What's Wrong with this Economic Picture?

Newsvine has an article titled 'Economists See US Avoiding Recession'. The subject is the Anderson forecast, which predicts that GDP will drop only 0.4 percent in the second quarter of '08 but then will rebound. The author goes on to say, though, that "while there will likely be no recession, there is little room to rejoice as the economy will slow to a sputter." In fact, it will be so delicate that "if there is a quick halt to consumer spending, we will for sure have a recession in 2008."

What exactly is consumer spending? The underlying support for consumer spending is home equity , employment, and slow inflation. According to Mark Zandi, a Moody's Economy.com economist, "The job market is weakening, house prices are plunging, stock prices are down and gasoline prices are headed higher."

I call this delicate, especially as the Federal reserve has unloaded all its ammunition and even invented some more. Bernanke is known for having an extremist position . He demonstrated this much in his dealing with the BOJ in the past and is now attempting to strong arm the economy into another round of debt, deficits, and devalued currency.

Why this tactic? In my opinion, it's partly because foreign investors get more for their money when the dollar is cheaper. Think of a lost-lost cousin flying from London or Madrid to NY to go shopping: They find bargains because not only are Nike and Yamaha products cheaper but their currency buys more dollars. Also, foreign countries who get credits, in dollars, apply those credits towards equity investments.

I came across an insightful piece of prose when reading up on Dow Theory. Charles Dow states:

It is vital, in a sense, that finished goods should move freely into the hands of consumers. If this does not occur, the manufacturer of finished goods must buy less of partly finished products and that must lead to smaller purchases of raw material which in turn must reduce the employment of labor and thereby curtail the public power of buying food products and goods of every description. Trade continually works to such a circle and the steps in this progression constitute the difference between rising and falling markets.

On May 12, 1900, he wrote:

All this goes to show a market in which fundamental principles must be kept in mind. These are that the market as a whole is controlled by the business situation which is reflected in larger or smaller earnings and profits and a consequently larger or smaller intrinsic value in stocks.

It is beyond speculation that unemployment is rising. Just Monday, Lehman (LEH) announced a 5% reduction in its workforce. Citigroup (C) is also laying off people. Countrywide (CFC) is proceeding with layoffs. BMW plans 5,600 job cuts. Google (GOOG), too. This is not the picture of a growing economy; it is definitely the picture of a slowing economy.

As Europe and Asia also begin to unwind, there will be a marked slowdown in foreign investment in the US stock market .This will only lead to more negative news and subsequent selloffs and more and more desperate moves by our government.

I still remember to this day when my older brother was explaining to me that, yes, it was a good thing that the Industrials crossed 2,500. Little did they know, back then, that bull market would go for so long. In fact, it's been going and going and going harder and faster than the energizer bunny itself. Unfortunately, there have been a lot of shady moves by, ahem, the investment banks, and ahem, the mortgage lenders, the bond insurers and reinsurers and, to be sure, the analysts that have kept the momentum going and going, kinda like giving the bunny a radioactive pack when the cells ran dry.

Now it's time we bury the spent fuel. In this case, however, we can't just bundle up the obligations and notes, etc and throw them into the fire. All those premiums and all those investments were real money, money that has simply disappeared since July of last year but that, realistically, has been missing for much longer. The Days of Judgment are here, finally.

The ultimate question is, then, can the DJIA continue to move higher? The answer is no, not given the current economic climate. Why, then is the Fed forcing all these actions onto the economy? Uh, the short answer is that they want to make it as 'soft' as possible, the 'soft landing' scenario. Unfortunately, the plane is too heavy and adding debt to the deficits and to economy the way Bernanke has done is just adding more and more mass. As we approach earth, that mass becomes weight and that weight is not going to go away all by itself. I'll hit on the topic of debt next time 'round...

This also from Charles Dow:

The dear money which comes from prosperity is only relatively dear. It is better to pay 6 or 8% for money and have a condition of prosperity reflected by large railway earnings, large industrial profits, and [a large amount of speculation] than it is to have the reverse of all these conditions and money at 1.5%. Interest is a very small item in speculation when stocks are active.

Comments

[daffy:]

The sky is falling and everyone will die.

end of story.

2008 Mar 12 08:06 AM

[Joseph McSp...:]

At least we'll die softly.

2008 Mar 12 08:16 AM

[the final h...:]

at least the FED will be smug in its approach to bamboozle the american people...or what's left of us.

2008 Mar 12 09:39 AM

[rodcore:]

What is better for overwhelming mass of Baby Boomers? Having 3 years of a bear market with a sound recovery or; having a 1 year bear market but with the buying power of their money eroded by 40%.

2008 Mar 12 02:19 PM

[Krakatoa:]

The Days of Judgment are here, finally...

beautiful.... sums up every thing... game over... bye..bye.. sayonara!

2008 Mar 13 08:14 AM

[Fat Arby:]

ambac is slowly digging its own grave, as is countrywide
how can this possibly lead to consolidation/recovery...

2008 Mar 13 04:49 PM