that the consumer will continue to rebuild balance sheets for the foreseeable future.

And small wonder, too! Even as househeld spending has fallen modestly over the past couple of years, it has reached a new high as a percentage of GDP. Not good. So if and as stimulus income is saved rather than spent, and spending growth remains subpar by the standards of the past quarter-century, it will be mathematically very difficult for GDP growth to be anything but pretty blah over the next couple of years.

So while H2 might see a bounce in GDP growth (though in a period of price or debt deflation, as we are currently observing, nominal GDP growth trumps real growth), it remains difficult to get excited about the permanance of the rebound. Plus ca change, indeed.

What it means for equity prices, or indeed any other prices, is of course anyone's guess. But it provided a timely reminder to Macro Man that while it's OK to swim in the sea of "everything goes up", when the tide goes out it's best not to drink the Kool-Aid on the beach.

Comments

[Moon Kil Woong:]

The more things change the more things stay the same. I wish it were true. Actually the longer the economy languishes and government keeps throwing money around the faster they run out of money, the faster the dollar falls, and the less political will they have. When that happens we may learn that it is not a bad downturn or the erosion of the banking sector that we should be concerned most about, but that we should be most worried about letting government support a market downturn to the point that they make a downturn linger for years and thus sparking the loss of hope that causes a depression.

A downturn, no matter how nasty is a business event and runs it's cycle if left to its own device. Perhaps it needs stimulation at the bottom but ony there. A banking sector erosion reveals poor financial scrutiny and regulation. Allowing the bad ones to fail no matter how bad, as long as the FDIC is running, leaves the remaining assets to go to healthy conservative institutions. Since we hijacked this mechanism the money now rots in the bad institutions it started in.

It is true the stock market is giddy over the money flows out of the dollar and long term Treasuries and into equities as well as the fall in the dollar. It is also true that the new round of government stimulus will arbitrarily pump up the already bloated government yet again in 2010 allowing cash with no new goods or services to wash into the market. But, what happens after that? Even in the Great Depression there was a great rebound before people figured out that the economy was being beilt on short term measures and lies.

Most everyone figures this out after years after years of declining jobs and wages. The longer the government tries supporting the market instead of letting it hit bottom, reset, and begin the business cycle again the greater the likelyhood of a W or worse yet this becoming a true depression with a worthless dollar and bankrupt government at the wheel.

Sep 10 05:43 AM

[Roger Knights:]

"while it's OK to swim in the sea of "everything goes up", when the tide goes out it's best not to drink the Kool-Aid on the beach."

That's a really muddled metaphor. How about:
"A rising tide of Kool-Aid covers many a sin."

Sep 10 08:08 AM

[DaveW:]

I prefer:

"Tide, it'll take out Kook-Aid stains, while you enjoy a day at the beach!" [an omg do we have kool-aid stains...]


On Sep 10 08:08 AM Roger Knights wrote:

> "while it's OK to swim in the sea of "everything goes up", when the
> tide goes out it's best not to drink the Kool-Aid on the beach."
>
>
> That's a really muddled metaphor. How about:
> "A rising tide of Kool-Aid covers many a sin."

Sep 10 12:45 PM

[NUCLEAR1929:]

whatever will happen, much blood will fill the pits full

Sep 10 02:22 PM

[speculari:]

MM, a rising tide floats all boats - unless, of course, it's Kool-Aid!

Sep 10 09:34 PM